For nearly five years, beneficiaries of inherited IRAs have lived in a kind of regulatory limbo. The SECURE Act rewrote the rules in 2020, the IRS spent multiple rounds of guidance trying to interpret them, and during that time the agency repeatedly waived the penalty for skipping required withdrawals. That grace period is now over. For many heirs, 2026 is the first year that missing an annual distribution carries real consequences — and the math behind the 10-year rule is unforgiving for anyone who waits until the end to act.
What the 10-Year Rule Actually Requires
When a non-spouse beneficiary inherits a traditional IRA from someone who died in 2020 or later, the entire account generally must be drained by December 31 of the tenth year after the original owner's death. The old "stretch IRA" — where heirs could spread distributions over their own lifetimes — is gone for most beneficiaries.
What changed in the latest IRS guidance is whether annual withdrawals are required during years one through nine. The answer now depends on a single question: had the original owner already begun taking required minimum distributions before they died?
- If the owner died on or after their Required Beginning Date (RBD): The beneficiary must take an annual RMD in years one through nine, then drain the remaining balance by the end of year ten.
- If the owner died before their RBD: No annual distributions are required during the 10-year window. The full balance just has to be out by year ten.
For the first group, IRS Notice 2024-35 confirmed that mandatory annual distributions begin in 2025 — and the agency's prior penalty waivers do not extend further. That puts 2026 squarely inside the live-fire phase of the rule.
The Penalty Has Teeth
The cost of missing an inherited-IRA RMD is one of the steepest in the tax code. The default penalty is 25% of the amount that should have been distributed. That can be reduced to 10% if the beneficiary takes the missed distribution and corrects the excise tax within a defined window, but even the discounted version dwarfs the penalties on most other retirement-account mistakes.
For a beneficiary who should have taken a $20,000 distribution and missed it, the unreduced penalty is $5,000 — on top of the ordinary income tax owed when the distribution finally happens.
Why "Wait and Drain in Year Ten" Is Usually a Bad Idea
Even when annual RMDs are not required, deferring all withdrawals to year ten is rarely the optimal strategy. Compressing a six- or seven-figure inherited balance into a single tax year can push the beneficiary into a much higher marginal bracket, trigger IRMAA Medicare surcharges, phase out other deductions, and raise the tax cost of Social Security benefits. Spreading withdrawals across the full 10-year window is generally cheaper, even if it is not legally required.
Practical Steps for 2026
A few moves are worth considering this year:
- Confirm which rule applies. Pull the original owner's date of death and check whether they had reached their RBD (currently age 73 for most). The answer determines whether 2026 distributions are mandatory.
- Calculate the year's RMD using the right life expectancy table. Non-spouse beneficiaries generally use the Single Life Table, with the divisor reduced by one each subsequent year.
- Coordinate with other taxable income. If a beneficiary is still working or in a high-earning year, deliberately taking a smaller distribution now and a larger one in a future low-income year can cut the lifetime tax bill.
- Consider Roth-inherited accounts differently. Inherited Roth IRAs are still subject to the 10-year rule, but qualified distributions remain tax-free, which changes the optimal sequencing.
The Broader Lesson
The end of the grace period is a useful reminder that retirement-account rules are not static. SECURE Act, SECURE 2.0, and a series of IRS notices have meaningfully changed how wealth passes between generations. For investors building a retirement plan today, the implication is twofold: account titling and beneficiary designations deserve a fresh review, and the long-standing assumption that "the kids can stretch it out" no longer holds for most accounts.
Sources: Internal Revenue Service Publication 590-B, IRS Notice 2024-35, Fidelity, Capstone Investment Financial Group, FIG Marketing