The IRS has a 10-year rule that says you need to take money out of your inherited IRA within 10 years of the date of death. This is true even if you’re the only beneficiary, and even if all the money in the account comes from a single source.
The IRS will let you leave money in an inherited IRA account for longer than 10 years, but it’s not automatic. You have to ask for permission first.
The IRS will approve one exception to the 10-year rule: If there’s no other beneficiary and all your money comes from one source, then you can keep it inside your inherited IRA indefinitely.
But that’s rare — most people inherit IRAs from friends or family members who had more than one beneficiary and who left many different sources of funds behind for future beneficiaries.
The IRS only allows you to withdraw money from your inherited Traditional IRA if it’s been in the plan for at least 10 years (unless you receive the money from your parent or grandparent who died after 1990). Withdrawing this amount will be taxable, even if you use it to buy a first home.
If you are an heir and have not yet met the minimum 10-year holding period requirement, take steps now to avoid incurring a 10% penalty on your withdrawal.
You can transfer traditional IRAs into an inherited IRA by contacting an advisor or trustee at your financial institution where you have a Traditional IRA account. Once you have done so, any future distributions will be eligible for the 10-year rule and any required 10% early withdrawal penalty will be waived.
The 10-year rule is a federal law that limits the amount of time that an inherited traditional IRA can be rolled over. If you inherit an IRA, you will have to wait 10 years before you can take any distributions from the account.
The 10-year rule is one of the most complicated and misunderstood retirement planning concepts in the U.S., so let’s try to clear up some confusion around it:
This rule applies only to inherited IRAs and not to Roth IRAs or employer-sponsored retirement plans such as 401(k)s and 403(b)s.
You must wait at least 10 years after inheriting an IRA before taking any distributions from it.
If you take money out of your inherited IRA before age 59½, you will have to pay a 10% early withdrawal penalty on the amount taken out plus income tax on all distributions taken during those 10 years.
This penalty is waived if you use your inherited IRA within 5 years of inheriting it or within 30 days after turning age 59½, whichever comes first, but be aware that this provision doesn’t apply if any part of the distribution was due to death before you turned 59½.)