31 Oct I have an inherited IRA. How does the 10-year rule work?

Q. Can you explain the 10-year rule? I inherited an IRA from an owner who died after January 2020. Do I need to take yearly withdrawals? Can I hold off any distributions until I’m retired in two years and in a lower tax bracket? Can I wait till the tenth year and take it all?
— Beneficiary

A. There was a lot of confusion about the 10-year rule when the law covering inherited distributions changed.

If you inherit an IRA from someone who is not your spouse, the new 10-year rule applies to you.

Here’s how it works.

Unless you are a minor child, a disabled individual or a chronically ill individual, you must take all the funds out of the IRA and pay taxes by Dec. 31 of the year containing the tenth anniversary of the owner’s death, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

You asked if you must take yearly withdrawals or can you wait until the end of the 10 years and then withdraw the entire amount.

“If the IRA owner dies before his or her 72nd birthday, then they died before they were required to take their annual Required Minimum Distribution,” Kiely said, citing the IRS publication on the matter.  “If so, then no distribution is required for any year before the tenth year.”

If the IRA owner died on or after their required distribution beginning date, then the beneficiary is required to continue taking Required Minimum Distributions, Kiely said.

“Divide the account balance at the end of the prior year by the appropriate life expectancy from Table I (Single Life Expectancy) in Appendix B of IRS Publication 590-B,’ he said. “Use the life expectancy listed next to the owner’s age as of his or her birthday in the year of death. Reduce the life expectancy by one for each year after the year of death.”

If you’re not sure, we recommend you meet with a qualified tax expert who can help you calculate the correct withdrawals.

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This story was originally published on Oct. 31, 2022.

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