The SECURE Act 10-Year Rule for Inherited IRAs

The SECURE Act of 2019 eliminated the stretch IRA for most non-spouse beneficiaries, replacing it with a 10-year rule that requires the entire inherited IRA balance to be distributed by December 31 of the tenth year following the original owner’s death. For a $500,000 inherited traditional IRA in a beneficiary’s peak earning years, this change can mean $100,000 or more in additional federal income tax over the distribution period compared to the old stretch rules.

The confusion deepened in July 2024, when the IRS issued Final Regulations (TD 9809) clarifying that annual required minimum distributions are mandatory in years one through nine for certain beneficiaries. Three years of proposed regulations, two rounds of penalty waivers, and one final rule later, the rules are now settled. Here is what heirs need to know.

How the 10-Year Rule Works

Under the SECURE Act (P.L. 116-94), most non-spouse beneficiaries who inherit an IRA from an original owner who died on or after January 1, 2020 must distribute the entire account balance by December 31 of the tenth calendar year following the year of death.

The critical question is whether you must take annual distributions during years one through nine, or whether you can let the account grow and take the entire balance in year ten. The answer depends on one factor: whether the original owner died before or after their Required Beginning Date (RBD).

Original Owner’s Death	Annual RMDs in Years 1-9?	Year 10 Requirement
Before RBD (died before April 1 of the year after turning 73)	No annual RMDs required	Entire balance must be distributed by 12/31 of year 10
After RBD (died on or after April 1 of the year after turning 73)	Yes, annual RMDs required using beneficiary’s life expectancy	Any remaining balance must be distributed by 12/31 of year 10

The RBD under current law is April 1 of the calendar year following the year the account owner reaches age 73 (raised from 72 by SECURE 2.0 Section 107, effective for individuals turning 72 after December 31, 2022).

Why the Pre-RBD vs. Post-RBD Distinction Matters

If the original owner died before their RBD, the beneficiary has maximum flexibility. No annual distributions are required during years one through nine. The beneficiary can let the entire balance compound tax-deferred and take a single lump-sum distribution in year ten, or distribute it in any combination across the 10-year window.

If the original owner died after their RBD, the Final Regulations require annual RMDs in years one through nine, calculated using the beneficiary’s single life expectancy from IRS Publication 590-B, Table I. Any remaining balance must still be fully distributed by year ten.

For a 45-year-old beneficiary inheriting a $500,000 traditional IRA from a parent who died after their RBD, the year-one RMD is approximately $12,887 (using the Table I life expectancy factor of 38.8 for age 45).

Missing an annual RMD triggers a penalty of 25% of the amount that should have been distributed (reduced from the old 50% penalty by SECURE 2.0 Section 302). If corrected within two years, the penalty drops to 10%.

The Five Categories of Eligible Designated Beneficiaries

Not everyone is subject to the 10-year rule. The SECURE Act carved out five categories of eligible designated beneficiaries (EDBs) who can still use the old stretch IRA rules, taking distributions over their own life expectancy:

EDB Category	Stretch Available?	Special Rules
1. Surviving spouse	Yes, life expectancy stretch	Can also roll over to own IRA, treat as own, or elect 10-year rule
2. Minor child of the deceased	Yes, until age of majority	Once the child reaches majority (age 21 under Final Regs), the 10-year clock begins
3. Disabled individual	Yes, life expectancy stretch	Must meet Section 72(m)(7) definition of disability
4. Chronically ill individual	Yes, life expectancy stretch	Must meet Section 7702B(c)(2) definition
5. Individual not more than 10 years younger than the deceased	Yes, life expectancy stretch	Typically a sibling or similar-age beneficiary

Surviving spouses have the most options. They can treat the inherited IRA as their own, roll it into their own IRA, remain as beneficiary and take life-expectancy distributions, or elect the 10-year rule. The optimal choice depends on the spouse’s age, income, and whether they need the funds before age 59.5 (the 10% early withdrawal penalty does not apply to inherited IRA distributions, but it does apply if the spouse rolls the IRA into their own account and withdraws before 59.5).

Minor children qualify for the stretch only until they reach the age of majority, defined as age 21 in the Final Regulations. Once the child turns 21, the 10-year clock begins. A child who inherits at age 10 gets the stretch until age 21, then must empty the account by age 31. This applies only to children of the deceased owner, not grandchildren, nieces, nephews, or other minors.

The Step-Up Trap: IRAs Do Not Get a Basis Step-Up

This is the mistake that costs heirs the most money in misconceptions alone. Under Section 1014(a), most inherited assets receive a step-up in cost basis to fair market value at the date of death. Stocks, real estate, and other capital assets benefit from this provision, often eliminating decades of unrealized gains.

IRAs do not receive a step-up. They are classified as income in respect of a decedent (IRD) under Section 691. Every dollar distributed from an inherited traditional IRA is taxed as ordinary income to the beneficiary, regardless of what the original owner contributed or when. The full balance, including all pre-tax contributions and all accumulated earnings, is ordinary income when distributed.

Asset Type	Step-Up at Death?	Tax Treatment to Heir
Stocks/bonds in taxable account	Yes (Section 1014(a))	Capital gains only on post-death appreciation
Real estate	Yes (Section 1014(a))	Capital gains only on post-death appreciation
Traditional IRA	No (IRD, Section 691)	100% ordinary income on every distribution
Roth IRA	No (but distributions are tax-free if qualified)	Tax-free if 5-year rule met by original owner
Annuities	No (IRD, Section 691)	Ordinary income on gains portion

For a beneficiary in the 24% federal bracket inheriting a $500,000 traditional IRA, the total federal income tax on the full balance is approximately $120,000, spread across however many years they take distributions. In practice, concentrating distributions into high-income years can push the effective rate well above 24%.

Planning Strategies Within the 10-Year Window

The 10-year window creates a planning opportunity for beneficiaries who inherited from owners who died pre-RBD (no annual RMDs required). The key variable is the beneficiary’s marginal tax rate in each year of the 10-year window.

Spread distributions across lower-income years. If the beneficiary expects a sabbatical, early retirement, or gap year with lower income, accelerating distributions into that year can save thousands in taxes. If the beneficiary expects rising income (early career), front-loading distributions while in a lower bracket may be optimal.

Consider Roth conversions of the inherited IRA. Wait. You cannot convert an inherited IRA to a Roth IRA. This is a common misconception. Beneficiary IRAs are not eligible for Roth conversion unless the beneficiary is a surviving spouse who has rolled the IRA into their own account.

Coordinate with state tax. Virginia taxes inherited IRA distributions as ordinary income. Beneficiaries who plan to relocate to a no-income-tax state (Florida, Texas, Nevada, Wyoming) before the end of the 10-year window may benefit from delaying larger distributions until after the move.

What to Watch

The IRS waived the penalty for missed annual RMDs for tax years 2021, 2022, and 2023 while the regulations were in proposed form. Those waivers expired. Starting with the 2025 tax year, the annual RMD requirement for post-RBD deaths is enforced, and the 25% penalty applies to missed distributions.

We believe the 10-year rule is the most consequential retirement tax change of the past decade for heirs. The difference between a well-planned distribution strategy and a lump sum in year 10 can be $30,000 to $80,000 in unnecessary federal taxes on a mid-six-figure inherited IRA. In our view, this is not a set-it-and-forget-it inheritance. It is a 10-year tax planning project.

Ferrante Capital LLC is not a law firm or CPA firm. This content is educational and does not constitute tax, legal, or investment advice. Consult a qualified tax professional before making inherited IRA distribution decisions. Please consult a qualified financial professional before making investment decisions.

Related reading:

• The Year-Three Tax Cliff After Losing a Spouse
• Roth vs. Traditional IRA: Which Is Right for You?
• How to Read Your 401(k) Statement

Ferrante Capital LLC is a registered investment adviser. This content is for educational purposes only and does not constitute investment advice or a recommendation to buy or sell any security.

FC may hold positions in the securities mentioned on behalf of clients.

Forward-looking statements reflect current views and are subject to change without notice and to material risk. Past performance does not guarantee future results.

Consult a qualified financial professional regarding your individual situation.

---

Ferrante Capital LLC is a registered investment adviser. Information presented is for educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. All investing involves risk, including the possible loss of principal.

FC and its principals may hold positions in securities or asset classes discussed in this article. This analysis is for educational purposes only and does not constitute a recommendation to buy, sell, or hold any security.

Forward-looking statements reflect Ferrante Capital’s current analysis and involve assumptions and estimates. Actual results may differ materially. Past performance is not indicative of future results.

Please consult a qualified financial professional before making investment decisions.