What a Stretch IRA Is and How the Rules Changed

A Stretch IRA is an inherited retirement account — typically a traditional IRA or Roth IRA — that a beneficiary keeps open and continues to withdraw from over their own lifetime rather than cashing it out all at once. The "stretch" refers to spreading the account's tax burden (and growth) across decades instead of years.

The rules for Stretch IRAs shifted significantly under the find Act, which took effect January 1, 2020. Before that date, most non-spouse beneficiaries could take small annual withdrawals based on their life expectancy, leaving the bulk of the account to grow tax-deferred. The find Act compressed that timeline for most people: non-spouse beneficiaries now must empty inherited IRAs within 10 years, though they can choose when to take the money during that window.

Spouses remain the exception. A surviving spouse can still treat an inherited IRA as their own, roll it into their own IRA, or use the old Stretch rules if they prefer. Adult children, grandchildren, and other non-spouse beneficiaries face the 10-year important date regardless of their age or relationship to the account owner.

Key Takeaways

  • Non-spouse beneficiaries who inherited an IRA after January 1, 2020 must withdraw the entire balance within 10 years, though they control the timing of those withdrawals.
  • Surviving spouses can treat an inherited IRA as their own, delay withdrawals until age 73, or use the 10-year rule if they choose.
  • The account continues to grow tax-deferred between withdrawals, but all distributions are taxed as ordinary income in the year they are taken.
  • IRAs inherited before January 1, 2020 may still follow the old Stretch rules if the beneficiary has not yet taken distributions; this depends on when the original account owner died.

How Withdrawals Work Under the 10-Year Rule

Under the current rules, a non-spouse beneficiary who inherits an IRA after December 31, 2019 has 10 years from the account owner's death to withdraw all the money. There is no requirement to take equal amounts each year or to take anything in years one through nine — the only important date is that the account must be empty by December 31 of the 10th year.

This flexibility means a beneficiary could leave the money untouched for eight years, then withdraw it all in year nine and ten. Or they could take steady annual withdrawals. The account keeps growing tax-deferred on whatever balance remains, so the timing strategy affects how much total money is available at the end.

Every dollar withdrawn is taxed as ordinary income in the year it is taken. If the inherited IRA is a traditional IRA, all withdrawals are taxable. If it is a Roth IRA, withdrawals are tax-free (because the original owner already paid tax on contributions). The tax bill lands on the beneficiary, not the estate.

Inherited IRAs Before 2020 and Grandfathered Accounts

If the original IRA owner died before January 1, 2020, the beneficiary may still be using the old Stretch rules — but only if they have not yet taken a required distribution. This is called a grandfathered beneficiary. These beneficiaries can continue taking distributions based on their life expectancy, which allows the account to stretch over many more years.

Once a grandfathered beneficiary takes their first required distribution, they lock in the old rules for the rest of their life. If they have not yet taken a distribution and the account owner died before 2020, they should check with the IRA custodian (the bank or brokerage holding the account) before taking any money, because the timing of that first withdrawal affects their entire withdrawal schedule going forward.

If the original account owner died on or after January 1, 2020, the 10-year rule applies to all non-spouse beneficiaries, with no grandfathered exception.

Roth IRAs Versus Traditional IRAs as Inherited Accounts

The 10-year important date applies to both traditional and Roth IRAs, but the tax treatment differs. Withdrawals from an inherited traditional IRA are fully taxable as ordinary income. Withdrawals from an inherited Roth IRA are tax-free, because the original owner already paid income tax on the money when it went in.

This difference can shape a beneficiary's withdrawal strategy. Someone inheriting a large traditional IRA might spread withdrawals across all 10 years to avoid pushing themselves into a higher tax bracket in any single year. Someone inheriting a Roth IRA has no tax penalty for taking it all at once, though they may still choose to spread it out to preserve the tax-free growth for as long as possible.

A beneficiary cannot convert an inherited traditional IRA to a Roth IRA. They can only withdraw the money as ordinary income or leave it in the account until the 10-year important date.

What Happens if You Miss the 10-Year important date

If a non-spouse beneficiary does not empty the inherited IRA by December 31 of the 10th year after the account owner's death, the IRS treats the remaining balance as a missed withdrawal. The penalty is 25% of the amount that should have been withdrawn but was not — reduced to 10% if the beneficiary corrects the error within two years.

The IRA custodian (the financial institution holding the account) is responsible for enforcing the important date and may freeze the account or force a full distribution if the 10-year window closes. Some custodians send reminders; others do not. The beneficiary bears the responsibility for tracking the important date themselves.

If you inherit an IRA, write down the account owner's death date and calculate your 10-year important date when ready. Set a calendar reminder for December 31 of year 10 to may support the account is empty by then.

Spousal Beneficiaries and Their Options

A surviving spouse has more choices than other beneficiaries. A spouse can treat the inherited IRA as their own, which means they become the account owner and can delay withdrawals until they reach age 73 (under current rules). They can also roll the IRA into their own existing IRA or open a new one. This option is not available to adult children, grandchildren, or other relatives.

Alternatively, a spouse can elect to be treated as a beneficiary rather than the owner, which means they follow the 10-year rule like any other non-spouse beneficiary. This might make sense if the spouse is younger and wants to preserve the account's tax-deferred growth for longer, or if they have other reasons to keep the inherited IRA separate from their own retirement savings.

A spouse should discuss these options with a tax professional or the IRA custodian before taking any distributions, because the choice made at the time of the first withdrawal can lock in the strategy for the rest of their life.

How to Set Up and Manage an Inherited IRA

When you inherit an IRA, the account does not automatically transfer to you. The IRA custodian (the bank, brokerage, or investment firm holding the account) will contact you or the estate executor with instructions. You will need to provide a death certificate and proof of your identity. The custodian will then retitle the account as an "inherited IRA" in your name.

Do not take possession of the money yourself and then deposit it into a new account — that counts as a distribution and triggers when ready taxation on the full amount. The custodian must handle the transfer directly, or you must roll it into an inherited IRA at another institution using a trustee-to-trustee transfer.

Once the account is set up, you can usually choose how the money is invested (stocks, bonds, mutual funds, or cash) just as you would with your own IRA. You control the timing of withdrawals within the 10-year window. Keep records of all withdrawals and the taxes paid, because you will report this income on your tax return each year.

Frequently Asked Questions

Can I roll an inherited IRA into my own IRA?

Only if you are the surviving spouse. Non-spouse beneficiaries cannot roll an inherited IRA into their own account. A spouse can roll it into their own IRA, treat the inherited IRA as their own, or keep it separate and follow the 10-year rule — the choice is theirs.

What if I inherit an IRA from someone who was already taking required distributions?

If the account owner was already taking required minimum distributions (RMDs) at the time of death, you must continue taking at least the RMD for that year. After that, the 10-year rule applies, and you can take distributions on your own schedule as long as the account is empty by year 10.

Do I have to take money out every year, or can I wait until year 10?

You can wait. The 10-year rule requires the account to be empty by the end of year 10, but there is no requirement to take distributions in years one through nine. You could take nothing for eight years and then withdraw everything in years nine and ten. The account continues growing tax-deferred on whatever balance remains.

What if the inherited IRA loses money — do I still owe taxes on withdrawals?

Yes. You owe income tax on every dollar you withdraw, regardless of whether the account has gained or lost value. The tax is based on the amount withdrawn, not on the account's performance. If the account has declined in value, you may have a smaller total to withdraw, but each withdrawal is still fully taxable.

Can I name my own beneficiary for an inherited IRA?

No. An inherited IRA must be emptied within 10 years (for non-spouse beneficiaries), so you cannot pass it on to your own heirs. Once you inherit an IRA, you are responsible for withdrawing it all within the important date. Any remaining balance at the end of year 10 is subject to the 25% penalty.