Navigating the Complexity Surrounding Distributions for IRA Beneficiaries
For most people, saving for retirement typically involves saving through a qualified retirement account. These retirement accounts typically come in the form of individual retirement accounts (IRAs, SIMPLE IRAs, & SEP IRAs) or workplace plans (401(k)s, 403(b)s, etc.). These accounts offer owners a tax deduction at the time of contribution and tax deferred growth over time. However, in exchange for the initial deduction and growth, the IRS requires account holders to make distributions later in life. These distributions are commonly known as required minimum distributions, or RMDs, and are taxed as ordinary income.
RMDs are based on the account owner’s birth date and adjust annually based on the year end account balance. The year in which account owners must begin taking RMDs is referred to as the required beginning date or RBD. The SECURE 2.0 Act adjusted when account owners must start making distributions from their qualified retirement accounts. Below is the corresponding age in which owners must start distributions:
There are certain exceptions for those that continue working past their RBD and contribute to workplace plans, but we will not get into those details.
The annual distribution amount is based on the prior year’s ending account balance and a factor from the IRS’s Lifetime Expectancy Table. One of the common misconceptions is that RMDs must be spent by the owner. The only requirement is that an annual distribution is taken by 12/31 of the current year. Owners in their first year of distributions may elect to postpone a withdrawal until April 1 of the following year, which will lead to two years of distributions being made in the same year. Account owners can spend, gift to charities (up to $108,000/year in 2025), and even reinvest distributions in a taxable brokerage account.
In the past, there was a 50% penalty on any undistributed amount. The SECURE 2.0 Act reduced this penalty to 25% and further to 10% if distributions are made within two years.
Lastly, there is no RMD requirement for Roth IRA owners.
Beneficiaries that have inherited an IRA or retirement plan have a separate set of distribution rules that are much more complicated.
Inherited IRAs
The rules for inherited IRA distributions are best broken out by the year in which the decedent passed away. The SECURE Act changed the way in which beneficiaries inherit and distribute assets over time and applies to beneficiaries of decedents who passed away after December 31, 2019. This new set of rules has been unclear for the past few years until the IRS recently provided more guidance. Because there are several subsets of beneficiaries who inherit IRAs, we will focus on the most common, non-eligible designated beneficiaries. This subset encompasses most non-spouse beneficiaries. Think of this being children, grandchildren, siblings, friends, or other people who are unable to claim the IRA as their own. For those account owners who inherited IRAs before January 1, 2020, a much easier to understand set of guidelines is in place surrounding distribution requirements.
Above is an illustration to highlight the different subcategories and rules that a non-eligible designated beneficiary might fall into.
Inherited IRA from decedents who passed away before 1/1/2020 (Stretch)
Most account owners that inherited IRAs before 2020 have an understanding for how their account is to be distributed. For non-spouse inheritors, owners will be able to distribute (or stretch) the account over the course of their lifetime unless they decide to accelerate distributions. Like traditional IRA owners who have reached their RBD, annual RMDs are calculated annually based on the prior year 12/31 account balance and IRS factor. Inherited IRA account owners over the age of 70.5 can make qualified charitable distributions from their inherited IRA. This can be a wonderful way to fulfill charitable giving bequests while directly reducing taxable income.
Inherited IRA from decedent who passed away after 12/31/2019
The SECURE Act introduced a change in which retirement accounts must be distributed. For the most part, gone are the days of stretching distributions over the beneficiary’s lifetime. The new rules introduced more complex requirements surrounding how and when distributions must be made. The primary change is that the inherited accounts must be fully distributed by December 31st of the 10th year after the year the account is inherited. In simpler terms, this is now known as the 10-year rule.
Example: A beneficiary inherited an IRA from a decedent who passed away in 2022, the beneficiary would have to fully distribute the account by December 31, 2032.
To start, we will break down distribution requirements into two subcategories for beneficiaries that inherit retirement accounts from a decedent who passed away after December 31, 2019.
Non-Eligible Designated Beneficiaries who inherit account before RBD (10-year Rule)
For non-eligible designated beneficiaries inheriting an account before the decedent had started RMDs, the 10-year rule is the only requirement. This means a beneficiary could potentially wait until the end of the 10th year to distribute the entire account. Under this scenario, the beneficiary would fall under the example previously described. Although the beneficiary has the ability to defer distributions, it is not necessarily recommended. Each beneficiary should evaluate their strategy on a case-by-case basis. What might make sense to one might not necessarily mean the same for others. Waiting until year 10 to distribute the entire account could mean a large tax liability.
Example: A beneficiary inherited an IRA from a decedent who passed away in 2021. The decedent had not yet started taking RMDs upon passing. The beneficiary is not required to make an annual distribution, but the account must be depleted by the end of year 10.
Non-Eligible Designated Beneficiaries who inherit account after RBD (Stretch AND 10-year Rule)
For non-eligible designated beneficiaries inheriting an account after the decedent had started RMDs, the 10-year rule AND annual RMDs are required. Thankfully due to the uncertainty of rules up until this point, the IRS has waived penalties for RMDs not distributed in 2021, 2022, 2023 & 2024. Starting in 2025, beneficiaries that fall into this subcategory will need to distribute a portion of their inherited account on an annual basis and fully distribute the account by the end of the tenth year.
Example: A beneficiary inherited an IRA from a decedent who passed away in 2022. The decedent had reached their RBD and was taking annual RMDs. The beneficiary must make an annual distribution in each of the 10 years AND deplete the account by the end of year 10.
Strategic Distributions
As you can see, navigating the web of rules surrounding inherited retirement accounts can be complex. It is important to have a strategy in place for how much and when to distribute each account. For some, taking an annual amount might be required, but not enough. One way to mitigate the tax burden is to take a pro-rata amount in each of the 10 years.
Example: Year 1 – distribute 1/10, Year 2 – distribute 1/9, Year 3 – distribute 1/8 and so on.
Alternatively, it might make sense to take the minimum out (if required) in higher income years and defer larger distributions to years where income might be lower.
The bottom line is to have a strategy and know the rules in which your account must make distributions. As advisors, we take pride in customizing these strategies based on an individual basis. What applies to one person might not apply to another. Ensuring that an appropriate distribution is made on a timely basis is paramount to avoid any penalties.
Please feel free to reach out to our team if you have questions regarding your inherited retirement account. We also encourage you to share this update with friends, family or colleagues who might benefit from our insights. If you know someone interested in an introduction to Kavar Capital Partners, please feel free to forward this email or connect them with our team directly.
Jack Faerber, CFP®
Wealth Advisor
Important Disclosures:
The views expressed herein are of Jack Faerber on August 7th, 2025 and are subject to change at any time based on market or other conditions, as are statements of financial market trends, which are based on current market conditions. This information is provided as a service to clients and friends of Kavar Capital Partners, LLC solely for their own use and information. Kavar Capital Partners is not an insurance broker. The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as, investment, legal or tax advice. Past performance does not ensure future results. Kavar Capital Partners, LLC makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based on information that Kavar Capital Partners, LLC considers reliable, it is not guaranteed as to accuracy or completeness. This information may become outdated and we are not obligated to update any information or opinions contained herein. Articles may not necessarily reflect the investment position or the strategies of our firm.