Inherited an IRA? The 10-Year Rule Is Now Being Enforced -- What You Must Do

If you've just inherited an IRA, you're probably going through a confusing time right now. A loved one has likely just passed away, and you may still be grieving that loss. At the same time, you could probably use that extra cash, but you might be worried about how the withdrawals will affect your tax bill.

It's a lot to process, and it's OK if you don't feel up to managing it all right now. The 10-year rule for inherited IRAs means you have plenty of time to sort out what to do with your inheritance.

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How the 10-year rule for inherited IRAs works

The 10-year rule is a limitation the IRS imposes on inherited IRAs to prevent the savings from growing in the account indefinitely. It enables you to take money out of the IRA whenever you'd like, as long as you've withdrawn everything by the end of the 10th year following the year of the account owner's death. For example, if the account owner died in 2026, you'd have until 2037 to withdraw all the funds.

You could take it all in a lump sum, if you'd like. But doing this could lead to a large tax bill if the money comes from a traditional IRA. This isn't the case for Roth IRAs because the original account owner paid taxes on their contributions in the year they made them. However, taking money out of the inherited Roth IRA all at once could cause you to miss investment earnings you may have gotten by waiting a little longer.

You can compromise by withdrawing some money from the IRA each year of the 10-year span. Just make sure you don't leave any money remaining in the account by the end of the 10th year, or you could face problems with the IRS.

Exceptions to the 10-year rule

The 10-year rule applies to most non-spouse beneficiaries, and spousal beneficiaries can choose it as well. But spousal beneficiaries may also choose to roll the inherited IRA into their own retirement account. This may enable them to defer taxes on the funds for longer, but it also means they'll pay a penalty for accessing the money before age 59 1/2.

There's also a special class known as the "eligible designated beneficiaries." You might belong to this group if you're the spouse or minor child of the account holder, you're disabled or chronically ill, or you're not more than 10 years younger than the original owner. These individuals can follow the 10-year rule, but they also have another option.

They can take distributions based on their life expectancy. There's a specific formula you'd follow that determines how much you must withdraw in a given year. The remainder can grow as long as you want it to. This is a nice choice if you don't need the money right now. However, minor children can only use this method until they turn 18. Then, they must default to the 10-year rule.

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