Inherited retirement accounts and the ten-year rule

Rules governing inherited retirement accounts changed substantially with recent legislation, and a great deal of guidance in circulation still describes the previous position.

What changed

Under the previous rules, most beneficiaries could take distributions over their own life expectancy, which for a young beneficiary meant decades of deferral.

The current rules require most non-spouse beneficiaries to empty the account within ten years of the owner's death.

The effect is to compress the tax consequences into a much shorter period, frequently coinciding with the beneficiary's highest-earning years.

Subsequent guidance has clarified that where the original owner had already begun required distributions, annual distributions must generally continue during the ten-year period as well as the account being emptied by the end of it.

This point was disputed and delayed in implementation, with relief granted for earlier years, and it is now the settled position.

Who is exempt

Certain beneficiaries retain more favourable treatment.

Surviving spouses, who have the broadest options, including treating the account as their own.

Minor children of the account owner, until they reach majority, after which the ten-year period begins.

Note that this applies to the owner's own children, not to grandchildren.

Individuals with a disability or chronic illness, meeting defined criteria.

Beneficiaries not more than ten years younger than the owner, which frequently covers siblings and unmarried partners of similar age.

These categories may generally take distributions over life expectancy.

The spousal options

Worth setting out because the choice matters.

A surviving spouse can generally roll the account into their own, which treats it as their own for all purposes — no distributions required until their own required beginning age, and their own beneficiaries can be named.

Alternatively, remaining a beneficiary can allow penalty-free access before the age at which early withdrawal penalties would otherwise apply, which matters for a younger surviving spouse who needs the money.

The choice depends on age and on whether access is needed, and it is one of the more consequential decisions a surviving spouse makes.

Planning for the beneficiary

Someone who inherits an account subject to the ten-year rule has choices about timing.

Taking everything in year ten maximises deferral and concentrates the tax into one year, potentially at the highest rates.

Spreading withdrawals across the ten years generally produces a lower total tax, particularly where it keeps income within lower brackets.

Timing around known low-income years — a career break, a year of unemployment, retirement — can produce a substantially better outcome.

The general principle is the same as elsewhere: smoothing income across years beats concentrating it.

Planning for the owner

The implications for someone still alive holding a substantial traditional account.

Roth conversions during life become more attractive, since heirs inheriting a Roth account face the same ten-year rule but pay no tax on the withdrawals.

Where the owner is in a lower bracket than the heirs will be, converting transfers the tax to the cheaper point.

Leaving traditional accounts to charity and other assets to individuals, since charities pay no income tax on such distributions.

Reviewing trust arrangements, which is urgent for anyone whose plan names a trust as beneficiary of a retirement account.

Conduit trusts drafted under the previous rules may now be required to distribute the entire balance to the beneficiary at the end of the ten years — defeating the protection entirely.

This is one of the more common unaddressed problems in existing estate plans.

Considering multiple beneficiaries, since splitting an account among several people spreads the tax across several taxpayers and several brackets.

The administrative points

For a beneficiary receiving an account.

The account must generally be retitled as an inherited account in a specific form, and cannot simply be rolled into the beneficiary's own IRA unless they are a spouse.

Taking a distribution and attempting to redeposit it does not work for non-spouse beneficiaries — the withdrawal is taxable and cannot be reversed.

Which makes taking advice before touching an inherited account genuinely important, since the most common errors are irreversible.

Splitting an account among multiple beneficiaries by a specified deadline allows each to use their own circumstances rather than being tied to the eldest.

General information only, not legal or tax advice. These rules changed recently and guidance continues to develop — consult a qualified tax professional before acting.