Inherited IRA- New Rules and How They May Affect You

For anyone who inherited an IRA from a parent after 2019, it’s important to know the new rules regarding distributions and to consider careful financial planning to minimize the tax impact. The new rules have been anything but intuitive, adding complexity and confusion to the process.

In the past, a non-spouse beneficiary who inherited an IRA from a parent could stretch that IRA over their lifetime. A “Stretch IRA” was a strategy used to maximize the tax-deferred growth and longevity of an inherited IRA. It involved carefully managing Required Minimum Distributions (RMDs) for non-spouse beneficiaries to minimize the tax impact and allow the funds to grow over a longer period. Most non-spouse beneficiaries who inherit any type of IRA, or a defined contribution plan such as a 401(k) or 403(b), could choose to withdraw the funds by taking required minimum distributions over their lifetime. Beneficiaries would calculate their life expectancy according to their current age in the IRS’ uniform lifetime table.

We should note that the new rules do not impact existing beneficiaries who inherited a retirement account before 2020. Those individuals can continue to stretch distributions over their lifetime. However, the SECURE Act, which became law in late 2019 eliminated the stretch ability for inherited IRAs.

Under the SECURE Act the following rules are now in place:

10-Year Rule: In most cases, non-spouse beneficiaries are now required to withdraw the entire balance of the inherited IRA within 10 years of the original account owner’s death. This effectively eliminated the ability to “stretch” RMDs over a beneficiary’s lifetime.

  • Exceptions: There are exceptions to the 10-Year Rule for certain eligible designated beneficiaries, such as a surviving spouse, minor children, disabled individuals, and beneficiaries who are not more than 10 years younger than the original account owner. These beneficiaries may still have the option to stretch RMDs over their life expectancy.


Spousal Inheritance: Spouses who inherit an IRA still have the option to treat it as their own IRA or roll it over into their existing IRA, which allows them to use the stretch strategy.

The 10-year rule also applies to inherited Roth IRAs, but with a key difference: the beneficiary is not required to pay taxes on the withdrawals, and doesn’t have to take required minimum distributions because the original owner didn’t have to take them either. This planning window presents flexibility with respect to withdrawals, but if the beneficiary can afford to wait until year 10 to deplete the account, they can capitalize on a decade of tax-free growth if the account is positioned well.

During the planning window, beneficiaries should consider the following:

  • Accelerating distributions during low-tax years
  • Roth Conversions: converting an inherited 401(k) to an inherited Roth IRA
  • Planning distributions around college financial aid applications or Medicare premiums

Initially, the new rules weren’t clear and led many to believe that non-spouse heirs who inherited a traditional IRA would be compliant as long as they depleted the account within 10 years. This would provide them with the ability to minimize withdrawals during high-income years and take higher distributions during low-income years.

However, in February 2022 the IRS clarified those rules. Under the IRS interpretation of the SECURE Act, if a parent died on or after the date he or she was required to take minimum distributions, the beneficiary must still take RMDs based on your life expectancy in years one through nine and then deplete the balance in year 10. In short, once the original owner has started taking RMDs, you can’t turn them off. However, you are not required to withdraw the same amount as your parent would have been required to withdraw.

Naturally this caused a lot of confusion. In response, the IRS waived penalties for anyone who did not take RMDs that should have from the inherited IRAs in tax years 2020, 2021 and 2022.

On July 14th of 2023, the IRS released Notice 2023-54. This notice again waived penalties on missed distributions for certain inherited retirement account beneficiaries and indicated that final guidance won’t come until 2024.

The penalty for missing a distribution is 25% of the amount you should have withdrawn.  (The penalty will be reduced to 10% if you make up the missed RMD within two years.) This excise tax 25% penalty was reduced from 50% if an account owner failed to withdraw the full amount of the RMD by the due date (1)

The key lesson is that non-spousal beneficiaries need to stay updated. As we have seen, tax laws can and likely will continue to change, so staying informed about any updates is key for effective financial planning. Consider working with a CERTIFIED FINANCIAL PLANNER™ professional and tax advisor to assess your situation and stay on top of changes ahead.

Written by,

Alex Austin, CFP®

Alex Austin, CFP®

Alex is a comprehensive, fee-only financial planner. Alex made a career move into personal financial planning and investment management after 10 years in investment banking and corporate finance to find more meaning in his work and better match his personality and interests to his career. It’s worked out better than he could have imagined.

Want to read more articles by Alex?

Insight Wealth Strategies, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Insight Wealth Strategies, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Insight Wealth Strategies, LLC unless a client service agreement is in place.

Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.