Understanding the 10-Year Rule When Inheriting a Retirement Account

In July, the IRS finalized the rules surrounding required minimum distributions (RMDs) for inherited IRAs. This is important for anyone who has (or who might in the future) inherit a retirement account, as it clarifies how and when you need to withdraw funds.

Over the next several decades, the Great Wealth Transfer will shift nearly $84 trillion in assets from one generation to the next.¹ This means a lot of retirement accounts will be in motion.

Translation? Pay attention. Even if these rules don’t impact you today, they may soon.

Let’s break down the finer details together.

The 10-year rule applies to most beneficiaries who inherit an IRA. Under this rule, you generally have until the end of the 10th year following the year of the original account owner’s death to withdraw all the funds from the inherited IRA. This means you’ll need to develop a withdrawal plan to distribute the entire balance within that timeframe.

Most beneficiaries who inherit an IRA are subject to the 10-year rule. However, there are some exceptions²:

• Spouses: Spouses can treat the inherited IRA as their own and take distributions based on their own life expectancy.
• Minor children: The 10-year rule is delayed for minor children and begins once they reach the age of majority, which is 21 years old.
• Eligible designated beneficiaries: This includes beneficiaries who are not more than 10 years younger than the original account owner, disabled beneficiaries, and chronically ill beneficiaries. These beneficiaries can generally stretch out their distributions over their lifetime (depending on the year the original owner passed away).

If you fail to withdraw all the funds from an inherited IRA by the end of the tenth year, you may face tax penalties. These penalties can be significant, so it’s crucial to understand the rules and plan your withdrawals accordingly.

If you inherited an IRA, it’s important to understand your specific situation. Together, we’ll develop a withdrawal plan that complies with the 10-year rule (or lifetime RMD rules if applicable).

Simply reply to this email to get the conversation started.