Your dad died in 2024. He had a $400,000 401(k). You’re his only kid, you’re 45, you’re listed as the beneficiary. The 401(k) administrator hands you forms and tells you “you have 10 years to empty the account.”
You think great, I’ll let it grow for 9 years, take it out in year 10, simple. That advice was right in 2020. It was probably wrong by 2022. By 2026 it’s almost certainly wrong, and the IRS is going to start enforcing the right answer with penalties starting in 2026 and 2027.
The confusion is real. Even financial advisors are still giving outdated guidance. Here’s what the rules actually require and what to do about it.
What Changed With SECURE Act
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) passed late 2019 and changed inherited retirement account rules. Before SECURE, non-spouse beneficiaries could “stretch” RMDs over their own life expectancy. A 45-year-old inheriting an IRA would take small annual distributions for 30+ years and grow the rest tax-deferred.
SECURE killed the stretch for most non-spouse beneficiaries who inherit from someone who died after 2019. The replacement rule: empty the account within 10 years of the death.
That much was clear. What wasn’t clear: do you have to take any specific amount out each year, or can you wait until year 10?
The IRS Said Annual RMDs Are Required
In 2022, the IRS issued proposed regulations that surprised a lot of people. If the original account owner had already started their own RMDs (i.e., died after their required beginning date, generally age 73 now), the beneficiary has to:
- Take annual RMDs in years 1 through 9 based on the beneficiary’s life expectancy
- Empty the account by the end of year 10
So it’s not really “any time within 10 years.” It’s “annually for 9 years, then empty out by year 10.”
The IRS waived the penalty for missed annual RMDs for tax years 2021 through 2024 because of the confusion. Starting with 2025 distributions, the annual RMD enforcement begins. If you inherited an account where the owner had started RMDs and you’ve been letting it sit, you have a 2025 RMD due.
The 50% Penalty (Now 25%)
Missing an RMD historically triggered a 50% penalty on the missed amount. SECURE 2.0 reduced that to 25%, and it can drop to 10% if you fix it within two years and file Form 5329 to request a waiver.
Still painful. A missed $20,000 RMD costs $5,000 in penalty before you fix it.
When the Annual RMD Doesn’t Apply
If the original owner died before reaching their required beginning date (so before 73 under current rules), the 10-year rule applies but without annual RMDs. You just have to empty the account by year 10. Your dad died at 65? You can wait until year 10. Your dad died at 76 after starting RMDs? Annual RMDs required.
Spouse beneficiaries have different options entirely. They can roll the account into their own IRA and treat it as their own, sidestepping the 10-year rule. This piece is about non-spouse beneficiaries (kids, siblings, friends).
Eligible Designated Beneficiaries (EDBs)
A small group still gets stretch treatment:
- Spouse
- Disabled or chronically ill beneficiary
- Minor child of the original owner (until majority, then 10-year rule kicks in)
- Beneficiary not more than 10 years younger than the deceased
If you’re a 67-year-old sister inheriting from your 70-year-old brother, you’re an EDB and can stretch over your own life expectancy. Most adult children inheriting from parents are not EDBs.
What to Do With the Inherited Account
First step is mechanical. The 401(k) administrator usually gives you two paths:
- Take a lump sum. All taxable income in one year, big tax hit, but done. Almost never the right choice unless the account is small.
- Direct rollover to an Inherited IRA. Move the assets to an Inherited IRA in your name (titled “X for benefit of Y, beneficiary”). You’re now subject to the 10-year rule but you control the investments and timing. Most people should do this.
Do NOT take a distribution and try to redeposit it as a rollover into your own IRA. Inherited IRAs cannot be rolled into the beneficiary’s own IRA (only spouses can do that). Once distributed, it’s taxable income and you can’t undo it.
The Tax-Smart Withdrawal Strategy
You have 10 years and you control the timing within those years. Two main approaches:
Even-Out Strategy
Take roughly equal distributions each year. If the account is $400k, you take ~$40k a year for 10 years (plus or minus growth). This keeps you in the same tax bracket each year and avoids spike years.
Tax-Bracket Targeting
If your income varies year to year (consulting, business owner, sabbatical year planned), take more in low-income years and less in high-income years. Goal is to keep total income under bracket-jump thresholds. This usually beats even-out for high earners.
Either way, don’t wait until year 10 if you can help it. Year 10 lump sum on a $400k account in addition to your salary can push you into the 32% or 35% bracket, plus state tax. You’re paying way more than necessary.
What If You’re a High Earner
This is where it gets painful. If you make $300k/year, every dollar of inherited account distribution is taxed at 32% or 35% federal plus state. There’s no way to avoid the tax (it’s pre-tax money being recognized as income), but you can manage timing.
Things to consider:
- Take more during sabbatical or low-income years
- Coordinate with charitable giving (a big donation in a high-distribution year offsets income)
- Watch the 3.8% Net Investment Income Tax threshold ($250k MFJ)
- Watch IRMAA (Medicare premium surcharges) if approaching 65
What If the Account Is Roth
Inherited Roth IRA or Roth 401(k) is the rare bright spot. The 10-year rule still applies, but distributions are tax-free (assuming the original owner had the Roth open at least 5 years).
The optimal strategy with an inherited Roth: let it grow as long as possible. Take the minimum required (which may be zero in some cases), and pull the full amount in year 10 when it’s grown the most. All tax-free.
This is the opposite strategy from inherited traditional, where you generally want to spread distributions out.
The 401(k) Plan Quirk
Some 401(k) plans force a 5-year payout rather than allowing the 10-year option, depending on plan rules. Check the summary plan description. If your dad’s 401(k) requires 5-year payout, you have less time to spread distributions.
You can usually move the assets to an Inherited IRA at a custodian of your choice (Fidelity, Schwab, Vanguard) and then operate under the 10-year rule. Most 401(k) plans allow this; some don’t. Worth confirming before assuming.
Common Mistakes
- Assuming “10 years” means “wait 10 years and take it then.” With annual RMDs required for many beneficiaries, this triggers penalties.
- Not taking the year-of-death RMD. If your dad hadn’t taken his 2024 RMD before he died, you have to take it for him by year-end. This is separate from your beneficiary RMD.
- Treating an inherited IRA like your own and rolling it into your IRA. This is a taxable distribution and irreversible.
- Naming a trust as beneficiary without understanding the see-through trust rules. Most trusts don’t qualify and trigger 5-year forced distribution.
Practical Action Steps
- Confirm if the original account owner died before or after their required beginning date.
- If after, calculate annual RMDs based on your single life expectancy table for year 1, then divisor minus 1 each subsequent year.
- Catch up on any missed years (2025 onward) by year-end with Form 5329 waiver request if needed.
- Set up a multi-year withdrawal plan that levels out tax bracket exposure.
- Move assets into an Inherited IRA at a custodian you can manage easily.
For another retirement-account topic that’s full of similar timing traps, see the backdoor Roth pro-rata rule writeup.
The 10-year rule sounds simple. The reality is layered with annual RMD requirements, bracket-management strategy, and plan-specific quirks that most beneficiaries learn the hard way. If you inherited a retirement account in the last few years and haven’t sat down with someone who’s read the actual SECURE Act regulations, the next 30 minutes of homework can save you tens of thousands of dollars.