Trillions of dollars in Baby Boomer assets will be transferred in the coming years. Beneficiaries may end up with multiple Inherited IRAs, each with varying distribution requirements. Careful management is needed to minimize taxation, thereby maximizing return.

Note: Beneficiaries must satisfy any remaining year of death required distributions (RMDs). This is generally best handled by establishing the inherited IRA and processing the remaining distribution. Taxes, if any, are due to the IRA beneficiary(s).

This article covers:

• Inherited IRA Rules: What Beneficiaries Need to Know
• Understanding the Required Beginning Date (RBD)
• Beneficiary Classifications and Distribution Options
• Roth IRAs and Inheritance
• Planning Considerations
• Frequently Asked Questions

Inherited IRA Rules: What Beneficiaries Need to Know

When you inherit an IRA, your distribution options depend on several key factors:

• Whether the decedent had reached their Required Beginning Date (RBD)
• The type of IRA (Traditional/Rollover, Roth)
• Your beneficiary classification: Eligible Designated Beneficiary (EDB), Non-Eligible Designated Beneficiary (NEDB), or Non-Designated Beneficiary

This post builds on our previous guide, “IRA Rules for Retirees”, which covered RMDs, Roth IRA withdrawal rules, and the Roth 5-year rule. Now, we explore how those rules shift when the account owner passes away.

Understanding the Required Beginning Date (RBD)

The RBD is the deadline for taking the first Required Minimum Distribution (RMD). For most IRA owners, the RBD is April 1 of the year after reaching age 73 (rising to 75 for those born in 1960 or later).

Why does this matter for beneficiaries? Because whether the decedent passed before or after their RBD affects whether annual RMDs are required during the 10-year deferral period.

Beneficiary Classifications and Distribution Options

The SECURE Act created three distinct beneficiary classes

1. Eligible Designated Beneficiary (EDB)

Includes:

• Surviving spouse of the decedent
• Minor child of the decedent (until reaching age of majority)
• Disabled individuals (as defined under IRC §72(m)(7))
• Chronically ill individuals (as defined under IRC §7702B(c)(2))
• Individuals not more than 10 years younger than the decedent
• Certain qualifying “see-through” trusts for the above individuals

Distribution Options:

Stretch IRA (Life Expectancy Method):

• EDBs can take distributions over their own life expectancy using the IRS Single Life Table.
• This option allows for smaller annual RMDs and tax deferral over a longer period.

Example:

• Owner dies in 2025 at age 72 (after RBD).
• Beneficiary is surviving spouse, age 68.
• Spouse can roll over the IRA into their own name or remain as beneficiary and calculate RMDs based on their life expectancy.

10-Year Rule:

• Applies if EDB later loses status (e.g., minor child reaches majority).
• At that point, the remaining balance must be distributed by December 31 of the 10th year following the year status changes.

Special Spousal Options:

Surviving spouse can:

• Treat the IRA as their own (most common).
• Delay RMDs until the decedent would have reached RBD.
• Use life expectancy method as beneficiary.

2. Non-Eligible Designated Beneficiary (NEDB)

Includes:

• Adult children of the decedent
• Friends, siblings, and most other individuals who do not meet EDB criteria
• Certain qualifying see-through trusts for these individuals

Distribution Options:

10-Year Rule:

If the decedent died before RBD:

• Entire account must be distributed by December 31 of the 10th year following death.
• No annual RMDs required during the 10 years; withdrawals can be taken at any time.

 Example:

• Owner dies in 2025 at age 70 (before RBD).
• Beneficiary is adult child.
• Account must be fully distributed by December 31, 2035.

If the decedent died after RBD:

• Annual RMDs are required during the 10-year period under the “at least as rapidly” rule.
• Beneficiary calculates RMDs using their own life expectancy for year one, then reduces by one each year, but still must empty the account by year 10.

Example:

• Owner dies in 2025 at age 75 (after RBD).
• Beneficiary is adult child, age 45.
• Child takes annual RMDs based on their life expectancy, but account must be zero by December 31, 2035.

3. Non-Designated Beneficiary

Includes:

• Estates
• Charities
• Non-see-through trusts

Distribution Options:

5-Year Rule: If decedent died before RBD

• If the account owner died before starting RMDs, the entire account must be distributed by December 31 of the fifth year following the year of death.
• There are no annual RMDs during those five years; the beneficiary can take distributions at any time, as long as the account is fully emptied by the end of year 5.
  • Example:
    • Owner dies in 2025 at age 70 (before RBD).
    • Beneficiary is the estate (non-designated).
    • The estate can take distributions in any pattern (all at once, or spread out), but the account must be fully distributed by December 31, 2030.

At least as rapidly rule: If decedent died after RBD

• If the account owner died after starting RMDs, the beneficiary must continue distributions at least as fast as the decedent was taking them.
• Practically, this means using the decedent’s remaining life expectancy under the IRS Single Life Table, reduced by one each year.
• This is sometimes called the ghost life expectancy method, because the beneficiary uses the deceased owner’s life expectancy, not their own.

Example:

• The owner dies in 2025 at age 75 (after RBD).
• Their remaining life expectancy per IRS table is 8 years.
• Beneficiary (estate) calculates RMDs based on that life expectancy, reducing by one each year:
• 2026: divide by 14.8
• 2027: divide by 13.8
• … and so on until the account is depleted.

Roth IRAs and Inheritance

Roth IRAs have no RMDs during the original owner’s lifetime. However, beneficiaries must still follow distribution rules:

• No RMDs during the 10-year period if the decedent died before RBD (which Roth owners never reach). The account must be liquidated in year 10.
• Tax-free withdrawals if the Roth IRA met the 5-year aging requirement.

Planning Considerations

• Spouses have the most flexibility: they can stretch, use the 10-year rule, or treat the IRA as their own
• Trusts must qualify as “see-through” to avoid being treated as non-designated beneficiaries
• Minor children get a stretch until age 21, then a 10-year deferral

For a deeper understanding of RMDs, Roth IRA rules, and the 5-year clock, check out our previous post: IRA Rules for Retirees: What You Need to Know About RMDs, Key Dates, and the Roth 5-Year Rule

 

Frequently Asked Questions

What happens when you inherit a Roth IRA?

You must withdraw all funds within 10 years, but no RMDs are required if the original owner had not reached their RBD (which Roth owners never do). Withdrawals are tax-free if the 5-year rule is met.

Do inherited IRAs require RMDs?

Yes, if the decedent died on or after their RBD, annual RMDs are required during the 10-year deferral period. If they died before RBD, no RMDs are required unless the beneficiary is a minor EDB who reaches age 21.

What is the Required Beginning Date for IRA withdrawals?

The RBD is April 1 of the year after the IRA owner reaches age 73 (or 75 for those born in 1960 or later).

Who qualifies as an Eligible Designated Beneficiary?

EDBs include:

• Surviving spouses
• Minor children of the decedent
• Disabled or chronically ill individuals
• Individuals not more than 10 years younger than the decedent
• Certain qualifying trusts.

Can a trust inherit an IRA and still use the stretch option?

Yes, if the trust qualifies as a see-through trust and all considered beneficiaries are EDBs. Otherwise, the 10-year rule or “at least as rapidly” rule applies.

What are the rules for minor children inheriting IRAs?

Minor children can stretch distributions until age 21, then must follow the 10-year rule. If the decedent died after RBD, RMDs are required during the stretch and 10-year phases.

How does the 10-year rule work for inherited IRAs?

The account must be fully liquidated by December 31 of the tenth year after the decedent’s death. RMDs are required if the decedent died on or after their RBD.

Are there RMDs for inherited Roth IRAs?

No RMDs are required for inherited Roth IRAs if the decedent died before RBD (which Roth owners never reach). However, the account must still be emptied within 10 years.

What’s the difference between EDB and NEDB?

EDBs can stretch distributions over their life expectancy. NEDBs must follow the 10-year rule and may be subject to RMDs if the decedent died after RBD.

How do SECURE Act rules affect inherited IRAs?

The SECURE Act eliminated the lifetime stretch for most beneficiaries, replacing it with the 10-year rule. It also introduced RMD requirements for inherited IRAs if the decedent died after RBD.