Retirement account withdrawal rules are ‘so complicated’ for inherited IRAs, expert says. What to know

Inheriting an individual retirement account can be a welcome surprise. But the gift comes with mandatory withdrawals for heirs and following the rules can be difficult, experts say.

According to the Secure Act of 2019, certain heirs now have less time to deplete inherited accounts due to a change in so-called “required minimum distributions.” Before 2020, heirs were allowed to “stretch” withdrawals over their lifetime.

“It is so complicated,” said IRA expert and certified public accountant Ed Slott. “It’s almost unfair that it’s so hard to get money out of an IRA by going through this quagmire of rules.”

“Inherited accounts generally require beneficiaries to take a distribution by Dec. 31 of the year of the original owner’s death,” said certified financial planner Ashton Lawrence, director at Mariner Wealth Advisors in Greenville, South Carolina. 

But the rules for inherited accounts “can be complex,” he said, depending on when the original owner died, whether they started RMDs and the type of beneficiary. (There’s an IRS chart with the details here.)

The first question is when you inherited the IRA, because heirs who received the account before 2020 can still use the “stretch” rules to take lifetime withdrawals, according to Slott.

But there’s now a 10-year withdrawal rule for certain heirs, meaning everything must be withdrawn by the 10th year after the original account owner’s death. The rule applies to accounts inherited by so-called “non-eligible designated beneficiaries” on Jan. 1, 2020, or later.

Non-eligible designated beneficiaries are heirs who aren’t a spouse, minor child, disabled, chronically ill or certain trusts. 

But if you inherited an account in 2020 or later and the original owner already started RMDs, you must start withdrawals immediately, Slott said. “It’s sort of like a water faucet,” he said. “Once the faucet is open and RMDs start, it can’t be shut off.”

Like retirees, heirs generally face a penalty for missing an RMD or not withdrawing enough. The penalty is 25% of the amount that should have been withdrawn or 10% if the RMD is corrected within two years.

Amid confusion, the IRS waived the penalty in 2022 for missed RMDs for some inherited IRAs and then expanded the waiver to include 2023 this summer.

“The IRS said we won’t implement a penalty for [missed] RMDs, which in effect means you don’t have to take them,” Slott said. But heirs may want to start taking RMDs anyway to avoid a “giant RMD” in future years, he said.