Inherited IRA Rules: The 10-Year Rule, Distributions and Planning Considerations
Inheriting an IRA can be both meaningful and confusing. Inherited IRA rules changed significantly in recent years, and the choices a beneficiary makes about timing withdrawals can affect taxes for a decade or more. For Wisconsin families receiving retirement accounts from parents or other relatives, understanding the basics is a useful first step before taking any money out.
This guide covers the 10-year rule at a high level, who may qualify for exceptions, and how an inherited IRA distribution plan connects to both your investments and your tax picture. These rules are complex, they have changed more than once, and the details depend on your relationship to the original owner and other facts, so confirm specifics with your tax advisor.
Start Here: A Complimentary Wealth and Tax Review
Before withdrawing from an inherited account, it helps to see how it fits your overall finances. Compound offers a complimentary, no-obligation wealth and tax review that may include:
The inherited account: type of IRA, beneficiary status, and any distributions that may be required
Your income picture: current and expected income over the next several years
Your own retirement accounts: how inherited assets may coordinate with your savings
Investment allocation: how the inherited account is invested compared with your goals
Estate plan: beneficiary designations on the inherited account and your own accounts
Request your wealth and tax review.
What Are the Inherited IRA Rules Today?
Federal law changes that took effect for deaths beginning in 2020 reshaped how beneficiaries take money from inherited retirement accounts. Before those changes, many beneficiaries could "stretch" withdrawals over their own life expectancy. Today, many beneficiaries are subject to a shorter time frame.
The 10-Year Rule for Inherited IRAs
Under the 10 year rule, many non-spouse beneficiaries, such as adult children, must generally withdraw the entire inherited account by the end of the tenth year after the year of the original owner's death.
In some situations, annual distributions may also be required during those years, depending on factors such as whether the original owner had already begun taking required distributions. IRS guidance on this point has evolved, so it is worth confirming what applies to your account each year.
Exceptions for Eligible Designated Beneficiaries
Certain beneficiaries, known as eligible designated beneficiaries, may be able to use different rules, which can include stretching distributions over a longer period. This group generally includes:
A surviving spouse
A minor child of the original owner (until reaching majority, after which the 10-year rule generally applies)
A beneficiary who is disabled or chronically ill
A beneficiary who is not more than ten years younger than the original owner
Surviving spouses often have additional options, such as treating the account as their own. Estates, charities, and certain trusts named as beneficiaries may face different rules altogether.
How an Inherited IRA Distribution Is Taxed
For an inherited traditional IRA, distributions are generally taxed as ordinary income in the year you take them. Inherited Roth IRA distributions are often tax-free if certain requirements are met, though the 10-year rule may still apply to when the account must be emptied.
That makes the timing of each inherited IRA distribution a planning decision. Questions worth discussing include:
Spreading withdrawals. Taking distributions evenly across the period may help avoid a large taxable spike in a single year.
Using lower-income years. A year with a career break, a business transition, or early retirement may be a good time to take larger withdrawals.
Avoiding a final-year crunch. Waiting until year ten can push a large balance into one tax year.
State taxes. Wisconsin generally taxes IRA distributions as income, so state tax is part of the picture.
Penalties for missed distributions. Missing a required distribution can lead to penalties, so tracking deadlines matters.
Proactive tax planning and preparation can model several withdrawal schedules across multiple years rather than deciding one year at a time.
The Wealth Management Side of an Inherited IRA
An inherited IRA is also an investment account that needs a plan:
Revisiting the allocation. The account may be invested for the original owner's goals, not yours. A shorter time horizon may call for a different mix.
Coordinating with your portfolio. Inherited assets can change your overall allocation and concentration, so they should be viewed alongside your other holdings. See investment management for high net worth individuals.
Using distributions with purpose. After-tax withdrawals might fund your own retirement savings, pay down debt, or support a Roth conversion strategy for your own accounts, depending on your situation.
Updating your own plan. An inheritance may change your retirement timeline and estate plans, including who you name as beneficiaries.
Wealth management and tax planning working together can help match withdrawal timing with investment and life goals. To see how reinvested distributions may grow under different assumptions, try the Compound calculator. Results are hypothetical and for illustration only.
Planning Ahead if You Will Leave an IRA to Heirs
If you expect to leave retirement accounts to children, these rules affect your plan too. Roth conversions during your lifetime, charitable beneficiary designations, and how trusts are named as beneficiaries can all change what heirs receive after taxes. Trusts named as IRA beneficiaries require careful drafting, so coordinate with an estate attorney. Learn more about retirement planning in Wisconsin.
Serving Beneficiaries and Families Across Wisconsin
Compound works with individuals and families throughout Wisconsin, including Milwaukee, Madison, Green Bay, Appleton, Kenosha, Racine, Janesville, and Sheboygan, as well as surrounding areas. With integrated tax and wealth planning, inherited IRA rules can be applied to your full picture.
Recently inherited an IRA? Request a complimentary wealth and tax review before taking your next distribution.
Frequently Asked Questions
What are the inherited IRA rules for non-spouse beneficiaries?
Many non-spouse beneficiaries must generally empty the account by the end of the tenth year after the year of the owner's death. Some may also need annual distributions during that period. Rules are complex and have changed, so confirm the details for your account.
How does the 10 year rule for an inherited IRA work?
The 10 year rule generally requires the full balance to be withdrawn by the end of the tenth year after the original owner's death. Timing within that window may be flexible or may include annual requirements, depending on the circumstances.
Who is exempt from the 10-year rule?
Eligible designated beneficiaries, including surviving spouses, minor children of the owner, disabled or chronically ill beneficiaries, and those not more than ten years younger than the owner, may qualify for different rules.
Is an inherited IRA distribution taxable?
Distributions from an inherited traditional IRA are generally taxed as ordinary income. Inherited Roth IRA distributions are often tax-free if requirements are met.
Should I take inherited IRA withdrawals all at once?
A lump sum may create a large tax bill in one year. Many beneficiaries evaluate spreading withdrawals across several years based on their income and goals.
Compound is a registered investment adviser. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. Tax laws are complex and subject to change. Strategies discussed may not be suitable for everyone, and there is no guarantee that any strategy will achieve its objectives or reduce taxes. Calculator results are hypothetical, are not guarantees of future results, and do not reflect any actual investment. Investing involves risk, including possible loss of principal. Diversification does not ensure a profit or protect against loss. Please consult your tax, legal, and financial professionals before acting on any information in this article. For more information, see Compound's Form ADV, available at adviserinfo.sec.gov.
About Compound Wealth
Compound Wealth believes many financial decisions benefit from being evaluated together rather than independently. The firm integrates tax planning, wealth management, accounting, and business advisory services to help clients navigate financial complexity through a coordinated planning approach tailored to their evolving needs.
