CWG Insight Series: IRS Finally Clarifies New Inherited IRA Distribution Rules

With the passing of the SECURE Act of 2019, most people who inherit retirement accounts have 10 years to distribute them entirely. The rule was not very clear, and we did not know if distributions needed to be taken every year, or if the money just needed to be out of the account by the end of year 10. In some situations, breaking the account up over 10 equal distributions makes the most sense, while in others, waiting to distribute everything in year 10 would be more efficient.

The IRS’s final rules say money must come out each year for many heirs. The new guidance applies to both future inheritors and the many people who inherited accounts since 2020, who have been in limbo waiting for the rules.

The new rules don’t apply to spouses who inherit an IRA — that is a whole different set of rules. The law mostly affects children and other inheritors, like grandchildren, siblings, and friends. It also doesn’t apply if the person with the IRA died before required distributions kicked in — today, that is anyone under age 73.

But, if the person who died was required to take withdrawals, the person who inherits the account must take annual payouts starting the year after death. Because there has been confusion about the new rules, many people didn’t take distributions in the past several years. The IRS has essentially excused them, saying it won’t penalize people in this situation for failing to take required payouts for the years 2021 through 2024.

If you haven’t already done so, you must start taking annual withdrawals in 2025, with the calculation of how much being based on your life expectancy.

If someone died and left you an IRA before they had to take withdrawals, you are allowed to take the money out any time during the 10-year period, even waiting until year 10, according to the final rules.

Caveat: With a Roth IRA, you don’t have to take the money out until the 10th year, and withdrawals are generally tax-free.