Inherited IRA 10-Year Rule Calculator
This calculator helps non-spouse beneficiaries estimate the potential growth and tax implications of an inherited IRA under the 10-year distribution rule (for deaths occurring after December 31, 2019).
Calculation Results (After 10 Years)
Projected IRA Value: $0.00
Estimated Tax on Withdrawal: $0.00
Net After-Tax Amount: $0.00
Understanding the Inherited IRA 10-Year Rule
An Inherited IRA, also known as a Beneficiary IRA, is an Individual Retirement Account that has been passed down to a beneficiary after the original owner's death. The rules for distributing funds from an inherited IRA can be complex and depend heavily on several factors, including the relationship of the beneficiary to the deceased, the age of the original account holder at death, and most significantly, the date of death.
The SECURE Act and the 10-Year Rule
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which became effective on January 1, 2020, brought significant changes to inherited IRA rules. For most non-spouse beneficiaries of IRA owners who died on or after this date, the "10-year rule" now applies. This rule generally requires the entire inherited IRA balance to be distributed by the end of the 10th calendar year following the year of the original owner's death.
- No Annual RMDs (Generally): Under the 10-year rule, there are typically no required minimum distributions (RMDs) during years 1 through 9. The beneficiary can choose to take distributions at any time during this period, or wait until the very end.
- Full Distribution by Year 10: The entire remaining balance must be withdrawn by December 31st of the 10th year following the year of the original owner's death.
- Tax Implications: All distributions from a traditional inherited IRA are generally subject to ordinary income tax at the beneficiary's marginal tax rate. If the inherited IRA was a Roth IRA, qualified distributions are tax-free.
Who is Subject to the 10-Year Rule?
The 10-year rule primarily applies to "non-eligible designated beneficiaries." This includes:
- Most non-spouse individuals (e.g., adult children, siblings, friends).
- Trusts that are not "see-through" trusts (i.e., those that do not name an individual as the ultimate beneficiary).
- Estates.
Exceptions to the 10-Year Rule (Eligible Designated Beneficiaries)
Certain "eligible designated beneficiaries" are exempt from the 10-year rule and can still stretch distributions over their life expectancy. These include:
- Surviving Spouses: Spouses have the most flexibility, often able to roll the inherited IRA into their own IRA or treat it as their own.
- Minor Children of the Deceased: They can stretch distributions until they reach the age of majority (typically 18 or 21), at which point the 10-year rule begins.
- Chronically Ill Individuals.
- Disabled Individuals.
- Individuals Not More Than 10 Years Younger Than the Deceased.
If you fall into one of these categories, the rules are different, and this calculator may not apply directly to your situation.
How the Calculator Works
This calculator assumes a non-spouse, non-eligible designated beneficiary under the SECURE Act's 10-year rule. It projects the growth of the inherited IRA balance over 10 years, assuming no withdrawals are made until the end of the 10th year. It then estimates the income tax due on the full withdrawal based on your provided marginal tax rate, showing the net after-tax amount you would receive.
Important Considerations
- Tax Planning: Taking a large lump sum distribution in the 10th year could push you into a higher tax bracket. Consider spreading distributions over the 10-year period to manage your tax liability.
- Investment Growth: The calculator uses an estimated annual growth rate. Actual returns may vary.
- Professional Advice: Inherited IRA rules are complex and can have significant tax implications. It is highly recommended to consult with a qualified financial advisor or tax professional to understand your specific situation and make informed decisions.
Example Calculation:
Let's say you inherit an IRA with a balance of $100,000. You expect an average annual growth rate of 6%, and your marginal tax rate is 24%.
- Initial Balance: $100,000
- Growth Rate: 6%
- Tax Rate: 24%
After 10 years, the IRA could grow to approximately $179,084.77. A 24% tax on this amount would be about $42,980.34, leaving you with a net after-tax amount of approximately $136,104.43.