The Inherited IRA 10-Year Rule RMD Trap: Why Waiting Until Year 10 Backfires.

An adult daughter inherits her father's $1,000,000 traditional IRA. He died at 78, well into taking his own required minimum distributions. Her advisor tells her the account just has to be empty within ten years, so she plans to let it ride and pull the money out near the deadline. That plan has two problems, and the inherited IRA 10-year rule RMD is the first one. Under the final regulations the IRS issued in July 2024 and began enforcing in 2025, a non-spouse beneficiary in her position must take an annual required minimum distribution in years one through nine and empty the account by the end of year ten. The second problem is the tax bill waiting in year ten. Here is how the rule works in 2026 and why the deadline-driven plan is usually the expensive one.

Start with what the 10-year rule replaced. Before 2020 a non-spouse beneficiary could stretch an inherited IRA over their own life expectancy, taking small distributions for decades. The SECURE Act ended that for most beneficiaries of owners who die after 2019. IRC §401(a)(9)(H) now forces the entire account out within ten years of death. The widely repeated version of the rule, that you simply empty the account by the end of year ten and owe nothing in between, was the original reading, and for several years it was effectively true because the IRS kept waiving the annual distribution requirement. That grace period is over.

The 10-year window has a second layer that most people missed. Under the 'at least as rapidly' rule in §401(a)(9)(B)(i), if the original owner had already reached their required beginning date and started taking RMDs, those distributions cannot stop just because the owner died. The final regulations Treasury issued as TD 10001, effective January 1, 2025, confirmed that reading: a designated beneficiary who is not an eligible designated beneficiary must continue annual RMDs in years one through nine, calculated under Treas. Reg. §1.401(a)(9)-5(9)-5), and still empty the account by the end of year ten. The IRS had waived the penalty for missed beneficiary RMDs every year from 2021 through 2024 under Notices 2022-53, 2023-54, and 2024-35 while the rules were unsettled. 2025 was the first year the annual RMD was actually required, and 2026 is the second. There is no waiver this year.

Whether years one through nine carry a required distribution turns on two facts. The first is the date of death relative to the owner's required beginning date, which under SECURE 2.0 is April 1 of the year after the owner turns 73 (rising to 75 for those born in 1960 or later). If the owner died on or after that date, annual RMDs continue for the beneficiary. If the owner died before it, there are no annual RMDs inside the 10-year window; the account just has to be empty by year ten. The second fact is whether you are an eligible designated beneficiary under §401(a)(9)(E): a surviving spouse, a minor child of the owner, someone disabled or chronically ill, or someone not more than ten years younger than the owner. Eligible designated beneficiaries are exempt from the 10-year rule entirely and can still stretch distributions over their life expectancy. Everyone else, the adult child, the grandchild, the sibling more than ten years younger, the friend, is a non-eligible designated beneficiary caught by the rule.

Two practical points fall out of this. Inherited Roth IRAs are always treated as if the owner died before the required beginning date, because Roth owners have no lifetime RMDs and therefore no required beginning date at all. So an inherited Roth follows the 10-year rule with no annual distribution requirement: leave it untouched and let it grow tax-free until year ten. And the annual RMD on a traditional account is small. It is the prior year-end balance divided by the beneficiary's single life expectancy factor from the year after death, reduced by one each year after that. For a 55-year-old that factor is 31.6, so the first-year RMD is about 3.2% of the account. That number is a floor, not a ceiling, and treating it as the whole plan is the mistake.

The annual RMD is so small that satisfying it barely dents the account. A beneficiary who takes only the required minimum spends nine years pulling out three or four percent a year, then runs into a balance that still holds most of the original million and a hard deadline to distribute all of it. That final distribution lands on top of a single year's income and pushes six figures of it into the top brackets. Spreading the same total evenly keeps each year's distribution in a lower bracket. The difference is real money.

Both columns move the same $1,000,000 out of the account over the same ten years. Path A satisfies the letter of the RMD rule and walks straight into the trap: the year-ten lump stacks on the beneficiary's other income and most of it is taxed at the top rate. Path B treats the RMD as a floor and voluntarily distributes more, filling the 24% bracket each year and never reaching the 37% one. The roughly $85,000 difference is nothing more than bracket management. This is the same income-smoothing logic behind deciding how many ISOs to exercise without triggering AMT: the goal is to meter income into the lower brackets across years instead of bunching it into one.

Skipping a required distribution is expensive but fixable. The excise tax under IRC §4974 is 25% of the amount you should have taken but did not, down from 50% before SECURE 2.0. If you correct the shortfall, by taking the missed distribution and filing Form 5329, within the two-year correction window, the penalty drops to 10%. And §4974 lets the IRS waive the tax entirely if the shortfall was due to reasonable error and you are taking reasonable steps to fix it, which you request by filing Form 5329 with an explanation. Given how recently these rules settled, a beneficiary who missed a 2025 RMD has a strong reasonable-cause argument, but the fix only works if you take the distribution and file the form rather than ignoring it.

Most of the errors I see come from applying the wrong version of the rule to the wrong account. Three are worth calling out.

• ◆Assuming 'ten years' means 'do nothing for ten years.' That was true under the waivers through 2024 and is still true if the owner died before their required beginning date. But for a post-required-beginning-date death, skipping a year-one-through-nine RMD now triggers the §4974 excise tax. Confirm the owner's date of death against their required beginning date before deciding to wait.
• ◆Forgetting that the deceased's final-year RMD is still owed. If the owner died in a year they had not yet taken their own RMD, the beneficiary must take that year-of-death RMD by December 31 of the year of death, separate from the beneficiary's own 10-year schedule. It is easy to miss in the chaos of settling an estate.
• ◆Treating an inherited account like your own. A non-spouse beneficiary cannot roll an inherited IRA into their own IRA or do a 60-day rollover. The account must stay titled as an inherited IRA, and any movement has to be a direct trustee-to-trustee transfer. A surviving spouse, by contrast, can roll it over and often should.

The planning is almost entirely about timing the distributions, and it has to start the year you inherit, not the year the deadline hits. Inherited retirement accounts carry no step-up in basis, the same income-in-respect-of-a-decedent problem I describe with company stock and the NUA election, so every dollar comes out as ordinary income to you. Utah conforms here: the state starts from federal taxable income and taxes the distributions at the 4.5% individual rate H.B. 106 set for tax years beginning in 2025, so the same bracket-smoothing that lowers the federal bill lowers the Utah one too. Map the ten years up front, decide how much to pull each year, and the year-ten cliff never arrives.