10.3 Inherited IRAs and Plans (SECURE Act 10-Year Rule) & Foreign Pensions and Retirement Income
Key Takeaways
- A designated beneficiary who is not an eligible designated beneficiary must withdraw the entire inherited account by December 31 of the 10th year following the year of the owner's death.
- If the owner died on or after the required beginning date, the beneficiary must also take annual RMDs in years 1 through 9 of the 10-year period; the IRS waived penalties for missed annual RMDs for 2021 through 2024, and they are required starting in 2025.
- Eligible designated beneficiaries (surviving spouse, the owner's minor child until age 21, disabled or chronically ill individuals, and individuals not more than 10 years younger than the owner) may take distributions over their life expectancy.
- Distributions to a beneficiary are exempt from the 10% additional tax, are income in respect of a decedent, and a non-spouse beneficiary can move the account only by direct trustee-to-trustee transfer to an inherited IRA, never by a 60-day rollover.
- Foreign pension distributions are generally taxable to U.S. residents, but treaties can change the result; for example, Canadian RRSP earnings are deferred automatically under Rev. Proc. 2014-55, and Canadian social security paid to a U.S. resident is taxed as if it were U.S. Social Security.
Why This Topic Matters
The outline lists inherited retirement accounts and foreign pensions and retirement income as separate retirement-income topics. Inherited-account questions test who the beneficiary is, whether the owner died before or after the required beginning date (RBD), and whether annual withdrawals or a 10-year deadline applies. Foreign pension questions test whether a U.S. citizen or resident owes tax on growth or distributions from a plan the IRS does not treat as qualified.
Beneficiary Categories Under the SECURE Act
For owners who died after 2019, beneficiaries fall into three groups:
| Beneficiary Type | Who Qualifies | Payout Rule |
|---|---|---|
| Eligible designated beneficiary (EDB) | Surviving spouse; owner's minor child (until age 21); disabled individual; chronically ill individual; individual not more than 10 years younger than the owner | Life-expectancy payments (the "stretch"); a minor child switches to the 10-year rule at 21 |
| Designated beneficiary (non-EDB) | Any other individual, such as an adult child, grandchild, or friend, and certain see-through trusts | Account must be empty by December 31 of the 10th year after the year of death |
| Non-designated beneficiary | Estate, charity, or a trust that is not a see-through trust | 5-year rule if the owner died before the RBD; owner's remaining life expectancy if the owner died on or after the RBD |
The 10-Year Rule and Annual RMDs
Final regulations issued in 2024 confirmed that the answer depends on when the owner died:
- Owner died before the RBD: A non-EDB may take any amount in any year, as long as the account is empty by the end of year 10.
- Owner died on or after the RBD: A non-EDB must take annual RMDs in years 1 through 9, based on the beneficiary's life expectancy, and empty the account by the end of year 10.
- Relief for 2021-2024: The IRS waived the 25% excise tax for annual RMDs that beneficiaries in this situation missed for 2021 through 2024 (Notice 2024-35). Annual RMDs are required starting in 2025.
Example: Lisa's father died in 2023 at age 78, after his RBD, leaving his traditional IRA to her. Lisa (age 50) is not an EDB. She must take an annual RMD each year beginning in 2025 (no penalty for skipping 2024), using her single life expectancy reduced by one each year, and must empty the account by December 31, 2033. Each distribution is ordinary income to her and is not subject to the 10% additional tax.
Special Rules for a Surviving Spouse
A surviving spouse has the most options:
- Treat the IRA as their own (or roll it into their own IRA). RMDs are then based on the spouse's own age, but withdrawals before 59½ are subject to the 10% additional tax.
- Remain a beneficiary of an inherited IRA. Withdrawals are penalty-free at any age, and RMDs can be delayed until the year the deceased spouse would have reached RMD age.
- SECURE 2.0 election (§401(a)(9)(B)(iv)): A spouse who is the sole beneficiary may elect to be treated as the deceased employee, which can use the more favorable Uniform Lifetime Table.
A young surviving spouse often remains a beneficiary until 59½, then rolls the account into their own IRA.
Other Inherited-Account Rules
- No 10% additional tax: Distributions after the owner's death qualify for the death exception, regardless of the beneficiary's age.
- Income in respect of a decedent (IRD): Distributions are taxable to the beneficiary, carry over any nondeductible basis from the owner's Form 8606, and may qualify for the IRC §691(c) deduction for estate tax attributable to the account.
- Titling and transfers: A non-spouse beneficiary cannot roll inherited funds into their own IRA or use a 60-day rollover. The account must be retitled as an inherited IRA (for example, "John Smith, deceased, for the benefit of Lisa Smith") and moved only by direct trustee-to-trustee transfer. A non-spouse beneficiary can directly roll an inherited employer-plan balance into an inherited IRA.
- Inherited Roth IRAs: The 10-year rule applies, but because a Roth owner has no RBD, no annual RMDs are required in years 1 through 9. Distributions are tax-free if the owner's 5-year period has been met; the beneficiary counts from the owner's first contribution year.
- Owner's year-of-death RMD: If the owner died after the RBD without taking that year's RMD, the beneficiary must take it by December 31 of the year of death (relief is available if taken by the beneficiary's tax filing deadline).
Foreign Pensions and Retirement Income
U.S. citizens and residents are taxed on worldwide income, so a foreign pension or foreign social security benefit is generally taxable. Foreign plans usually are not qualified plans under U.S. law, which creates timing and reporting issues.
| Item | General U.S. Treatment | Common Modification |
|---|---|---|
| Distributions from a foreign employer pension | Taxable as a pension or annuity; the employee recovers after-tax contributions as basis | Some treaties exempt lump sums or treat the plan like a U.S. plan (for example, the U.S.-U.K. treaty for U.K. pension schemes) |
| Growth inside a foreign plan | May be currently taxable if the plan is a nonexempt employees' trust (IRC §402(b)) | Treaty deferral elections; Canadian RRSPs and RRIFs receive automatic deferral under Rev. Proc. 2014-55 (no Form 8891) |
| Foreign social security | Taxable as foreign pension income | Canada: benefits paid to a U.S. resident are taxed only in the U.S., and as if they were U.S. Social Security (up to 85% taxable). Other treaties vary |
| Reporting | Foreign pension accounts may require Form 8938 and, if they are financial accounts, an FBAR | Many foreign retirement trusts are exempt from Form 3520/3520-A under Rev. Proc. 2020-17 |
Planning points:
- A foreign tax credit (Form 1116) is usually available for foreign tax withheld on the pension.
- The foreign earned income exclusion never applies to pensions, because pensions are not earned income.
- Preparers should read the specific treaty article on pensions and social security before reporting the income. Most exam questions turn on the general rule: foreign pension distributions are taxable income on the U.S. return.
Example: Grace, a U.S. citizen living in Ohio, receives a monthly pension from her former German employer and Canada Pension Plan benefits from years she worked in Toronto. The German pension is reported as pension income (with a foreign tax credit for any German tax withheld, subject to the treaty). The CPP benefits are reported on Form 1040, Line 6a with her U.S. Social Security and run through the Social Security benefits worksheet.
Omar died in 2022 at age 80, after his required beginning date, leaving his traditional IRA to his 55-year-old nephew, Sam, who is not disabled or chronically ill. Which statement describes Sam's required distributions?
Kara, age 38, inherited a traditional IRA from her husband, who died in 2025 at age 45. She needs to withdraw money for living expenses over the next several years. Which choice avoids the 10% additional tax on her withdrawals?
Liam, a U.S. citizen who moved from Toronto to Denver, still owns a Canadian RRSP that earned $4,000 of income in 2025. He took no distributions. How is the RRSP treated on his 2025 U.S. return?