The 2020 Rule Change That’s Costing IRA Heirs Millions

Inherited an IRA? The 10-Year Rule Changed Everything in 2020

The SECURE Act of 2019 fundamentally changed how inherited IRAs work for most beneficiaries. If you inherited an IRA after 2019, the old “stretch IRA” strategy—taking small required distributions over your lifetime—no longer applies in most cases. Understanding the new 10-year rule and its exceptions determines how you manage inherited retirement assets.

The Old Rules (Pre-2020)

Before the SECURE Act, most IRA beneficiaries could “stretch” distributions over their life expectancy:

How stretching worked: A 40-year-old inheriting an IRA could take required minimum distributions based on their 43-year life expectancy. These small annual distributions allowed the remaining balance to continue growing tax-deferred for decades.

Tax efficiency: Small annual distributions generated manageable tax bills. Beneficiaries could plan around distributions, timing them to lower-income years or spreading the tax burden across decades.

Wealth transfer power: A large IRA could fund generations of beneficiaries through careful stretch planning. This made IRAs powerful estate planning tools for high-net-worth families.

The 10-Year Rule (Post-2019 Deaths)

For most beneficiaries inheriting from someone who died after December 31, 2019, the rules changed dramatically:

Complete distribution required: The entire inherited IRA must be distributed by the end of the 10th year following the year of death. No stretching over life expectancy; no multi-generational wealth transfer through IRA wrapper.

No annual requirements (with caveats): Originally understood as requiring no distributions during the 10-year period (just full liquidation by year 10), the IRS later clarified that annual RMDs may be required during the 10 years if the original owner was already taking RMDs. This created confusion that’s still being clarified through regulations.

Timing flexibility: Within the 10-year window, beneficiaries choose when to take distributions. You could take nothing for 9 years and liquidate in year 10, or spread distributions evenly, or take varying amounts based on tax planning.

Who the 10-Year Rule Affects

Designated beneficiaries: Named individuals who don’t qualify as “eligible designated beneficiaries” (explained below) must follow the 10-year rule. Adult children inheriting from parents represent the largest affected group.

Non-spouse beneficiaries: The 10-year rule applies to all non-spouse beneficiaries except specific categories. Siblings, adult children, nieces, nephews, friends, and domestic partners (in most cases) all face the 10-year requirement.

Trust beneficiaries: When trusts inherit IRAs, the 10-year rule typically applies unless the trust qualifies as a “see-through trust” with only eligible designated beneficiaries.

Eligible Designated Beneficiaries (Exceptions to 10-Year Rule)

Five categories of beneficiaries can still stretch distributions over life expectancy:

Surviving spouses: Spouses have the most flexibility. They can treat inherited IRAs as their own, roll funds into their own IRAs, or remain beneficiaries taking distributions over their life expectancy. The 10-year rule doesn’t apply.

Minor children of the deceased: Children under 21 can stretch until reaching majority, then the 10-year clock starts. Note: this applies only to the deceased’s own children, not grandchildren or other minors.

Disabled individuals: Beneficiaries meeting IRS disability definitions qualify for life expectancy stretching. The disability must be documented and meet specific criteria.

Chronically ill individuals: Similar to disability, chronic illness that limits independent living qualifies for stretch treatment. Medical certification required.

Beneficiaries not more than 10 years younger: Siblings or others close in age to the deceased can stretch. This provision helps near-age-peer beneficiaries avoid the 10-year crunch.

Strategic Considerations Under the 10-Year Rule

Income smoothing: Rather than taking the entire IRA in year 10 (creating massive tax liability), consider spreading distributions across all 10 years. This keeps you in lower brackets each year, reducing total taxes paid.

Roth conversion opportunity: Lower-income years during the 10-year period might justify accelerated distributions, paying tax at low rates. If you’re between jobs, in early retirement, or have unusual deductions, take more that year.

State tax considerations: If you might relocate to a no-income-tax state, timing distributions for after that move reduces taxes. Plan relocations with inherited IRA timing in mind.

Capital loss harvesting: Years with significant capital losses in taxable accounts might support larger IRA distributions—the losses offset the ordinary income. Coordinate IRA strategy with overall tax planning.

The RMD Complication

IRS regulations (still being finalized) indicate that if the original IRA owner had already begun taking required minimum distributions (RMDs), beneficiaries must continue annual distributions during the 10-year period.

How this works: Calculate annual RMDs based on beneficiary life expectancy tables. Take at least that amount each year. By year 10, the full remaining balance must be distributed regardless of whether RMDs would have required it.

If owner died before RMD age: When the original owner died before their required beginning date for RMDs (currently age 73), no annual distributions are required during the 10 years—just complete liquidation by year 10.

Tracking matters: Know whether the original owner was taking RMDs. This determines whether you have annual requirements or complete flexibility within the 10-year window.

Inherited Roth IRAs

The 10-year rule applies to inherited Roth IRAs too, with important differences:

Tax-free distributions: Inherited Roth IRA distributions are generally tax-free (assuming the 5-year rule is satisfied). The 10-year requirement forces liquidation, but no income tax applies.

No annual RMDs: Even if the original Roth owner would have been RMD age, Roths never require RMDs during the owner’s lifetime. The annual RMD complication doesn’t apply.

Strategic timing: Given tax-free treatment, the main planning consideration is investment growth. Leaving money in the Roth as long as possible (until year 10) maximizes tax-free growth before required liquidation.

Planning Opportunities

Multi-beneficiary considerations: When an IRA passes to multiple beneficiaries, consider splitting into separate inherited IRAs by September 30 of the year after death. Each beneficiary can then manage their own 10-year timeline and tax strategy.

Charitable planning: Qualified charitable distributions (QCDs) from inherited IRAs can satisfy distribution requirements while generating charitable deductions. If you’re charitably inclined, coordinate IRA distributions with giving plans.

Estate planning adjustments: The 10-year rule makes IRAs less attractive for some beneficiaries. Consider alternative beneficiaries (spouse, charity) or converting to Roth during your lifetime to benefit heirs who’d face high tax brackets on inherited traditional IRA distributions.

Common Mistakes to Avoid

Missing the 10-year deadline: Failing to fully distribute by year 10 triggers 25% excess accumulation penalties on amounts that should have been distributed. Track your deadline carefully.

Ignoring annual RMD requirements: If annual RMDs apply (original owner was taking them), missing these triggers penalties even if you’ll distribute everything by year 10.

Forgetting about inherited accounts: IRA custodians don’t always proactively remind beneficiaries of obligations. Set your own reminders and review inherited IRA status annually.

Poor tax timing: Defaulting to year-10 liquidation when income smoothing would save significant taxes wastes money. Plan distributions across the full 10-year window.

The SECURE Act’s 10-year rule represents the most significant change to inherited IRA planning in decades. Understanding whether exceptions apply to your situation and planning distributions strategically across the 10-year window minimizes taxes on inherited retirement assets.