The 10-Year Rule Is Here to Stay: What IRA Beneficiaries Need to Know
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 brought significant changes to retirement planning. One of the most impactful updates is the 10-Year Rule for inherited IRAs and other retirement accounts. If you are a beneficiary or a retirement account owner doing estate planning, understanding this rule is essential.
With the release of final Required Minimum Distribution (RMD) regulations in July 2024, the IRS has now confirmed how the 10-Year Rule is to be applied moving forward.
What Is the 10-Year Rule?
The 10-Year Rule requires certain beneficiaries to fully withdraw all assets from an inherited IRA or retirement plan by December 31 of the year that contains the tenth anniversary of the original account holder’s death.
Depending on the situation, some beneficiaries must also take annual distributions within that period. Others may take distributions in any amount and at any frequency, as long as the account is depleted by the end of the tenth year.
How the SECURE Act Changed Beneficiary Categories
The SECURE Act established three classes of beneficiaries, each with different distribution rules:
Eligible Designated Beneficiaries (EDBs)
This group includes:
- The surviving spouse of the account owner
- A minor child of the account owner
- A disabled or chronically ill individual
- An individual not more than ten years younger than the account owner
- A beneficiary of someone who died before January 1, 2020
Eligible Designated Beneficiaries generally may stretch distributions over their life expectancy, depending on when the original account holder died.
Designated Beneficiaries (DBs)
These are individual beneficiaries who do not qualify as eligible designated beneficiaries. They are typically required to follow the 10-Year Rule.
Nonperson Beneficiaries
This includes estates, charities, and certain types of trusts. These beneficiaries are subject to different and often less favorable distribution rules, as they are not natural persons.
How the 10-Year Rule Applies Under Final RMD Regulations
The IRS finalized regulations in July 2024 that confirm the following:
- A designated beneficiary must deplete the inherited account by December 31 of the tenth year after the account owner’s death.
- If the account owner died on or after their Required Beginning Date (RBD), the designated beneficiary must also take annual life expectancy distributions in years one through nine.
- Eligible designated beneficiaries may not elect the 10-Year Rule if the account owner died on or after the RBD. They must use life expectancy payments instead.
- A see-through trust with a designated beneficiary must follow the 10-Year Rule.
- A minor child of the account owner may begin by taking life expectancy payments. Once that child reaches age 21, they are subject to the 10-Year Rule going forward.
Who Is Required to Use the 10-Year Rule?
The 10-Year Rule applies to:
- Designated beneficiaries who inherit accounts on or after January 1, 2020
- See-through trusts with designated beneficiaries
- Minor children of the account owner once they reach age 21
Who Cannot Use the 10-Year Rule?
The 10-Year Rule does not apply to:
- Eligible designated beneficiaries when the account owner died on or after the RBD
- See-through trusts composed solely of eligible designated beneficiaries, when the account owner died on or after the RBD
- Nonperson beneficiaries such as estates and charities
When Are Annual Distributions Required?
This has been one of the most misunderstood aspects of the 10-Year Rule. Initially, many believed that no annual distributions were required under the rule. The final RMD regulations clarify the following:
- If the account owner died before reaching their RBD, or if the account is a Roth IRA, there is no requirement for annual distributions. The beneficiary must simply deplete the account within ten years.
- If the account owner died on or after their RBD, and the beneficiary is a designated beneficiary, the beneficiary must take life expectancy payments each year for the first nine years. The entire account must still be distributed by the end of year ten.
Note that these life expectancy payments are minimums. The beneficiary may always withdraw more than the required amount without penalty.
What If You Miss a Required Distribution?
Failing to take a required distribution triggers a 25 percent penalty on the amount that should have been withdrawn. If the error is corrected in a timely fashion, the penalty can be reduced to 10 percent.
Prior to 2023, this penalty was 50 percent. The SECURE 2.0 Act reduced it to 25 percent and added the opportunity to reduce it further by correcting the error quickly.
Beneficiaries may request a waiver of the penalty by filing IRS Form 5329.
IRS Relief for Missed Distributions Has Ended
Due to confusion about the 10-Year Rule, the IRS did not enforce the penalty for missed life expectancy distributions during the 2021 through 2024 tax years. This relief applied only to:
- Designated beneficiaries of account owners who died on or after the RBD between 2020 and 2023, who were not taking life expectancy payments
- Successor beneficiaries of eligible designated beneficiaries who died between 2020 and 2023, who were taking life expectancy payments
This relief expired on January 1, 2025. Moving forward, beneficiaries must comply with RMD rules to avoid penalties.
Final Thoughts
The 10-Year Rule is no longer temporary or unclear. With finalized IRS regulations now in place, beneficiaries and retirement account owners must understand how the rules affect them. This is especially important for planning tax strategies and ensuring compliance with distribution deadlines.
Consult a qualified financial or tax advisor to make sure you are following the appropriate rules for your situation.
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