Inherited IRA withdrawals: Explaining the 10-year rule
You previously mentioned that a beneficiary has 10 years to withdraw inherited IRA funds. My question is: Must you take a withdrawal amount in each of the 10 years, or can you wait until the 10th year and then withdraw 100% of the account?
First things first. If you inherited an IRA before Jan. 1, 2020, the 10-year rule does not apply to you. But if you inherited the account on or after that date, you must empty the account (paying taxes on the distributions) within 10 years unless you qualify for an exception based on your relationship to the deceased owner and/or your age or health.
Beneficiaries exempt from the 10-year rule include surviving spouses; minor children — but not grandchildren — up to their age of majority (18 in New York); people who are disabled or chronically ill; and anyone 10 years younger or less than the deceased IRA owner.
For withdrawal purposes, Year 1 is the year after the original owner’s death.
How rapidly you must empty the IRA within those 10 years depends on whether the deceased IRA owner was old enough to be taking required minimum distributions (RMDs) when he or she died. (The age to start taking RMDs varies depending on when the individual died. See the links below for more information.)
If the deceased owner was old enough to take RMDs, you as the beneficiary must take annual RMDs from the inherited account in years 1 through 9 and withdraw the remaining balance by the end of year 10.
If the original owner wasn’t yet subject to annual RMDs, neither are you — and you can therefore wait until the end of year 10 to empty the IRA if you wish. The advantage of waiting 10 years is that investments inside the IRA grow untaxed, potentially increasing your inheritance. The downside is that you’ll have to pay taxes on the entire account in a single tax year.
The bottom line:
Many IRA beneficiaries must empty inherited accounts within 10 years.
