A successor beneficiary is someone who inherits an individual retirement account (IRA) from a prior beneficiary rather than directly from the original owner. That second-generation inheritance can affect distribution deadlines, annual required minimum distributions (RMDs) and tax-planning considerations. Because of these implications, it’s especially important to understand the original beneficiary’s status.
A financial advisor can help you plan ahead for retirement and take the rules, options and taxes surrounding IRAs into account.
Who Is a Successor Beneficiary and How the 10-Year Rule Applies
As we mentioned above, a successor beneficiary is someone who inherits an IRA after the person who originally inherited it has passed. In other words, the successor does not inherit directly from the original IRA owner, but rather from a beneficiary who was already subject to inherited IRA distribution rules.
The distribution deadline heavily depends on which rules applied to that first beneficiary. If the deceased beneficiary was an eligible designated beneficiary taking distributions based on life expectancy, the successor generally must empty the remaining account within 10 years after that beneficiary’s death. 1 Eligible designated beneficiaries can include a surviving spouse, a minor child of the account owner, a disabled or chronically ill individual, or someone less than 10 years younger than the original owner.
How the 10-Year Clock Resets for a Successor Beneficiary
Suppose an IRA owner died in 2020 and left the account to an eligible designated beneficiary who qualified to take life-expectancy distributions. If that beneficiary died in 2026 with $300,000 still in the inherited IRA, the successor beneficiary would generally have until December 31, 2036 to fully distribute the remaining account.
| Scenario | Original Owner’s Death | Original Beneficiary’s Death | Successor Beneficiary’s 10-Year Deadline | Account Balance at Succession |
|---|---|---|---|---|
| Successor inherits from eligible designated beneficiary | 2020 | 2026 | Dec. 31, 2036 | $300,000 |
A successor beneficiary does not always receive a fresh 10-year period, however. If the first beneficiary was already subject to the SECURE Act’s 10-year rule following the original owner’s death, the successor generally steps into that existing schedule. This means they must empty the account by the original deadline. So, for instance, if the owner died in 2020 and the first beneficiary’s deadline was December 31, 2030, that deadline generally would not extend simply because the beneficiary died in 2026.
Required Minimum Distributions During the Successor’s 10-Year Period
A successor may also have to take annual RMDs before the final deadline. When an eligible designated beneficiary had been taking life-expectancy payments, the successor generally continues annual RMDs using the deceased beneficiary’s remaining distribution schedule. They don’t have to calculate them from the successor’s own life expectancy.
Whether annual distributions apply in other cases depends partly on the original owner’s required beginning date and the rules governing the deceased beneficiary. Regardless, it’s still necessary to fully deplete the account by the applicable deadline.
Successor Beneficiary RMDs Combined With the 10-Year Deadline
This simplified illustration assumes a $300,000 starting balance, 5% annual growth and a 30.5 beginning divisor carried forward from the deceased beneficiary.
| Year | Required Annual RMD | Remaining Balance* | Years Left | Final Requirement |
|---|---|---|---|---|
| 1 | $9,836 | $304,672 | 9 | — |
| 2 | $9,989 | $309,417 | 8 | — |
| 3 | $10,145 | $314,236 | 7 | — |
| 4 | $10,303 | $319,130 | 6 | — |
| 5 | $10,463 | $324,100 | 5 | — |
| 6 | $10,626 | $329,147 | 4 | — |
| 7 | $10,792 | $334,273 | 3 | — |
| 8 | $10,960 | $339,479 | 2 | — |
| 9 | $11,130 | $344,766 | 1 | — |
| 10 | — | — | 0 | Withdraw all remaining funds |
*Illustrative balances assume growth after each distribution.
RMD amounts generally depend on factors including the account balance and applicable distribution period. The calculator below can provide an estimate of RMDs in situations it supports, but successor beneficiaries may be subject to different rules based on the original owner and prior beneficiary.
Tax Planning for Successor Beneficiaries
Distributions from a traditional inherited IRA are generally taxed as ordinary income in the year they are withdrawn. That means a large distribution can increase significantly taxable income. It may even push a successor beneficiary into a higher federal tax bracket, especially if the withdrawal is in addition to wages, investment income or other retirement distributions.
For that reason, waiting until the final year of the 10-year period to empty the account can create a much larger tax bill than necessary. Spreading withdrawals over several years may help keep taxable income more consistent and reduce the risk of concentrating too much income into a single year.
Successor beneficiaries may also benefit from coordinating inherited IRA withdrawals with changes in their own income. For example, taking larger distributions during a lower-income year, such as after retirement or during a temporary reduction in earnings, may result in a lower overall tax cost than taking the same amount during a peak-earning year.
Annual RMD requirements can further shape the withdrawal strategy. If RMDs apply during the 10-year period, it’s generally necessary to take out those minimum amounts even if the beneficiary would otherwise prefer to delay distributions. As such, planning should account for both the annual requirements and the final depletion deadline.
Tax planning should also take into consideration state income taxes, Medicare premium surcharges and other potential consequences of having higher adjusted gross income.
A financial advisor can help confirm the applicable RMD rules, estimate the tax effect of different withdrawal schedules, and create a plan that reduces the chance of an unexpectedly large taxable distribution near the deadline.
Frequently Asked Questions (FAQs)
Does a successor beneficiary always get a new 10-year period?
Not necessarily. A successor beneficiary may receive a new 10-year distribution period if the deceased beneficiary was an eligible designated beneficiary using life-expectancy distributions. But if the first beneficiary was already subject to a 10-year deadline, the successor generally must follow the remaining portion of that original schedule.
Do successor beneficiaries have to take RMDs every year?
They may. Annual required minimum distributions can apply depending on the rules that governed the original owner and first beneficiary. A successor beneficiary may need to take yearly distributions while also ensuring they fully deplete the account by the applicable deadline.
How are inherited IRA withdrawals taxed for a successor beneficiary?
Distributions from a traditional inherited IRA are generally taxed as ordinary income in the year they are withdrawn. Spreading withdrawals over multiple years may help manage taxable income. Taking a large distribution in a single year could push the beneficiary into a higher tax bracket.
Bottom Line
Successor beneficiaries face inherited IRA rules that can differ from those that applied to the person who originally inherited the account. Depending on the circumstances, they may need to continue annual RMDs, follow an existing deadline or empty the account within a new 10-year period. Because distributions are generally taxable as ordinary income, planning withdrawals carefully can help manage the tax impact and avoid a large final-year distribution.
Tips for Tax Planning
- Consider working with a financial advisor to determine the best tax strategies based on your inheritance. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Consider using a tax calculator to estimate what you might end up paying in federal income tax next year.
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