Must inherited retirement account beneficiaries take annual distributions under the 10-year rule?

Yes, under the final IRS regulations, non-eligible designated beneficiaries who inherit from an owner who died after their required beginning date must take annual distributions during the 10-year period and empty the account by year 10. Simply waiting until the final year to withdraw the entire balance is not permitted.

What transitional relief did the IRS provide for inherited retirement account distribution rules?

The IRS excused non-eligible designated beneficiaries from required annual distributions for calendar years 2021 through 2024. The final rules take effect for distribution calendar years beginning January 1, 2025, giving beneficiaries and plan administrators time to adjust to the new annual distribution requirement.

IRS Issues Final Regulations on Required Minimum Distributions | Lynch Law

After years of uncertainty — including proposed regulations in February 2022 and multiple transitional relief notices — the IRS has issued final regulations governing required minimum distributions from retirement accounts under the SECURE Act and SECURE 2.0 Act. The final rules, published as T.D. 9998, are effective for distribution calendar years beginning on or after January 1, 2025, and they resolve several contentious interpretive questions that had left account owners, beneficiaries, and plan administrators in limbo.^[1]

The most significant clarification involves the 10-year rule for inherited retirement accounts — and the answer is not what many beneficiaries were hoping to hear.

The 10-Year Rule and Annual Distributions

The SECURE Act of 2019 eliminated the "stretch IRA" for most non-spouse beneficiaries of retirement accounts, replacing it with a 10-year rule that requires the inherited account to be fully distributed by the end of the tenth year following the account owner's death. The question that has generated the most controversy is whether beneficiaries subject to the 10-year rule must take annual distributions during those ten years, or whether they can wait until the tenth year and take a single lump-sum distribution.

The final regulations confirm that if the original account owner died on or after the required beginning date for RMDs, the beneficiary must take annual distributions in years one through nine (calculated using the beneficiary's life expectancy), AND must empty the entire account by the end of year ten. If the owner died before the required beginning date, the beneficiary has more flexibility — no annual distributions are required, and the account can be distributed in any amounts over the ten-year period, as long as it is fully distributed by the end of year ten.^[2]

This distinction depends entirely on whether the original owner had reached the applicable RMD age — currently 73 under SECURE 2.0 — at the time of death. For a beneficiary who inherited an IRA from a parent who died at age 80, annual distributions are required. For a beneficiary who inherited from a parent who died at age 65, the 10-year window is more flexible.

Eligible Designated Beneficiaries

The 10-year rule does not apply to "eligible designated beneficiaries," who may still use the life expectancy stretch method. The eligible designated beneficiary categories are: the surviving spouse, a minor child of the account owner (but only until reaching the age of majority, at which point the 10-year clock starts), a disabled individual, a chronically ill individual, and an individual not more than 10 years younger than the deceased account owner.^[3]

The surviving spouse has additional options: rolling the inherited account into the spouse's own IRA, treating the inherited IRA as the spouse's own, or using the new "spousal election" under SECURE 2.0, which allows the surviving spouse to elect to treat the account as if the deceased spouse had lived until the surviving spouse's RMD age. This last option can be advantageous when the deceased spouse was younger than the surviving spouse.

The Age-of-Majority Question

For minor children of the account owner, the final regulations define the age of majority as 21 — not 18, as some commentators had expected. Upon reaching age 21, the minor child transitions to the 10-year rule, meaning the inherited account must be fully distributed within 10 years of the child's 21st birthday. This provides a longer total distribution period than many anticipated, potentially extending to age 31 for a child who inherits at birth.^[4]

Importantly, only children of the account owner qualify for this exception — not grandchildren, nieces, nephews, or other minors. This is a common point of confusion. A grandchild named as a beneficiary is subject to the standard 10-year rule regardless of age.

Estate Planning Implications

The final RMD regulations have significant implications for estate planning involving retirement accounts. The requirement for annual distributions during the 10-year period for post-RMD-age deaths means that beneficiaries cannot defer the income tax hit to a single year of their choosing. Instead, the income will be spread over years one through nine, with a potential large distribution in year ten to empty the account.

This affects the analysis of whether to use a conduit trust (which requires all distributions to be passed through to the beneficiary) or an accumulation trust (which allows the trustee to retain distributions inside the trust). An accumulation trust that retains annual RMDs will be subject to the compressed trust income tax brackets — reaching the 37% rate at just $14,450 of taxable income in 2024 — which may produce a worse after-tax result than passing the distributions through to a beneficiary in a lower bracket.

Roth conversions during the account owner's lifetime have become even more valuable under the final regulations. Because Roth IRAs are not subject to RMDs during the owner's lifetime, and because inherited Roth IRAs are subject to the 10-year distribution rule but distributions are tax-free, converting traditional IRA assets to Roth removes the income tax sting of the 10-year rule entirely. The conversion accelerates the income tax, but it can produce significant tax savings over the 10-year distribution period, especially for beneficiaries in high brackets.^[5]

Transitional Relief

Recognizing the confusion caused by the extended rulemaking process, the IRS has provided transitional relief for beneficiaries who failed to take annual distributions during 2021 through 2024 while the regulations were being finalized. These missed distributions will not be subject to the 25% excise tax (reduced from 50% by SECURE 2.0) that normally applies to RMD shortfalls. Beginning in 2025, however, beneficiaries must comply with the final regulations.

Account owners, beneficiaries, and tax advisors should review their inherited IRA distribution strategies in light of the final regulations and ensure compliance for 2025 and beyond. The interaction between the annual distribution requirement, the 10-year exhaustion rule, and the various eligible designated beneficiary exceptions makes this one of the most complex areas of retirement planning — and one where professional guidance is essential.

References

^[1] T.D. 9998, 89 Fed. Reg. 58,898 (July 19, 2024) (final regulations on required minimum distributions under the SECURE Act and SECURE 2.0). The regulations are effective for distribution calendar years beginning on or after January 1, 2025.
^[2] Treas. Reg. § 1.401(a)(9)-5(e)(2). The annual distribution requirement applies only when the account owner died on or after the applicable required beginning date.
^[3] IRC § 401(a)(9)(E)(ii); Treas. Reg. § 1.401(a)(9)-4(e). The five categories of eligible designated beneficiaries are exhaustive — no other beneficiary qualifies for the life expectancy method.
^[4] Treas. Reg. § 1.401(a)(9)-4(e)(3). The age of majority is defined as 21 for purposes of the minor child exception, regardless of the state law definition of majority.
^[5] IRC § 408A(d)(3) (Roth conversion rules). Roth conversions are taxable events, but the converted amounts grow tax-free and qualify for tax-free distribution to beneficiaries under the 10-year rule.