6.4 Inherited IRAs, The 10-Year Rule & Eligible Designated Beneficiaries

Inherited IRAs, The 10-Year Rule & Eligible Designated Beneficiaries

Core Principle: Post-mortem retirement distribution planning was radically transformed by the SECURE Act. By eliminating the multi-generational lifetime "stretch IRA" for most non-spouse beneficiaries, federal law compressed decades of deferred taxation into an accelerated 10-year window, necessitating rigorous tax-bracket management and estate coordination.

The SECURE Act Shift: Dismantling the Stretch IRA

Prior to January 1, 2020, any designated individual beneficiary inheriting an IRA or qualified plan could elect to "stretch" required distributions across their own single life expectancy using the IRS Single Life Table. A 25-year-old grandchild inheriting a $1,000,000 Traditional IRA could withdraw modest annual RMDs over a 58.2-year life expectancy divisor, allowing the bulk of the assets to compound tax-deferred over their entire lifetime.

Effective for deaths occurring on or after January 1, 2020, the SECURE Act eliminated the lifetime stretch for the vast majority of individual beneficiaries. Under IRC §401(a)(9)(H), post-mortem retirement planning divides all beneficiaries into three distinct statutory tiers:

1. Eligible Designated Beneficiaries (EDBs): Entitled to lifetime stretch distributions or specialized statutory treatment.
2. Non-Eligible Designated Beneficiaries (NEDBs): Individual human beneficiaries who do not qualify as an EDB; strictly subject to the 10-Year Rule.
3. Non-Designated Beneficiaries (Non-DBs): Non-person entities (estates, charities, non-qualified trusts) subject to the 5-Year Rule or the decedent's remaining life expectancy.

---

The 10-Year Rule & The IRS Final Regulations

Under the statutory 10-Year Rule, all assets within an inherited retirement account must be completely distributed by December 31 of the calendar year containing the 10th anniversary of the account owner's death.

The "At-Least-As-Rapidly" Requirement (Treas. Reg. §1.401(a)(9)-5)

Following the passage of the SECURE Act, practitioners debated whether beneficiaries under the 10-year rule could simply leave the entire account untouched for 9 years and liquidate 100% in year 10. In July 2024, the Treasury and IRS issued final regulations confirming that the "at-least-as-rapidly" rule of IRC §401(a)(9)(B)(i) still applies inside the 10-year window. The IRS waived the excise tax for missed annual beneficiary RMDs for 2021 through 2024 (Notice 2024-35), so these annual distributions are enforced from 2025 onward:

• Death Occurs PRIOR to the Owner's Required Beginning Date (Pre-RBD): If the account owner died before April 1 following their statutory RMD age, the NEDB has no mandatory annual distributions in years 1 through 9. The beneficiary may withdraw any amount at any time, provided 100% of the account is emptied by December 31 of the 10th anniversary year.
• Death Occurs ON OR AFTER the Owner's Required Beginning Date (Post-RBD): If the account owner died on or after their RBD, the NEDB MUST take annual RMDs in years 1 through 9, calculated using the beneficiary's single life expectancy (reduced by 1.0 each subsequent year). In year 10, the entire remaining balance must be distributed in full.

Inherited Roth IRAs Under the 10-Year Rule

Because original Roth IRA owners are deemed to have died prior to their Required Beginning Date regardless of their actual attained age at death (since Roth IRAs have no pre-death lifetime RMDs), beneficiaries of inherited Roth IRAs are never required to take annual distributions in years 1 through 9. A non-spouse beneficiary inheriting a Roth IRA can allow the entire balance to compound 100% tax-free for the entire 10-year window, taking a complete tax-free distribution on December 31 of the 10th year.

---

The Five Eligible Designated Beneficiary (EDB) Categories

Under IRC §401(a)(9)(E)(ii), only five categories of beneficiaries qualify as Eligible Designated Beneficiaries (EDBs) entitled to lifetime stretch distributions:

1. Surviving Spouse

The surviving spouse holds the highest degree of distribution flexibility, possessing statutory options unavailable to any other heir.

2. Minor Child of the Account Owner

• Strict Direct Child Requirement: Applies only to the biological or legally adopted minor child of the deceased account owner. Grandchildren, nieces, and nephews do not qualify as EDBs under this exception.
• The Age 21 Sunset: Federal regulations define minority status as ending at age 21, regardless of state law majority ages. The minor child takes annual stretch RMDs over their single life expectancy until reaching age 21. Upon attaining age 21, the child transitions to the 10-Year Rule, requiring complete account liquidation by December 31 of the year the child turns age 31.

3. Disabled Individual

A beneficiary who is permanently and totally disabled under IRC §72(m)(7) on the date of the account owner's death. The individual must be unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment expected to result in death or be of long-continued and indefinite duration. Entitled to lifetime stretch.

4. Chronically Ill Individual

A beneficiary who is certified under IRC §7702B(c)(2) as being unable to perform at least two Activities of Daily Living (ADLs) without substantial assistance for a period of at least 90 days, or requiring substantial supervision due to severe cognitive impairment. The condition must be certified as long-continued and indefinite. Entitled to lifetime stretch.

5. Individual Not More Than 10 Years Younger

A designated individual who is older than the decedent, the same age as the decedent, or younger than the decedent by not more than 10 years (measured by calendar birth dates). This category commonly protects unmarried partners, domestic companions, siblings, and close-in-age family members. Entitled to lifetime stretch using the Single Life Table.

[!IMPORTANT] When an Eligible Designated Beneficiary dies while taking lifetime stretch payments, their successor beneficiary does NOT inherit the remaining stretch. The successor beneficiary is subject to the 10-Year Rule, running from the calendar year of the EDB's death.

---

Surviving Spouse Distribution Options

A surviving spouse inheriting a Traditional IRA or qualified plan can elect among several distinct strategies based on their age and cash flow requirements:

Option 1: Spousal Rollover (Treat as Own)

The spouse rolls the inherited assets into their own Traditional IRA (or designates the inherited IRA as their own).

• Key Advantage: RMDs are postponed until the surviving spouse reaches their own statutory RMD age (73 or 75).
• Key Hazard: If the surviving spouse is under age 59½, any subsequent withdrawals from their own rollover IRA will trigger the IRC §72(t) 10% early withdrawal penalty unless an exception applies.

Option 2: Remain as Beneficiary (Inherited IRA)

The spouse maintains the account as an Inherited Beneficiary IRA (e.g., "Jane Doe as beneficiary of John Doe").

• Key Advantage: Under IRC §72(t)(2)(A)(ii), distributions from an inherited IRA are 100% exempt from the 10% premature penalty, regardless of the surviving spouse's age. This is ideal if the surviving spouse is under age 59½ and requires cash flow.
• RMD Timing: If the deceased spouse died before their Required Beginning Date, the surviving spouse's RMDs can wait until the year the deceased spouse would have reached RMD age. If the deceased spouse died on or after the RBD, annual RMDs must continue starting the year after death, generally using the longer of the survivor's single life expectancy or the decedent's remaining life expectancy.

Option 3: SECURE 2.0 Section 327 Spousal Election (Effective 2024)

Beginning in 2024, a surviving spouse who is the sole beneficiary of an inherited IRA can elect to be treated as the deceased employee for RMD purposes. Under this election:

• RMDs are delayed until the deceased spouse would have reached RMD age.
• Once RMDs begin, the surviving spouse calculates RMDs using the more favorable Uniform Lifetime Table rather than the Single Life Table, significantly reducing required annual taxable withdrawals.

---

Non-Designated Beneficiaries (Estates, Charities, Non-Qualifying Trusts)

When an account owner fails to designate an individual beneficiary (or designates their estate, a non-qualifying charity, or a non-see-through trust), the account has no designated beneficiary under IRC §401(a)(9):

• Death Occurs Pre-RBD: The 5-Year Rule applies under IRC §401(a)(9)(B)(ii). The entire balance must be distributed by December 31 of the fifth calendar year following the year of death. No annual distributions are required in years 1 through 4.
• Death Occurs Post-RBD: The Ghost Life Expectancy Rule applies under IRC §401(a)(9)(B)(i). Assets must be distributed over the deceased owner's remaining single life expectancy (calculated in the year of death from the Single Life Table and reduced by 1.0 each subsequent year). The 5-year rule does not apply.

---

Comparison: Post-SECURE Act Beneficiary Rules

---

Advisor-Client Case Scenario: The Multi-Tiered Inheritance

Franklin (age 76) passed away in November 2024 holding a $1,500,000 Traditional IRA. Franklin had already passed his Required Beginning Date. His named beneficiaries on file are:

• Primary Beneficiary 1 (50%): His brother Richard, age 72.
• Primary Beneficiary 2 (50%): His adult daughter Amanda, age 45 (a corporate attorney in the 35% federal tax bracket).

RICP Analysis & Strategic Guidance

1. Richard's Share ($750,000): Richard was born 4 years after Franklin (not more than 10 years younger). Richard qualifies as an Eligible Designated Beneficiary (EDB) under IRC §401(a)(9)(E)(ii)(V). He may stretch distributions over his own single life expectancy, which is 16.4 years at age 73 in 2025 under the IRS Single Life Table, reduced by 1.0 each later year. Because Franklin died after his RBD, Richard uses the longer of his own life expectancy or Franklin's remaining life expectancy, which here is his own. This preserves tax deferral and keeps annual taxable amounts modest.
2. Amanda's Share ($750,000): Amanda is an adult child and does not qualify as an EDB. She is a Non-Eligible Designated Beneficiary (NEDB) subject to the 10-Year Rule.
3. Amanda's Post-RBD Annual RMD Mandate: Because Franklin died after his RBD (at age 76), Amanda cannot delay distributions until year 10. Under the IRS Final Regulations, she must take annual RMDs in years 1 through 9 based on her single life expectancy (factor 40.0 at age 46 in 2025, reduced by 1.0 each subsequent year). In year 10 (2034), she must liquidate the entire remaining account.
4. Strategic Bracket Management: Rather than taking the statutory minimum in years 1–9 and triggering a massive $600,000+ liquidation in year 10 that would catapult her into the top 37% tax bracket, the advisor models a level distribution schedule of roughly $90,000 to $100,000 annually across all 10 years, smoothing taxable income across her career.

---

Exam Tip

RICP questions on inherited accounts frequently test boundary conditions:

• The minor child exception applies only to the decedent's child, never to grandchildren. Stretch ends at age 21, triggering the 10-year rule (ending at age 31).
• Post-RBD deaths for NEDBs mandate annual RMDs in years 1–9 under the Final Regulations. Pre-RBD deaths have no annual RMDs in years 1–9.
• Inherited Roth IRAs are ALWAYS treated as pre-RBD deaths—no annual RMDs in years 1–9 for anyone under the 10-year rule.
• Surviving spouses under 59½ who need cash flow should maintain an Inherited IRA rather than a spousal rollover to avoid the 10% early withdrawal penalty.