If you have an inherited IRA, you may have to either take out money every year, no matter what age you are when you open the account, or you may have to give away all the money in the account within a certain number of years, or sometimes you have to do both. If you’ve just moved money from another IRA to your own, these rules don’t apply. They’re only for inherited IRAs.
This guidance is also for situations where the IRA account holder died after 2019, and therefore the rules under the SECURE Act apply. You can also review additional information in our Inherited IRA Brochure (SECURE Act compliant).
The changes in the SECURE Act won’t affect accounts where the owner died before 2020. You can read our Inherited IRA Brochure to learn about your options for distributions in situations before the SECURE Act.
Please also note that the below options are for individuals that are specifically named as the beneficiary on the decedents IRA account. If you are named as the beneficiary in an estate, you should consult your estate executor or trustee.
If you inherit a Traditional, Rollover, SEP, or SIMPLE IRA from a spouse, you have several options, depending on whether your spouse died before or after their required beginning date to start taking Required Minimum Distributions (RMDs). Most commonly, those who inherit an IRA from a spouse transfer the funds to their own IRA.
Note: If the original account holder did not take an RMD in the year of death and they were required to, an RMD must be taken from the account by 12/31 of the year the original account holder died.
If your spouse (the account holder) died before their RMD required begin date, these are your choices:
At any time, but a penalty will apply to withdrawals made before you reach age 59½.
Distributions must begin no later than 12/31 of the year the account holder would have reached 73.
At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed.
If your spouse (the account holder) had already reached their required beginning date to start taking RMDs (age 73 and over):
At any time, but a penalty will apply to withdrawals made before you reach age 59½.
You must begin taking an annual RMD over your life expectancy beginning no later than 12/31 of the year following the original account holders death.
Note: If the original account holder did not take an RMD in the year of death, an RMD must be taken from the account by 12/31 of the year the original account holder died.
The Ticking Clock on Your Inherited Retirement Account
I’ll guess that you just got an IRA as a gift and are now confused about tax terms and how to distribute the money. “Five-year rule” is one of those words that sounds easy but quickly gets hard to understand. Trust me, I’ve been there.
When my uncle left me his IRA last year, I spent weeks trying to figure out what I could and couldn’t do with it. The five-year rule was especially confusing because it means different things in different contexts.
So let’s break this down in plain English and save you some headaches!
What Exactly Is the Five-Year Rule for Inherited IRAs?
The five-year rule for inherited IRAs is pretty straightforward in concept: it’s a distribution requirement that mandates the entire inherited IRA balance must be withdrawn by December 31st of the fifth year following the original account owner’s death.
Unlike regular Required Minimum Distributions (RMDs), this rule doesn’t require you to take annual withdrawals. You have flexibility in how and when you withdraw the money during that five-year period, as long as the account is completely emptied by the deadline.
For example, if someone passed away in 2018, their beneficiary would need to empty the account by December 31, 2023.
When Did the Five-Year Rule Apply?
Here’s where things get a bit tricky. The five-year rule is now used in a different way than it was before the SECURE Act went into effect in 2020.
Pre-SECURE Act (Deaths Before 2020)
Before the SECURE Act, the five-year rule typically applied in these scenarios:
- When the original IRA owner died before their Required Beginning Date (RBD) for taking RMDs
- When the beneficiary was a non-individual entity like an estate, charity, or certain trusts
For spouse beneficiaries specifically, if the original owner died before their RBD, the spouse had several options:
- Keep it as an inherited account and follow the five-year rule
- Take distributions based on their own life expectancy
- Roll over the account into their own IRA
Non-spouse beneficiaries had fewer options:
- Take distributions based on their own life expectancy
- Follow the five-year rule if the owner died before their RBD
The SECURE Act Changed Everything
The game changed significantly when the SECURE Act came into effect on January 1, 2020. For deaths occurring after December 31, 2019, the five-year rule was largely replaced by the ten-year rule for most non-spouse beneficiaries.
In the event that the owner of an IRA died after 2020, the beneficiaries must empty the account by December 31 of the tenth year following the year of death.
Important note: The five-year rule still applies to non-individual beneficiaries (like estates or charities) for deaths occurring after 2019, and in cases where the original owner died before 2020.
Who’s Exempt from the Ten-Year Rule?
Not everyone has to follow the ten-year rule. “Eligible Designated Beneficiaries” (EDBs) are a group made by the SECURE Act who can still use the life expectancy method. These include:
- Surviving spouses
- Minor children of the deceased (until they reach the age of majority, usually 21)
- Disabled individuals
- Chronically ill individuals
- Individuals not more than 10 years younger than the original IRA owner
Once a minor child reaches the age of majority, however, they must switch to the ten-year rule.
The Five-Year Rule vs. The Ten-Year Rule
Let’s compare these two important distribution rules:
| Feature | Five-Year Rule | Ten-Year Rule |
|---|---|---|
| Applicable deaths | Generally before 2020 | Generally 2020 and later |
| Distribution deadline | Dec 31 of 5th year after death | Dec 31 of 10th year after death |
| Annual RMDs required? | No | Maybe (see below) |
| Flexibility | Take money anytime within 5 years | Take money anytime within 10 years |
An important clarification about the ten-year rule: Recent IRS guidance (effective for distributions starting in 2025) indicates that annual RMDs may be required during the ten-year period if the original owner had already begun taking RMDs.
Five-Year Rule for Inherited Roth IRAs
For Roth IRAs, the five-year rule works a bit differently. There are actually two “five-year rules” that might apply:
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The first five-year rule relates to qualified distributions. For tax-free withdrawals of earnings, the Roth IRA must have been established for at least five years.
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The second five-year rule relates to inherited Roth IRAs. Beneficiaries of Roth IRAs may need to distribute the entire account within five years if the original owner died before 2020 and certain conditions apply.
If the beneficiary takes distributions from an inherited Roth IRA that existed for over five years, all distributions will be tax-free. For accounts that haven’t met the five-year mark, withdrawals of earnings are taxable, while the principal remains untaxed.
How to Meet the Five-Year Distribution Requirement
If you’re subject to the five-year rule, meeting the requirement is pretty straightforward:
- You must withdraw the entire account balance by December 31st of the fifth year following the original owner’s death
- There’s no requirement for annual withdrawals during the five-year period
- You have flexibility in how you take distributions – lump sum, annual withdrawals, or any combination
For example, if someone passed away in 2019, you’d need to empty the account by December 31, 2024. You could take it all out in 2024, or spread withdrawals across 2020-2024.
Tax Implications of Inherited IRAs
When you inherit an IRA, there are important tax considerations:
For Traditional IRAs:
- Distributions are generally taxed as ordinary income
- The 10% early withdrawal penalty doesn’t apply, even if you’re under 59½
- Depending on the size of the inheritance, it could push you into a higher tax bracket
For Roth IRAs:
- Qualified distributions are tax-free
- If the original Roth IRA was less than five years old, earnings may be taxable
- Principal withdrawals are always tax-free
Common Mistakes to Avoid with Inherited IRAs
I’ve seen people make these mistakes, so learn from them:
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Missing the deadline: Failing to empty the account by the five-year deadline triggers penalties of 50% on amounts not distributed!
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Taking distributions too early: Sometimes spreading distributions over several years can minimize tax impact.
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Not considering the rollover option for spouses: Spouses have the unique option to roll the inherited IRA into their own IRA, which may be advantageous.
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Forgetting about the 2020 exception: Due to COVID-19, 2020 doesn’t count when determining the five years for the five-year rule.
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Mixing up which rules apply: The rules depend on when the original owner died and your relationship to them.
Real-World Example of the Five-Year Rule
Let’s say John’s father passed away in 2018 at age 68 (before his RBD), leaving John as the beneficiary of his $250,000 traditional IRA.
Under the five-year rule, John would need to withdraw the entire $250,000 by December 31, 2023. He has several options:
- Option 1: Take $50,000 each year from 2019-2023
- Option 2: Wait and take the entire $250,000 in 2023
- Option 3: Take varying amounts each year, as long as the account is emptied by the deadline
John needs to consider his tax situation carefully. Taking the entire amount in one year might push him into a higher tax bracket.
Recent Changes and Relief Provisions
The IRS recently provided some relief under Notice 2022-53 for beneficiaries subject to the ten-year rule. The IRS won’t penalize beneficiaries who failed to take an RMD for 2021 and 2022 if they were subject to the ten-year rule.
This relief acknowledges some confusion about whether annual RMDs are required during the ten-year period when the original owner died after their RBD.
Bottom Line: What Should You Do?
If you’ve inherited an IRA, here’s my advice:
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Determine which rule applies to you based on when the original owner died and your relationship to them
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Consult with a tax professional to create a distribution strategy that minimizes tax impact
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Mark the final distribution deadline on your calendar and set reminders
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Consider your current and future tax brackets when planning distributions
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Don’t procrastinate – having a plan early gives you more flexibility
We’ve helped many clients navigate these complex rules, and proper planning can make a big difference in how much of your inheritance actually stays in your pocket.
Final Thoughts
The five-year rule for inherited IRAs can be confusing, especially with all the changes from the SECURE Act. Remember that for deaths after 2019, most non-spouse beneficiaries now follow the ten-year rule instead.
If you’re dealing with an inheritance from someone who died before 2020, you might still be subject to the five-year rule depending on your relationship to the deceased and whether they died before their RBD.
When in doubt, consult with a financial advisor or tax professional. The penalties for getting this wrong can be steep, and the right strategy can save you thousands in unnecessary taxes.
Eligible Designated Beneficiary options (other than a spouse)
If you are an Eligible Designated Beneficiary (someone other than your spouse) and you inherit a Traditional, Rollover, SEP, or SIMPLE IRA, you have a few different ways to take money out.
If the account holder died before their required beginning date to start taking RMDs, these are your choices:
Account type:
You transfer the assets into an Inherited IRA held in your name.
Money is available:
RMDs must begin no later than 12/31 of the year after death.
Other considerations:
- Your yearly payments are spread out over your single life expectancy, which is based on your age in the year after your death and is checked every year. Please note that the life expectancy method of distribution is no longer available after the child turns 21 if the Eligible designated Beneficiary is the child of the deceased account holder. After that, the distribution option must change to the 10-year method below, and all assets must be given to the minor by the end of the 10th year after they turn 21.
- If there are more than one beneficiary, each account must be set up by December 31 of the year after the death; if not, the oldest beneficiary will get the money.
- RMDs are mandatory and you are taxed on each distribution.
- You will not incur the 10% early withdrawal penalty.
- Undistributed assets can continue growing tax-deferred.
- You may designate your own IRA beneficiary.
Account type:
The assets are transferred into an Inherited IRA held in your name.
Money is available:
At any time until December 31 of the tenth year after the account holder died. After that date, all assets must be given out in full.
Other considerations:
- You are taxed on each distribution.
- You will not incur the 10% early withdrawal penalty.
- Assets that haven’t been distributed can continue to grow tax-free for up to ten years.
- You may designate your own IRA beneficiary.
Account type:
None. All assets in the Inherited IRA are distributed to you.
Money is available:
Other considerations:
- You will not incur the 10% early withdrawal penalty.
- Depending on how much money you get and how much money you make now, you may move up to a higher tax bracket.
If the account holder died after their required beginning date to start taking RMDs, these are your choices:
Account type:
You transfer the assets into an Inherited IRA held in your name.
Money is available:
RMDs must start by 12/31 of the year after death.
Note: If the original account holder did not take an RMD in the year of death, one must be taken by December 31 of the year of death.
Other considerations:
- The amount of money you get each year is split between your single life expectancy (calculated by your age in the year after the account holder dies and updated every year) or the account holder’s remaining life expectancy, whichever is longer. One thing to keep in mind is that the life expectancy method of distribution stops working for children under 21 who are the Eligible Designated Beneficiary of a deceased account holder. After that, the distribution option must change to the 10-year method below, and all assets must be given to the minor by the end of the 10th year after they turn 21.
- If there are more than one beneficiary, each account must be set up by December 31 of the year after the death; if not, the oldest beneficiary will receive the money.
- RMDs are mandatory and you are taxed on each distribution.
- You will not incur the 10% early withdrawal penalty.
- Undistributed assets can continue growing tax-deferred.
- You may designate your own beneficiary.
Account type:
None. All assets in the IRA are distributed to you.
Money is available:
Other considerations:
- The income tax on the distribution will be due all at once.
- You will not incur the 10% early withdrawal penalty.
- Depending on how much money you get and how much money you make now, you may move up to a higher tax bracket.
Roth IRA: Non-spouse inherits
If you inherit a Roth IRA and are considered to be an Eligible Designated Beneficiary (other than a spouse) you have several withdrawal options:
Account type:
You transfer the assets into an Inherited Roth IRA held in your name.
Money is available:
- As of December 31, the year after the death, RMDs must be paid and distributions must begin.
- Distributions are spread over the beneficiarys single life expectancy. One thing to keep in mind is that the life expectancy method of distribution stops working for children under 21 who are the Eligible Designated Beneficiary of a deceased account holder. After that, the distribution option must change to the 10-year method, and all assets must be given to the minor by the end of the 10th year after they turn 21.
Other considerations:
- If you have more than one beneficiary, you must set up separate accounts by December 31 of the year after the death in order to use your own single life expectancy. If you don’t, the oldest beneficiary’s life expectancy will be used to decide how much to pay out.
- If the five-year holding period has been met, distributions can be taken without being taxed. If not, only earnings are taxed.
- You will not incur the 10% early withdrawal penalty.
- Undistributed assets can continue growing tax-free.
- You may designate your own beneficiary.
Account type:
The assets are transferred into an Inherited Roth IRA held in your name.
Money is available:
At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed.
Other considerations:
- If you want to take out your money over time, you can, but everything must be done by December 31 of the tenth year after the account holder died.
- During that time, distributions can be made tax-free as long as the five-year holding period has been met. If not, only earnings are taxed.
- You will not incur the 10% early withdrawal penalty.
- For up to ten years, assets that haven’t been distributed can continue to grow tax-free.
- You may designate your own beneficiary.
Account type:
None. All assets in the Roth IRA are distributed to you.
Money is available:
Other considerations:
- During that time, distributions can be made tax-free as long as the five-year holding period has been met. If not, only earnings are taxed.
- You will not incur the 10% early withdrawal penalty.
If the beneficiary is not an individual (such as an estate, charity, or organization):
- If the founder of the IRA had to take RMDs when they died, then RMD distributions are needed based on how long the founder of the IRA thought they would live.
- If the original IRA owner had not yet reached the required starting date for RMDs when they died, the 5-year rule applies. All assets must be fully distributed by the end of the fifth year after the death of the original IRA owner.
Note: If the original account holder did not take an RMD in the year of death and they were required to, an RMD must be taken from the account by 12/31 of the year the original account holder died.
Inherited IRAs – What should I do with this?
FAQ
Is there still a 5-year rule for inherited IRA?
… the SECURE Act 1. 0, an inherited IRA must be given to beneficiaries who are not married within 10 years of the death of the person who originally owned the IRA…
Do beneficiaries pay tax on IRA inheritance?
Yes, beneficiaries generally pay taxes on inherited IRA withdrawals, but the type of IRA and the beneficiary’s status determine the specifics: traditional IRA distributions are taxed as ordinary income at the beneficiary’s tax rate, while most inherited Roth IRA withdrawals are tax-free after the account meets the 5-year holding period.
How do I avoid the 10-year rule for an inherited IRA?
If you are an eligible designated beneficiary of an inherited IRA, you don’t have to follow the 10-year rule. An eligible designated beneficiary can be a surviving spouse, a disabled or chronically ill person, a minor child of the account holder, or someone not more than 10 years younger than the original owner. For these eligible beneficiaries, the 10-year rule doesn’t apply, allowing for distributions over their lifetime.
How long can money stay in an inherited IRA?
You generally must empty an inherited IRA within 10 years of the original owner’s death, according to the SECURE Act, unless you are a spouse or other eligible designated beneficiary.
What is the 5 year rule for inherited IRAs?
The 5-year rule for inherited IRAs dictates the timeframe within which beneficiaries must withdraw funds from an inherited account. This rule applies to both traditional and Roth IRAs, and understanding its nuances is crucial for maximizing your financial benefits and minimizing tax implications. What is the 5-Year Rule for Inherited IRAs?.
Do inherited IRAs have a 10 year rule?
However, a “10-year rule” now applies to many beneficiaries of inherited IRAs. Due to the original SECURE Act, most beneficiaries can no longer “stretch” distributions over their lifetimes. Instead, many non-spouse beneficiaries who inherited IRAs on or after January 1, 2020, must empty the account within 10 years of the account owner’s death.
What is the 5 year IRA withdrawal rule?
By the end of the fifth year after the account holder’s death, the 5-year rule says that beneficiaries of inherited IRAs must take out all the money in the account. This rule applies regardless of the beneficiary’s age or financial situation. However, there are some key exceptions to this rule:
What is a 5 year IRA distribution rule?
A separate 5-year rule applies to one of several options when beneficiaries take distributions from an inherited IRA if the account holder’s death occurred before 2020. Whether it’s a traditional IRA or a Roth IRA, heirs must take annual allocations from the account, known as required minimum distributions (RMDs).
What is the 5 year rule in a Roth IRA?
The 5-year rule applies to both contributions and earnings made within the Roth IRA. If the 5-year rule is not met, earnings withdrawn from the Roth IRA will be subject to income taxes. Beneficiaries can choose to disclaim an inherited IRA: If a beneficiary does not want to inherit an IRA, they can choose to disclaim it.
What is a 5 year rule?
In the context of individual retirement accounts (IRAs), the 5-year rule commonly refers to a waiting period before you can withdraw funds without penalty from a Roth IRA. Learn more about the various definitions of a “5-year rule” and how they may apply to you. The 5-year rule applies to withdrawals from Individual Retirement Accounts (IRAs).