A retirement account left behind by a parent, sibling, or friend once came with decades of flexibility about when to draw the money down. Since 2020, most people who inherit an IRA or a 401(k) balance face a hard ten-year deadline to empty the account, and a set of final regulations issued in 2024 added an extra wrinkle: many of those heirs must also withdraw money every single year along the way, not just as a lump sum at the end. Getting the timing wrong does not only risk an IRS penalty; it can turn an ordinary inheritance into a much larger tax bill than necessary.
The Ten-Year Deadline Created by the SECURE Act
The SECURE Act of 2019 rewrote what happens to a retirement account after its original owner dies. For most individual beneficiaries who are not the deceased’s spouse, the entire balance of an inherited IRA, 401(k), or similar defined contribution account must now be distributed by December 31 of the tenth year following the year of death. Nothing in the rule requires the account to shrink evenly across those ten years in every case, but it cannot still hold a balance once the window closes, and whatever remains once the deadline passes is treated as though it were fully distributed and taxed on that basis.
The rule applies whether the original owner died before or after starting their own required withdrawals, a real change from the system that came before it, which let many beneficiaries stretch distributions across their own life expectancy indefinitely, according to guidance published by the Internal Revenue Service. A handful of beneficiaries are exempt from the ten-year rule entirely: a surviving spouse, a minor child of the account owner until that child reaches the age of majority, a person who is disabled or chronically ill under the government’s definition, and a beneficiary who is not more than ten years younger than the original account owner. These “eligible designated beneficiaries” can still stretch withdrawals over their own remaining life expectancy instead of racing a ten-year clock, which can matter enormously for the size of each year’s tax bill.
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Why Some Heirs Also Owe a Withdrawal Every Year
For years after the SECURE Act passed, it was unclear whether beneficiaries subject to the ten-year rule had to withdraw anything before the final deadline or could simply wait and take the full balance in year ten. Final regulations the IRS issued in July 2024 settled the question: if the original account owner had already reached the age at which their own required minimum distributions began before dying, most beneficiaries subject to the ten-year rule must also take an annual withdrawal in years one through nine, sized using the beneficiary’s own life expectancy, according to the agency’s retirement plan and IRA distribution guidance. That annual obligation binds for the 2025 distribution year onward and remains in force for 2026; the IRS said beneficiaries who took nothing between 2021 and 2024, while the requirement was unsettled, do not owe a retroactive penalty for those particular years.
If the original owner died before reaching their required beginning date, no annual withdrawal is required during the ten-year window at all. A beneficiary in that situation can leave the account untouched for nine years and take the entire balance in year ten, spread withdrawals evenly across the decade, or pull money out unevenly to manage taxable income from one year to the next, as long as nothing remains once the tenth year ends. The distinction hinges entirely on whether the person who died had already started their own required withdrawals before death, a detail that beneficiaries and the professionals helping settle an estate need to confirm early rather than assume from the account statements alone.
The Tax Bill Behind a Missed or Delayed Withdrawal
Money coming out of a traditional inherited IRA counts as ordinary taxable income to the beneficiary in the year it is withdrawn, the same as it would have for the original owner while alive. A beneficiary who ignores the annual requirement, or who simply assumes none exists, and then withdraws the full remaining balance in year ten can unintentionally push a single year’s income into a much higher tax bracket, trigger higher Medicare premium surcharges tied to income two years later, or reduce eligibility for other income-based benefits, all from a timing decision that could have been avoided by spreading withdrawals across the entire ten-year window instead of compressing them into one.
Missing a required annual withdrawal carries its own separate cost on top of the income-tax exposure. The IRS can apply an excise tax of 25 percent on the amount that should have been withdrawn but was not, reduced to 10 percent if the shortfall is corrected within two years, according to the agency’s guidance on the retirement topics for beneficiaries page. For a household managing an inheritance alongside its own retirement income, confirming which version of the ten-year rule applies, and whether an annual withdrawal is due for the current year, is worth doing well before the December deadline rather than scrambling once it has already passed.
This article was produced with the assistance of AI and reviewed by The Financial Wire editorial team.
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David M. Keller is a finance writer based in Columbus, Ohio, covering personal finance and consumer-focused economic topics. He earned his degree in journalism from Ohio University and began his career reporting on local business and economic trends for a regional media outlet. Since then, he has contributed to a variety of online publications, focusing on clear, practical coverage of topics such as cost of living, debt, and everyday financial decision-making.
