Inherited IRA rules and the 10-year rule
Leaving a big IRA to your kids sounds like a gift — but a 2019 law change turned it into a compressed tax bill for most heirs. Understanding the rules lets you plan around them, sometimes with a cleaner, tax-free alternative.
The 10-year rule
For most non-spouse beneficiaries who inherit after 2019, the entire IRA must be emptied within 10 years of the owner’s death. With a traditional (pre-tax) IRA, every withdrawal is taxed as ordinary income to the heir — so a large balance can stack on top of a working-age child’s salary and land in high tax brackets, all within a decade. The old “stretch IRA” that let heirs spread withdrawals over their lifetime is gone for most.
Spouse vs non-spouse
- A surviving spouse has the most flexibility — generally able to treat the IRA as their own and follow normal RMD timing.
- Non-spouse heirs (adult children, etc.) usually face the 10-year rule, sometimes with annual withdrawals required within that window if the original owner had already started RMDs.
- Certain eligible beneficiaries (minor children, disabled or chronically ill individuals) get special treatment.
The details are intricate and have been clarified repeatedly by the IRS — confirm current rules before acting.
The trap most heirs miss: annual RMDs inside the 10 years
Many people assume the 10-year rule means "withdraw nothing, then empty it in year 10." Not always. Under the IRS's finalized rules, if the original owner had already started their own RMDs before dying, most non-spouse heirs must take an annual RMD in years 1–9 and empty the account by year 10. The IRS waived the penalty for missed annual RMDs in the confusing transition years, but that relief has ended, so getting this right now matters.
A planning tip either way: even when annual withdrawals aren't required, deliberately waiting until year 10 to take everything usually backfires — it dumps the entire balance into one year's income and spikes your bracket. Spreading withdrawals more evenly across the decade, and taking more in your own lower-income years, typically keeps the lifetime tax lower.
The tax problem in plain terms
A traditional IRA is an IOU to the IRS: the tax was deferred, not forgiven. When your heirs withdraw it, they pay the tax — often at their peak earning years. A $500,000 IRA can deliver far less than $500,000 to a child after a decade of taxable withdrawals. Roth IRAs are the exception: inherited Roth withdrawals are generally tax-free (though usually still subject to the 10-year emptying rule).
The tax-free alternative
If leaving money to heirs is the goal, there are cleaner routes than handing them a taxable IRA:
- Roth conversions during your lifetime — you pay the tax in controlled, lower-bracket years, and heirs inherit tax-free. See Roth conversions explained.
- Life insurance. A death benefit is generally income-tax-free and pays immediately. A common strategy: use some IRA dollars (or unneeded RMDs) to fund a life insurance policy, effectively converting a taxable inheritance into a tax-free one — sometimes a larger net amount for heirs. It also gives liquidity for any estate costs.
Whether this beats simply leaving the IRA depends on your health, the heirs’ tax brackets, and the policy’s cost — so model it honestly rather than assuming.
Frequently asked questions
- What is the 10-year rule?
- Most non-spouse heirs who inherited after 2019 must empty the inherited IRA within 10 years. Traditional IRA withdrawals are taxed as ordinary income, compressing the tax into a decade.
- Are inherited IRA withdrawals taxed?
- Yes for traditional IRAs (ordinary income to the heir). Inherited Roth withdrawals are generally tax-free, though usually still subject to the 10-year rule.
- How can I leave money without the tax?
- Roth conversions during your life, or life insurance — whose death benefit is generally income-tax-free. Some replace a traditional IRA with a policy for a cleaner inheritance.
- Do I have to take annual withdrawals during the 10 years?
- Often yes. If the original owner had already started their own RMDs, most non-spouse heirs must take an annual RMD in years 1–9 and still empty the account by year 10. Even when annual withdrawals aren't required, spreading them out beats dumping the whole balance into year 10.