Does an Inherited IRA Have to Be Distributed in 5 Years? The Complete Guide

The Truth About Inherited IRA Distribution Rules in 2025

Inheriting an IRA can feel like finding a treasure chest with a complicated lock. You’ve got the money, but accessing it means navigating a maze of tax rules that could cost you big time if you make a wrong turn.

I have seen too many people get hit with harsh fines because they didn’t know about the well-known “5-year rule” for inherited IRAs. That’s why I’m going to explain it all in simple terms today.

The short answer is no, not all inherited IRAs need to be paid out within 5 years. However, some do, and the rules have changed a lot since the SECURE Act of 2019. How you were related to the account holder and when they died make ALL the difference.

Let’s dive into what you really need to know without the confusing jargon.

What Is the 5-Year Rule for Inherited IRAs?

Following the 5-year rule is pretty simple: if someone inherits an IRA, the beneficiaries must take out all the money by December 31 of the fifth year after the account owner died.

For example, if someone passed away in 2023, you’d need to empty the account by December 31, 2028.

Here’s the important part – you don’t have to take any specific amounts each year during this period. You could

• Take it all at once
• Spread withdrawals over the 5 years
• Wait till the last day of year 5
• Take withdrawals in any pattern you choose

The only requirement is that the account be completely empty by that 5-year deadline.

But wait! There’s an interesting COVID exception: 2020 doesn’t count toward the 5-year period due to pandemic relief provisions. If your 5-year period included 2020, you effectively get a 6-year period instead.

When Does the 5-Year Rule Actually Apply?

This is where things get tricky. The 5-year rule doesn’t apply to all inherited IRAs. In fact, after the SECURE Act changed the rules in 2019, the 5-year rule applies in fewer cases than before.

The 5-year rule typically applies when:

1. The original IRA owner died before their required beginning date (RBD) for taking required minimum distributions
2. The beneficiary is not an “eligible designated beneficiary” (more on this below)
3. The death occurred before 2020

For deaths after 2019, the SECURE Act replaced the 5-year rule with a 10-year rule for most non-spouse beneficiaries.

The 10-Year Rule: The New Normal for Many Beneficiaries

If the original IRA owner died in 2020 or later, most non-spouse individual beneficiaries are now subject to a 10-year rule instead of the 5-year rule.

This means you must empty the inherited IRA by December 31 of the 10th year following the year of death. Like the 5-year rule, there’s no requirement for annual withdrawals during this period – you just need to empty the account by the end of year 10.

Who Are “Eligible Designated Beneficiaries”?

This special category of beneficiaries can still use the old “stretch IRA” provisions even after the SECURE Act. Eligible designated beneficiaries include:

1. Surviving spouses
2. Minor children of the account owner (until they reach majority)
3. Disabled individuals
4. Chronically ill individuals
5. Individuals not more than 10 years younger than the account owner

They don’t have to follow the 5- or 10-year rule when taking distributions; instead, they can do so based on how long they expect to live.

Special Rules for Spouse Beneficiaries

If you’re inheriting an IRA from your spouse, you have more options than any other type of beneficiary:

1. Roll over the IRA into your own IRA – This is often the best choice as it lets you treat it as your own and delay distributions until your own required beginning date
2. Keep it as an inherited IRA – You can then:
   • Take distributions based on your own life expectancy
   • Follow the 5-year rule (if applicable) or 10-year rule
   • For deaths before the required beginning date, delay beginning distributions until the deceased spouse would have turned 72

As a spouse, you essentially have all the options of a non-spouse plus the ability to roll over the account into your own.

Traditional IRA vs. Roth IRA Inheritance: Important Differences

There are critical differences when inheriting different types of IRAs:

Traditional IRA Inheritance:

• Distributions are generally taxable as ordinary income
• Required minimum distributions are mandatory
• You’ll be paying taxes on all withdrawals

Roth IRA Inheritance:

• Distributions are generally tax-free (if the original account was open for at least 5 years)
• Still subject to the same 5-year or 10-year rules
• No taxes on most withdrawals makes this much simpler

While Roth IRAs offer tax-free distributions, they’re still subject to the same distribution timeline requirements as traditional IRAs.

Common Questions About Inherited IRAs

What happens if I miss the 5-year or 10-year deadline?

If you fail to withdraw all funds by the deadline, the remaining balance could be subject to a whopping 25-50% penalty tax on the amount that should have been withdrawn. That’s right – the IRS could take HALF of what’s left! However, for 2021 and 2022, the IRS provided relief for beneficiaries subject to the 10-year rule who missed taking RMDs.

Can I take a hardship withdrawal from an inherited IRA?

No, hardship withdrawals aren’t allowed from inherited IRAs. However, you can generally withdraw funds whenever you want within the applicable timeframe.

What if I don’t want the inherited IRA?

You can “disclaim” an inherited IRA, which means you choose not to accept it. The assets would then pass to the contingent beneficiaries. This must be done within 9 months of the original owner’s death.

Can I use inherited IRA funds to pay for college or buy a house?

Yes, you can use the funds for any purpose, including paying for education or buying a home. The distribution rules still apply, but there’s no restriction on how you use the money once it’s withdrawn.

Real-World Impact: Traditional IRA Example

Let’s see how this works with real numbers:

Imagine you inherit a $500,000 traditional IRA from your uncle (a non-spouse beneficiary) who died in 2024. Under current rules, you’re subject to the 10-year rule.

Option 1: Equal annual withdrawals

• Take $50,000 per year for 10 years
• Each withdrawal is taxed as ordinary income
• Spreading it out keeps you in lower tax brackets

Option 2: Lump sum in year 10

• Take the entire $500,000 in 2034
• Likely pushes you into a much higher tax bracket that year
• Potentially lose more to taxes

Option 3: Strategic withdrawals

• Take more in years when your income is lower
• Take less in high-income years
• Maximize tax efficiency

Step-by-Step: What to Do If You’ve Inherited an IRA

1. Confirm your beneficiary status – Are you a spouse or non-spouse? An individual or entity?
2. Check when the original owner died – Before or after 2020? Before or after their required beginning date?
3. Transfer the assets – Move them to an “inherited IRA” in your name as beneficiary
4. Determine your distribution timeline – 5-year rule, 10-year rule, or life expectancy?
5. Create a withdrawal strategy – Consider your tax situation each year
6. Track your deadlines – Mark the final distribution date on your calendar
7. Consult a tax professional – These rules are complex and mistakes are costly

Conclusion: Plan Carefully to Maximize Your Inheritance

The rules for inherited IRAs have gotten more complex over time, especially with the SECURE Act changes. The old “stretch IRA” strategy is gone for many beneficiaries, replaced with either the 5-year or 10-year rule.

While this might seem unfair, it’s actually part of the government’s plan to eventually collect taxes on retirement accounts. Remember, IRAs were created as retirement vehicles, not wealth transfer tools.

The most important thing is to understand which rules apply to your specific situation and plan accordingly. A mistake could cost you thousands in unnecessary taxes or penalties.

I always recommend consulting with a qualified tax professional who specializes in retirement accounts. The few hundred dollars you spend on good advice could save you tens of thousands in the long run.

Have you inherited an IRA? What distribution strategy are you using? Drop a comment below and share your experience!

Disclaimer: This article is for informational purposes only and should not be considered tax or financial advice. Always consult with a qualified professional about your specific situation.