Understanding Inherited IRA Rules: What You Need to Know

When wealth is passed down through generations, inherited IRAs can play a significant role in helping beneficiaries manage retirement savings. However, the rules surrounding inherited IRAs have changed in recent years, especially with the passage of the SECURE Act and its latest update, SECURE 2.0. 

These changes may affect how and when required minimum distributions (RMDs) are taken from an inherited IRA. Whether you’ve recently inherited an IRA or are planning ahead, it’s important to become familiar with the recent and upcoming updates. 

What Are the Key Rules for Inherited IRAs?

IRAs including Traditional, SEP, and SIMPLE IRAs, come with specific requirements regarding withdrawals once the account holder reaches a certain age. Under the current rules, account owners must start withdrawing required minimum distributions (RMDs) by their "required beginning date" (RBD). (1)

The RBD used to be April 1 of the year after turning 70 ½, but the SECURE Act pushed this back to age 72 for IRA owners born after June 30, 1949. With SECURE 2.0, the RBD has now been further extended to age 73 for those turning 73 in 2023 or later. (1)

All types of IRA owners must withdraw the minimum RMD, except for owners of Roth IRAs. Roth IRAs only have a RMD requirement once the original Roth IRA owner dies and the Roth IRA passes to their beneficiary(ies). (1)

What Happens When You Inherit an IRA from a Spouse?

If you inherit an IRA from your spouse, you have the option to transfer the inherited IRA into your own name, allowing you to treat the IRA as if it were your own. (1)

For example, if you inherit a Traditional IRA, you can roll it over into your own IRA. This allows the account to continue potentially growing tax-deferred and may even give you the opportunity to make additional contributions to the account, subject to the annual contribution limits. In addition, if you're under age 75, you would begin taking RMDs based on your age. (1)

Inheriting an IRA as a Non-Spouse Beneficiary

The SECURE Act made significant changes for non-spouse beneficiaries of IRAs. Before 2020, non-spouse heirs could "stretch" RMDs over their lifetime using their life expectancy, which helped reduce taxes on IRA withdrawals. However, the SECURE Act eliminated this option for most non-spouse beneficiaries, introducing a new “10-year rule” that requires the account to be emptied by the 10th year following the IRA owner’s death. (1)

There are a few exceptions to this rule, which allow certain non-spouse beneficiaries to use their life expectancy for RMDs, including:

> Chronically ill or disabled beneficiaries

> Beneficiaries who are no more than 10 years younger than the original IRA owner

> Minor children of the account owner (but only until the child reaches age 21, at which point the 10-year rule applies) (1)

For all other non-spouse beneficiaries, the IRA must be fully depleted by the end of the 10th year following the account holder's death. This means there are no required annual withdrawals, but the entire account balance must be withdrawn by the 10th anniversary of the original account owner’s death. (1)

New Inherited IRA Rules Are Coming in 2025

Starting in 2025, a new requirement will apply to certain heirs who inherit IRAs under the 10-year rule. Under the new SECURE 2.0 provisions, beneficiaries will be required to take annual withdrawals, beginning in the year following the IRA owner’s death. If an heir fails to take an RMD in any given year, a 25% penalty will apply to the amount not withdrawn, though the penalty can be reduced to 10% if the mistake is corrected within two years. (2)

This means that, moving forward, heirs who are not subject to the exceptions for life expectancy withdrawals (chronically ill, disabled, minor children, etc.) must adhere to the new RMD schedule or face potential penalties. (2)

Closing Thoughts

Inherited IRAs can be a valuable way to pass on retirement savings to future generations, but the rules surrounding them can be complex. Understanding the changes brought by the SECURE Act and SECURE 2.0 is crucial for beneficiaries to ensure they comply with distribution requirements and avoid unnecessary penalties. As always, you should consult with an estate attorney to discuss inheritances. 

Article Sources: 

(1 ) “Inherited IRA Rules & SECURE Act 2.0 Changes.” Charles Schwab, January 9, 2024.
(2) Dore, Kate. “Inherited IRA rules are changing in 2025 — here’s what beneficiaries need to know.” CNBC, October 17, 2024.