Inherited retirement accounts

The ten-year rule

For an account owner who died in a tax year beginning after 31 December 2019, most designated beneficiaries must empty the inherited account by the end of the tenth year after the death. The old practice of spreading withdrawals across the beneficiary's own lifetime — the stretch IRA — no longer applies to them.

This matters because withdrawals from a traditional account are taxed as ordinary income in the year they are taken. Ten years is enough room to plan and not enough to ignore. A beneficiary who does nothing for nine years faces one very large taxable year.

A great deal of older material online still describes the stretch rule. Check the date on anything you read about inherited IRAs, including this page's own reviewed date.

The five categories that are exempt

The IRS calls these eligible designated beneficiaries, and they may still take distributions over life expectancy rather than inside ten years.

• The owner's surviving spouse.
• The owner's minor child. This one is temporary: the exemption ends at majority, and the ten-year clock then runs.
• A disabled individual.
• A chronically ill individual.
• Anyone not more than ten years younger than the account owner — which commonly covers a sibling or a partner of similar age.

An adult child of an ordinary age gap is not on that list, which is why the ten-year rule reaches most people who inherit from a parent.

The choice a surviving spouse has to make

A surviving spouse who is the sole designated beneficiary can elect to treat the inherited IRA as their own. That puts the account back on the ordinary rules for an owner: their own required-distribution age, their own beneficiaries, no ten-year clock.

It is not automatically the right answer. Treating it as your own means the early-withdrawal rules for owners apply, which matters for a spouse under 59½ who needs the money. Keeping it as an inherited account can allow access without that penalty.

This is a genuine trade-off between tax timing and access, and it is worth an hour with an accountant before electing. The election is difficult to unwind.

The mistake that cannot be undone

Do not have the account paid to you directly as a check, and do not deposit it into your own bank account. For a non-spouse beneficiary, taking possession of the money is treated as a full distribution — the entire balance becomes taxable income in that year, and it cannot be put back.

The transfer that keeps the account's tax treatment intact is a direct trustee-to-trustee transfer into an inherited IRA titled in the deceased owner's name for the benefit of the beneficiary. The institution knows how to do this. You have to ask for it by name, because the default offer is often a check.

Ask for a direct transfer to an inherited IRA. Say those words. This single sentence is worth more than everything else on this page.