How Inherited IRA Rules Changed Under the SECURE Act

The End of the Stretch IRA Strategy

Before December 31, 2019, a non-spouse beneficiary who inherited an IRA could take required minimum distributions (RMDs) stretched over their own life expectancy — potentially 30, 40, or 50 years. A 30-year-old inheriting a $500,000 IRA could withdraw as little as $13,000 in the first year, letting the remaining $487,000 continue growing tax-deferred. This was the stretch IRA, and the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 eliminated it for most beneficiaries effective January 1, 2020.

The change replaced the stretch IRA with a 10-year rule for most non-spouse beneficiaries: the entire inherited account must be emptied by December 31 of the tenth year following the original owner's death. The tax implications are significant. A $500,000 inherited traditional IRA must now be fully distributed within a decade — potentially pushing the beneficiary into the highest tax brackets during those distribution years.

Who Is Affected and Who Is Exempt

The SECURE Act created a category called Eligible Designated Beneficiaries (EDBs), who retain the ability to stretch distributions over their life expectancy. Non-Eligible Designated Beneficiaries (non-EDBs) are subject to the 10-year rule. Non-designated beneficiaries face even stricter rules.

The Annual RMD Confusion in the 10-Year Rule

The IRS created significant confusion between 2020 and 2024 by failing to clarify whether non-EDB beneficiaries must take annual RMDs during the 10-year period or can defer all distributions until year 10. Final IRS regulations issued in July 2024 resolved this ambiguity.

The answer depends on whether the original IRA owner had already begun taking RMDs at the time of death. If the owner died before their required beginning date (RBD — generally April 1 of the year after turning 73), no annual RMDs are required during the 10-year period; the beneficiary can take withdrawals at any pace as long as the account is empty by December 31 of year 10. If the owner died on or after their RBD, annual RMDs are required during the 10-year period based on the beneficiary's life expectancy.

• The IRS waived penalties for missed annual RMDs from 2021 through 2024 while final regulations were pending
• Beginning in 2025, penalties apply for beneficiaries who miss required annual distributions when the owner had started RMDs
• The penalty for missing an RMD is 25% of the amount that should have been distributed (reduced from 50% under SECURE 2.0)

Tax Planning Strategies Under the New Rules

The compressed distribution window creates genuine planning challenges. A beneficiary in their peak earning years — say, ages 45–55 — who inherits a large traditional IRA faces a decade of forced income that can push them into the 32% or 37% federal brackets. Strategic planning can reduce this burden.

Roth IRA conversions during the original owner's lifetime represent the most effective planning tool. If the owner converts traditional IRA funds to Roth status before death, the beneficiary inherits a tax-free account. Ten years of Roth growth and tax-free withdrawals produce far better outcomes than ten years of taxable traditional IRA distributions.

• Spreading distributions across all 10 years, rather than taking a lump sum in year 10, reduces bracket bunching
• Accelerating distributions in years when the beneficiary has lower income (sabbatical, early retirement) minimizes effective rates
• Charitable remainder trusts (CRTs) named as beneficiaries can replicate some stretch-like tax deferral while benefiting charity
• See-through trusts with conduit or accumulation provisions can pass EDB status to individual trust beneficiaries in some cases

SECURE 2.0 Act: Additional Changes in 2022

The SECURE 2.0 Act, signed into law in December 2022, introduced further modifications to inherited IRA rules. It raised the age at which RMDs begin from 72 to 73 in 2023 and to 75 by 2033. This change affects when the 10-year clock starts for beneficiaries, since the owner's death date determines whether annual RMDs apply during the distribution window.

Practical Steps for Inherited IRA Beneficiaries

Beneficiaries should act deliberately rather than reactively. The default outcome — taking no distributions for 10 years then withdrawing everything — is rarely optimal from a tax perspective. A beneficiary who inherits $750,000 and waits until year 10 to withdraw it all might face a single-year taxable income event exceeding $800,000 when combined with regular earnings.

Working with a tax professional to model multi-year distribution scenarios — including the beneficiary's projected income, tax brackets, and other income sources — typically generates better outcomes than default inaction. Inheriting a Roth IRA versus a traditional IRA produces dramatically different planning needs; Roth inherited IRAs still follow the 10-year rule but all distributions are tax-free if the original account was held for at least five years.

This article is for informational purposes only and does not constitute financial advice.