What the rule is
The Inherited IRA 10 Year Rule requires inheritors of individual retirement accounts (IRAs) to distribute the balance of the account within 10 years of the IRA owner’s date of death. For example, you can choose to distribute the whole amount in year 1, in year 10 or in varying amounts throughout the 10 years ─ as long as you distribute the entire balance within 10 years after the passing of the owner. If you fail to withdraw the balance of the account by the end of the 10th year, the IRS assesses a 50% penalty on the amount not distributed.
To whom the rule applies
The Inherited IRA 10 Year Rule applies to everyone who inherits an IRA, although there are exceptions to the rule for “eligible designated beneficiaries” such as:
- You are the IRA owner’s spouse.
- You are the minor child of the IRA owner. However, once you reach the age of majority (which is 18 in most states), you are subject to the 10 year rule.
- You are 10 years (or less) younger than the IRA owner.
- You are disabled (as defined by the IRS).
- You are chronically ill (as defined by the IRS).
If you fall into any of these categories, you still have the ability to “stretch” the required distributions over your lifetime.
What to know about the rule
Inheritors have choices. You can choose to distribute the whole amount in year 1, year 10 or in varying amounts throughout the 10 years, just as long as you distribute the entire balance within 10 years after the passing of the owner. If you fail to withdraw the balance by the end of the 10th year, the IRS will require you to pay a 50% penalty on the amount not distributed.
When considering how to invest the funds in the Inherited IRA or the distribution plan, it really is centered around whether you need these funds to use immediately. For many people who don’t need the funds, keeping the account invested and compounding with tax deferred growth over the 10 years might be optimal. You also do not need to be concerned with the tax impact if you inherit a Roth IRA, as distributions from a Roth IRA are tax free. As always, it’s important to discuss with your Financial Advisor the appropriate strategy for your unique situation.
DISCLAIMER:
Sathya Chey is a registered representative with, and securities and advisory services are offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59½ may result in a 10% IRS penalty tax in addition to current income tax.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
