Ask an Advisor: Does the 10-Year Rule Apply to the IRA I Inherited Years Ago?

I inherited an IRA from an aunt in 2009 and have been receiving the RMD each year since 2010. If the 10-year rule went into effect in 2019, how does it affect my inherited IRA from that point forward?  Does that mean I have to draw it down to zero by 2029? If so, can any of it be moved to my personal IRA without penalty?

– Ken 

I’m happy to tell you that you are completely exempt from the 10-year rule. Since it was not in effect when you inherited your IRA in 2009, it simply does not apply to you. As a result, you are not required to withdraw all of the the money in your inherited IRA by 2029.

A financial advisor can help you manage inherited retirement accounts and other windfalls. Connect with a financial advisor today.

What Is the 10-Year Rule?

The so-called “10-year rule¹” requires most non-spouse beneficiaries of inherited IRAs withdraw all the funds from the account by the end of the 10th year after the original account owner’s death. This rule was created as part of the SECURE Act of 2019 and went into effect on Jan. 1, 2020.

For example, say that a woman inherited an IRA from her uncle in 2021. Because she’s a non-spouse beneficiary, she must follow the 10-year rule. That means she has until the end of 2031 to fully withdraw the account balance, regardless of her age or retirement status.

Before this rule was created, beneficiaries were generally allowed to “stretch” required minimum distributions (RMDs) over their own life expectancy. This strategy was aptly known as the stretch IRA. There were several reasons someone may have wanted to do this. For one, it allowed the inherited account to grow tax-deferred for decades. Many beneficiaries also chose this approach for tax management, especially when inheriting large IRAs. By spreading distributions over many years, they could minimize annual tax liability and possibly avoid pushing into higher tax brackets.

Congress enacted the 10-year rule to eliminate stretch IRAs for most beneficiaries. This change was intended to discourage the use of inherited IRAs as long-term wealth transfer vehicles and to accelerate tax revenue by requiring faster distributions.

(A financial advisor can help you manage an inheritance and navigate RMD rules related to an inherited retirement account.)

Who Does the 10-Year Rule Apply to?

This rule applies to most non-spouse beneficiaries who inherit an IRA in 2020 or after, with a few exceptions. The 10-year rule does not automatically apply to beneficiaries who are:

• Surviving spouses
• Minor children
• Disabled or chronically ill
• Not more than 10 years younger than the deceased

Although it doesn’t apply specifically to your situation here, there is a consideration regarding minor children that is similar to the nature of your question. Although they are not required to withdraw the funds within 10 years, this is only until they reach the age of 21. Once they turn 21, the 10-year rule applies and the clock starts.

Again, it doesn’t apply to you simply because you inherited your IRA before the law that created the rule was established. You are grandfathered in. You can continue to take RMDs based on your own life expectancy. (If she died on or after he required beginning date (RBD), your distributions are based on the longer of your own life expectancy or her remaining life expectancy when she died².)

(A financial advisor can help you make sense of the constellation of rules and regulations associated with retirement accounts, so you aren’t subject to costly penalties.)

Rolling an Inherited IRA into Your Own

I want to separately address the question about whether or not you can roll an inherited IRA into your own IRA. Only surviving spouses have this option. Otherwise, you must keep the account as an inherited IRA, which comes with different rules and restrictions. This restriction applies regardless of whether the IRA was inherited before or after the SECURE Act took effect in 2020.

Unlike a traditional IRA you own, an inherited IRA cannot accept new contributions, and you must follow required distribution rules based on your relationship to the deceased and the year of death.

The rule exists to prevent indefinite tax deferral. Without it, beneficiaries could keep rolling inherited IRAs into their own accounts, potentially allowing families to delay required distributions and the associated taxes for multiple generations. 

(And if you have more questions related to inherited IRAs and whether SECURE Act changes impact your situation, speak with a financial advisor.)

Bottom Line

Since you inherited your aunt’s IRA before the SECURE Act of 2019 went into effect, you are not subject to the 10-year rule. In other words, you did not have to deplete the account within 10 years of her death. You are also not required to deplete the account within 10 years of the rule becoming effective. Instead, you’ll likely continue to take annual distributions based on either your own life expectancy or your aunt’s life expectancy when she died.

Retirement Planning Tips

• A financial advisor can help tailor a retirement plan to specific goals, income sources and risk tolerance. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• To build a realistic retirement plan, start by estimating your annual expenses in today’s dollars. Consider housing (including potential downsizing), food, healthcare premiums and out-of-pocket costs, travel and discretionary spending. Then, total your expected income sources—such as Social Security, 401(k) withdrawals, IRAs, annuities or rental income—and compare the two. This can help identify whether your current savings trajectory is on track or if you’ll need to adjust contributions or spending expectations.

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.

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