Inherited IRA Rules

Inherited IRA Rules for 2026: What the IRS 10-Year Rule Means for Self-Directed IRA Investors

 

Inherited an IRA? Newer IRS regulations could affect when you must withdraw funds, how much you owe in taxes, and what happens to alternative investments held inside the account.

 

Inheriting an IRA can provide a valuable financial opportunity. However, beneficiaries must understand the rules governing how long inherited retirement assets can remain invested.

The IRS finalized important Required Minimum Distribution (RMD) regulations in 2024, with key provisions taking effect in 2025. These rules clarify how the inherited IRA 10-year rule works and when annual withdrawals are mandatory.

For beneficiaries of Self-Directed IRAs, the rules deserve special attention. Unlike traditional IRAs invested primarily in publicly traded stocks and mutual funds, Self-Directed IRAs may hold real estate, private equity, promissory notes, and other alternative investments that cannot always be liquidated quickly.

The bottom line: Many non-spouse beneficiaries must empty an inherited IRA within 10 years, and some must also take annual RMDs during years 1 through 9.

Understanding the difference could help you avoid costly penalties and make informed decisions about inherited retirement assets.

What Is the Inherited IRA 10-Year Rule?

The inherited IRA 10-year rule generally requires designated beneficiaries who do not qualify for a special exception to withdraw the entire inherited IRA balance by December 31 of the tenth year following the original account owner’s death.

The rule generally applies when the IRA owner died on or after January 1, 2020.

For example, if someone inherited an IRA from an owner who passed away in 2023, the beneficiary generally must withdraw the entire balance by December 31, 2033.

However, that does not necessarily mean the beneficiary can wait until the final year to begin taking distributions.

Whether annual withdrawals are required depends largely on whether the original IRA owner died before or after their Required Beginning Date (RBD), as well as the beneficiary’s status.

Two Versions of the Inherited IRA 10-Year Rule

The IRS distinguishes between beneficiaries who inherit an IRA before the original owner reaches their Required Beginning Date and those who inherit after that date.

Original IRA owner’s status at death	Annual RMDs during years 1–9	Final deadline
Died before Required Beginning Date	Generally not required	Empty account by December 31 of Year 10
Died on or after Required Beginning Date	Generally required annually	Empty account by December 31 of Year 10

This table describes the general rules for designated beneficiaries who are not eligible designated beneficiaries, primarily involving traditional IRAs.

Scenario 1: The IRA Owner Died Before Their Required Beginning Date

If the original owner died before their Required Beginning Date, a beneficiary subject to the standard 10-year rule generally does not have to take annual distributions during the first nine years.

The beneficiary may choose to take withdrawals periodically or wait until the final year.

However, the entire account must be distributed by December 31 of Year 10.

Example: Your mother passed away in 2024 before reaching her Required Beginning Date. You inherited her traditional IRA.

• You generally do not have to withdraw funds annually from 2025 through 2033.
• You may choose to take distributions during those years.
• The remaining balance must be distributed by December 31, 2034.

For a Self-Directed IRA holding real estate or private investments, this flexibility may provide additional time to plan distributions or arrange for the sale of assets.

Scenario 2: The IRA Owner Died on or After Their Required Beginning Date

If the original owner died on or after their Required Beginning Date, a beneficiary subject to the standard 10-year rule generally must take annual RMDs beginning in the year following the owner’s death.

The remaining account balance must still be fully distributed by December 31 of Year 10.

Example: Your father passed away in 2024 after his Required Beginning Date. You inherited his traditional Self-Directed IRA.

• Annual RMDs generally begin in 2025.
• You must continue taking required distributions each year.
• The remaining account balance must be distributed by December 31, 2034.

Annual RMDs are calculated using applicable IRS life expectancy rules. In certain cases, the deceased owner’s remaining life expectancy may be used if it produces a longer distribution period.

Important: The Required Beginning Date is not always simply the owner’s 73rd birthday. Applicable RMD ages vary by birth year. For individuals born in 1960 or later, the general RMD starting age increases to 75.

The IRS Penalty Waivers Have Ended

For several years following passage of the SECURE Act, confusion surrounded whether annual distributions were required under the 10-year rule.

The IRS provided temporary penalty relief for certain beneficiaries who failed to take specified RMDs during 2021 through 2024.

That blanket relief did not extend into 2025.

Under the final regulations, affected beneficiaries must comply with applicable annual RMD requirements.

What Happens If You Miss an Inherited IRA RMD?

Failure to take a required distribution may result in:

• A 25% excise tax on the amount that should have been withdrawn but was not.
• A reduced 10% excise tax if the missed distribution is corrected within the applicable correction window.
• Potential IRS relief when the failure resulted from reasonable error and appropriate corrective action is taken.

For example, if a beneficiary fails to withdraw a required $20,000 RMD, the potential excise tax could be $5,000, or $2,000 if the beneficiary qualifies for the reduced rate.

Beneficiaries seeking relief may need to file IRS Form 5329.

The lesson for investors: Do not assume that having 10 years to empty an IRA means you have 10 years without annual withdrawal obligations.

What Do These Rules Mean for Self-Directed IRA Investors?

This is where inherited IRA planning becomes particularly important.

A Self-Directed IRA can hold investments beyond traditional stocks, bonds, and mutual funds, including:

• Residential and commercial real estate
• Private equity and private placements
• Limited liability company interests
• Promissory notes and private lending investments
• Precious metals
• Cryptocurrency
• Other permitted alternative investments

These assets may provide diversification opportunities, but they also present challenges when inherited IRA distributions become mandatory.

Challenge #1: What If Your Inherited IRA Owns Real Estate?

Imagine inheriting a Self-Directed IRA holding a rental property valued at $400,000.

If annual RMDs are required, the beneficiary must arrange for sufficient distributions even if the property is not generating enough cash to cover them.

The IRS does not generally excuse a missed RMD simply because the IRA owns an illiquid investment.

Possible planning considerations include:

Using available IRA cash: Rental income or other cash held inside the IRA may help fund required distributions.

Selling the property: Selling an investment within the inherited IRA may generate liquidity for required withdrawals.

Taking an in-kind distribution: Under appropriate circumstances, an IRA may distribute property or an interest in property rather than cash. The fair market value of the property distributed generally determines the amount reported as a distribution.

An in-kind distribution transfers ownership of the distributed asset outside the IRA and may create a taxable event.

It also requires careful attention to property valuation, ownership documentation, and applicable custodian procedures.

For Self-Directed IRA investors, early planning is particularly important because real estate transactions may take months to complete.

Challenge #2: What If Your Inherited IRA Holds Private Placements?

Private placements and limited partnership interests may have restrictions on transfers or redemptions.

Suppose your inherited IRA owns a $250,000 interest in a private investment fund.

The investment may not provide liquidity until the fund sells its underlying assets or makes distributions.

However, the IRS withdrawal deadline still applies.

Beneficiaries should evaluate:

• Whether the investment is expected to generate cash distributions.
• Whether the investment sponsor permits ownership transfers.
• Whether an in-kind distribution may be possible.
• Whether a secondary sale is permitted.
• Whether sufficient liquidity exists elsewhere in the inherited IRA.

Remember: The investment’s maturity date and the IRS distribution deadline may not be the same.

Investors who overlook this distinction could find themselves facing mandatory withdrawals without an immediate source of cash.

Challenge #3: Fair Market Value Is Essential

Self-Directed IRAs frequently hold assets without a readily available market price.

Accurate fair market valuations are especially important when calculating RMDs or processing in-kind distributions.

For example, if an inherited IRA contains a promissory note that has declined in value because the borrower defaulted, the beneficiary should not automatically assume that the original investment amount remains its current fair market value.

Appropriate supporting documentation and a qualified independent valuation may be necessary.

IRA custodians and administrators generally rely on valuation information provided by appropriate parties rather than independently appraising alternative assets.

Keeping valuations current helps support accurate tax reporting and distribution calculations.

What About Inherited Roth IRAs?

Inherited Roth IRAs receive different treatment.

Because Roth IRA owners are not subject to lifetime RMDs, an individual beneficiary subject to the standard 10-year rule generally does not need to take annual RMDs during years 1 through 9.

However, the inherited Roth IRA must still be completely distributed by December 31 of Year 10.

This may create an opportunity for continued tax-free investment growth, assuming applicable requirements are satisfied.

For example, someone who inherits a Self-Directed Roth IRA containing private investments may be able to keep those investments in the inherited account during the 10-year period, subject to applicable rules and investment restrictions.

Qualified inherited Roth IRA distributions are generally tax-free. However, the Roth IRA five-year holding-period requirement can affect the taxation of earnings.

Beneficiaries should verify that requirement before assuming every withdrawal will be tax-free.

Who Is Exempt from the Standard 10-Year Rule?

Certain beneficiaries qualify as Eligible Designated Beneficiaries (EDBs) and may receive more favorable distribution options.

These generally include:

1. Surviving spouses: Spouses have special options, including potentially treating an inherited IRA as their own.
2. Minor children of the deceased IRA owner: Special rules apply until the child reaches age 21, after which the 10-year period generally begins.
3. Disabled individuals: Beneficiaries meeting applicable IRS disability requirements may qualify for life expectancy distributions.
4. Chronically ill individuals: Certain qualifying beneficiaries may also use special distribution rules.
5. Individuals not more than 10 years younger than the deceased IRA owner: These beneficiaries may qualify for distributions based on life expectancy.

These exceptions do not necessarily eliminate distribution requirements. Instead, they may change the permitted timeline.

Additionally, IRAs inherited by estates, certain trusts, or other non-individual beneficiaries may be subject to different rules.

Can You Transfer an Inherited Self-Directed IRA to Another Custodian?

Generally, yes. A properly structured trustee-to-trustee transfer may allow a non-spouse beneficiary to move an inherited IRA to another IRA custodian or administrator that accommodates the investments they wish to hold.

However, a non-spouse beneficiary generally cannot roll the inherited IRA into their own personal IRA.

The inherited IRA must retain appropriate beneficiary titling identifying the deceased owner and the beneficiary.

For investors who inherit retirement accounts containing alternative assets, working with an administrator experienced in Self-Directed IRAs can help facilitate the transfer and ongoing administration.

Important: Moving an inherited IRA to another custodian does not reset the 10-year distribution deadline or eliminate annual RMD requirements.

Tax Planning: Should You Wait Until Year 10 to Withdraw Everything?

Not necessarily.

For inherited traditional IRAs, distributions generally count as ordinary taxable income, except to the extent the IRA contains tax basis or another exclusion applies.

Taking a large distribution in a single year could push a beneficiary into a higher income tax bracket.

For example, consider a beneficiary who inherits a $500,000 traditional IRA and is not required to take annual distributions.

Waiting until Year 10 to withdraw the entire account might create a substantial taxable income event, particularly if the investments have increased in value.

Taking distributions across several years might help manage the beneficiary’s tax burden.

However, the most effective strategy depends on factors including:

• Current and anticipated future income
• Federal and state income tax rates
• Investment liquidity
• Expected investment performance
• Other retirement savings
• Applicable annual RMD requirements

A qualified tax professional can help determine whether spreading distributions over multiple years makes sense.

Five Steps Self-Directed IRA Beneficiaries Should Take Now

1. Confirm the original IRA owner’s date of death and Required Beginning Date.

These facts help determine the applicable withdrawal rules.

2. Determine your beneficiary classification.

Find out whether you are subject to the standard 10-year rule or qualify as an Eligible Designated Beneficiary.

3. Review the investments inside the inherited IRA.

Identify assets that may be difficult to liquidate, including real estate, private placements, and promissory notes.

4. Establish a distribution and valuation plan.

Work with appropriate professionals to determine annual withdrawal obligations, maintain supportable asset values, and identify potential liquidity needs.

5. Plan well before the deadline.

Do not wait until December to arrange a distribution, particularly if the account contains alternative investments requiring documentation, valuations, or asset transfers.

Frequently Asked Questions About Inherited IRAs

 

Do I have to take an RMD from my inherited IRA in 2026?

It depends. If you inherited a traditional IRA from someone who died on or after their Required Beginning Date and you are a non-eligible designated beneficiary, annual RMDs generally apply during years 1 through 9. Other beneficiary categories may have different requirements.

Can I leave an inherited IRA untouched for 10 years?

Generally, only if you are subject to the 10-year rule and the original owner died before their Required Beginning Date. Even then, the entire account must be distributed by the end of Year 10.

Does the 10-year rule apply to Self-Directed IRAs?

Yes. The same federal inherited IRA distribution rules generally apply whether the IRA holds publicly traded securities, real estate, private equity, or other permissible investments.

Can I satisfy an inherited IRA RMD by distributing real estate?

Potentially. An in-kind distribution of property or a qualifying ownership interest may count toward an RMD, using the applicable fair market value. Proper valuation, documentation, and processing are essential.

What if my inherited IRA investment cannot be sold before the deadline?

An illiquid investment does not automatically extend the IRS deadline. Beneficiaries should explore permitted sales, transfers, and in-kind distribution options well in advance and consult qualified professionals about the consequences.

Are inherited Roth IRA withdrawals taxable?

Qualified inherited Roth IRA distributions are generally tax-free. However, the five-year holding-period rules may affect whether earnings are taxable.

Is there a 10% early withdrawal penalty on an inherited IRA?

Generally, distributions made to a beneficiary following the original IRA owner’s death are exempt from the usual 10% early distribution additional tax, even if the beneficiary is under age 59½. Ordinary income taxes may still apply to traditional IRA distributions, and separate penalties may apply for missed RMDs.

What happens if I miss an inherited IRA RMD?

The shortfall may be subject to a 25% excise tax, potentially reduced to 10% after timely correction. The IRS may waive the tax for reasonable error when the beneficiary takes appropriate corrective steps and follows the required filing procedures.

The Bottom Line: An Inherited Self-Directed IRA Requires Planning

Inheriting a Self-Directed IRA can provide access to retirement assets invested in real estate, private businesses, promissory notes, and other alternative investments.

But those investment opportunities come with important responsibilities.

The IRS’s finalized inherited IRA regulations make one point clear: Beneficiaries must understand both their annual RMD obligations and their ultimate distribution deadline.

For investors holding illiquid assets, the consequences of waiting too long can be especially significant.

Planning ahead may help beneficiaries preserve investment flexibility, manage tax consequences, and avoid unnecessary penalties.

Have You Inherited an IRA? uDirect IRA Services Can Help

At uDirect IRA Services, we help investors understand the administrative process of holding alternative investments in Self-Directed IRAs, including inherited accounts.

Whether your inherited IRA contains real estate, private placements, promissory notes, or other permitted investments, our team can help you understand the account administration and documentation involved.

Explore the possibilities of self-directed retirement investing.

Get Started with uDirect IRA Services

Educational disclaimer: uDirect IRA Services provides educational information and account administration services. uDirect is not a tax advisor, investment advisor, or law firm. This article is intended for educational purposes only and should not be construed as tax, legal, or investment advice. Inherited IRA rules vary based on individual circumstances. Consult qualified tax and legal professionals regarding your situation.