Inherited Retirement Accounts

Contents

1. The form that decides who inherits
2. The classes of heir
3. The rule before 2020
4. The ten year rule
5. Whether withdrawals are owed every year
6. The spouse’s choices
7. Several heirs on one form
8. Trusts, estates and charities as heirs
9. The first thing the heir should do
10. Where the account sits in the wider estate

Brent O’Mara works with business owners and multigenerational families, and among the second group few pieces of paper matter more at a death than the form on file with the custodian of a retirement account. What follows is the process an heir goes through, in order, under rules Congress rewrote in December 2019 and the Internal Revenue Service took until 2024 to finish explaining.

The form that decides who inherits

An individual retirement account does not pass under a will. Two fellows of the American College of Trust and Estate Counsel explain that the account goes to whoever is named on its beneficiary designation, and that where no designation was ever filled in, the custodian’s own paperwork supplies a default order, perhaps the spouse first, then the children, then the estate; a will or trust that tries to direct the account elsewhere has no effect, since the designation governs every time.⁷ Kiplinger gives the standard example: someone remarries, rewrites the will for the new spouse, and never touches the account form, so the former spouse is still entitled to the money.⁹

The classes of heir

The rules sort heirs into groups. The surviving spouse may treat the account as his or her own.¹ A second group, which the law calls eligible designated beneficiaries, includes the owner’s minor children, anyone disabled or chronically ill as the tax code defines those terms, and any beneficiary whose age is within ten years of the owner’s, a category that can include an older sibling.⁶ Everyone else named on the form, mostly adult children and grandchildren, falls into a third group; an estate or a trust can also be named.⁷

The rule before 2020

Under the earlier law a child named on the form could draw the account down over his or her own life expectancy, which one ACTEC fellow says made the account worth at least twice as much to the heir after tax.⁶ That arrangement, known as the stretch, is what the new law took away from most heirs.

Figure

Before and after the SECURE Act

	Before 2020	Deaths from 2020 on
Most nonspouse heirs	Could stretch withdrawals over their own life expectancy	Must empty the account within ten years of the owner's death
Annual withdrawals	Required each year on the life expectancy table	Required each year only if the owner had already begun required distributions
Spouse	Could roll the account into their own	Unchanged: may still treat it as their own
Minor children	Stretched like any heir	Stretch until the age of majority, then ten years, for the owner's own children only
Owner's starting age	Required distributions began at 70 and a half	Moved to 72 by the act

The ten year rule

The SECURE Act, enacted in December 2019 and effective for deaths from the start of 2020, requires most nonspouse heirs to draw an inherited account down to nothing within ten years of the owner’s death.⁶ Accounting Today described the practical effect: an heir in peak earning years who must take a large balance out within a decade can be pushed into a higher tax bracket, and the rule applies to inherited Roth accounts and employer plans as well as traditional accounts.⁴ The exempt groups keep a version of the stretch, with limits: the owner’s own minor children, not grandchildren, may stretch until the age of majority and then have ten years, and a disabled or chronically ill beneficiary can stretch over life expectancy even through a properly drafted trust.⁶

Whether withdrawals are owed every year

The act did not say whether an heir could wait until year ten, and the IRS first said annual withdrawals were required, then in 2021 acknowledged an error.⁴ The final regulations, summarized by Kiplinger, settled the point in 2024: if the owner had already begun required distributions before dying, the heir must take an annual minimum in each of the ten years, with nothing left after the tenth; if the owner died before reaching that age, the heir has more freedom about timing within the decade. Because the question had been open so long, the IRS excused the annual amounts for the years 2021 to 2024.² Money adds the cost of getting it wrong: a missed required amount can draw an excise tax of up to 25 percent, falling to 10 percent when the error is fixed inside two years.³

Figure

What an heir does with an inherited account, in order

1. 01
   Find the formThe beneficiary designation on file with the custodian decides who inherits, whatever the will says
2. 02
   Classify the heirSpouse, eligible designated beneficiary, other designated beneficiary, or an estate or trust
3. 03
   Check the owner's ageWhether the owner had reached the required beginning date decides whether annual withdrawals are owed
4. 04
   Split if sharedChildren who divide an account into separate inherited accounts in time can each use their own schedule
5. 05
   Name a successorThe heir immediately names a beneficiary for the inherited account
6. 06
   Take the withdrawalsAnnual amounts where required, and the whole balance out by the end of the tenth year

The spouse’s choices

The IRS table for beneficiaries gives a surviving spouse three routes: treat the account as his or her own, take distributions over the spouse’s own life expectancy using the spouse’s age each year, or, if the owner died before the required beginning date, delay distributions until the year the owner would have reached the starting age.¹ Rolling the account into the spouse’s own avoids the ten year rule, Money notes, though the spouse’s own required distributions may then apply.³

Several heirs on one form

When children share an account, the IRS table uses the age of the oldest beneficiary unless the account is divided.¹ The ACTEC fellows suggest two drafting habits: dividing a shared inheritance promptly into separate accounts, one per child, so that each heir’s own age governs whatever stretch remains available, and wording the form in general terms, to the owner’s living children in equal shares or to living descendants by representation, so that it still works if a child dies first.⁷

Trusts, estates and charities as heirs

Naming a trust buys professional management and protection from a beneficiary’s creditors, at the price of a possibly faster distribution and higher tax rate unless the trust meets particular income tax rules.⁷ After the act, any plan naming a trust as beneficiary should be reread, since a trust drafted for the old stretch may now have to pay the whole account out within ten years.⁶ Because an estate is not a person with a life expectancy, an estate named as heir must take the account out within the longer of five years and the period the owner would have had left, and the money becomes reachable by the owner’s creditors. A charity, by contrast, pays no income tax, so an account carrying a built in tax bill can suit it especially well.⁷

Figure

The IRS table for a spouse who inherits

a spouse may treat the inherited account as his or her own account

As their own

or take distributions over the spouse's life, recalculated by age each year

Own life expectancy

or distribute on the owner's age at death, reducing the period by one each year

Owner's age

in any case the spouse can take the owner's required amount for that year

Year of death

The first thing the heir should do

The Wall Street Journal’s first instruction to anyone who has just inherited an account is to name a successor beneficiary for the inherited account immediately, and it notes that the rules differ for spouses and nonspouses and that errors can be costly.⁵ CNBC explains why: advisers keep finding former spouses and dead relatives named on old employer plans and insurance policies, and in one 2009 decision the Supreme Court ruled that a man’s retirement plan went to the wife he had divorced years earlier, because she had waived her claim in the divorce but had never been taken off the form. The reporting suggests rereading the designations after any marriage, divorce, birth or death and holding copies, since institutions have mislaid forms.⁸

Where the account sits in the wider estate

How the rest of an estate is directed is covered under what a will does, and the scale of what is passing between generations under the great wealth transfer. A family that meets regularly, as described under family meetings and family governance, has a place to confirm that the names on these forms still match the plan.

The honest limit is that these rules have changed three times in six years, by statute in 2019, by a withdrawn interpretation in 2021 and by final regulations in 2024, and the sources above differ on details settled only recently. Any specific account turns on the owner’s age at death, the heir’s class, the form on file and that year’s regulations, all of which are individual circumstances, and the choices belong to qualified professionals in tax and estate law rather than to a general reference.