The Inherited IRA 10-Year Rule Is Now Being Enforced: What It Means for Indiana Trusts and Beneficiaries

For several years, families who inherited an IRA or a 401(k) got a reprieve from a confusing distribution rule while the IRS worked out the details. That reprieve has ended. Starting with the 2025 tax year, the inherited IRA 10-year rule is being enforced as written, and the penalty relief that applied from 2021 through 2024 no longer does. For a great many Indiana families, retirement accounts are among the largest assets they will ever pass on, which makes this a change worth understanding before a death forces the question.

Two groups feel the rule most directly. The first is the adult children and other non-spouse beneficiaries who will inherit these accounts. The second is Indiana families who named a revocable living trust as the beneficiary of a retirement account, often years ago, under rules that no longer apply. A trust written for the old system can now produce a result the family never intended.

What the Inherited IRA 10-Year Rule Requires Now

The SECURE Act of 2019 ended the long-standing practice of stretching inherited retirement account distributions over a beneficiary’s lifetime. In July 2024, the IRS issued final regulations (T.D. 10001) confirming how the rule works, and those regulations apply for distribution years beginning January 1, 2025.

For most non-spouse beneficiaries, a category the rules call non-eligible designated beneficiaries, the inherited account must be fully withdrawn within ten years of the original owner’s death. The final regulations kept a feature that drew heavy criticism. If the owner died on or after the age at which they had to begin taking their own required minimum distributions, the beneficiary must also take a distribution in each of years one through nine, then empty the account by the end of year ten. Where the owner died before that age, the beneficiary can take distributions in any pattern they choose, so long as the account is empty by the tenth year.

The IRS waived the penalty for missed annual distributions for 2021 through 2024 while the rules were unsettled. That relief is gone for 2025 and later years. Beneficiaries who are subject to the annual requirement need to take their distributions or face the penalty for falling short.

Who Still Gets More Time

A limited group of heirs, called eligible designated beneficiaries, can still spread distributions over a longer period. The category includes a surviving spouse, a minor child of the account owner until the child reaches age 21 (after which the ten-year clock begins), a beneficiary who is disabled or chronically ill, and a beneficiary who is not more than ten years younger than the owner. A surviving spouse has additional options, including rolling the account into their own IRA. Most other heirs, including the typical adult child, fall under the ten-year rule.

Why Naming a Trust as Beneficiary Now Needs a Second Look

Indiana families often build a revocable living trust to keep assets out of probate, then name that trust as the beneficiary of an IRA or 401(k). Whether the trust still accomplishes what the family had in mind depends on how it is drafted, and the new rules change the analysis.

For the retirement account to be measured by the people behind a trust rather than by a harsher default, the trust generally has to qualify as a see-through trust under the regulations. Two common designs sit inside that category. A conduit trust passes each distribution out to the beneficiary as it arrives. An accumulation trust can hold distributions inside the trust instead.

Under the old stretch rules, a conduit trust could release small annual amounts over a beneficiary’s lifetime. Now the entire account has to leave the IRA within ten years, so a conduit trust ends up handing the full balance to the beneficiary by the end of that period. For a young beneficiary, a beneficiary with creditor problems, or one who does not manage money well, that outcome can undo the very control the trust was meant to provide. An accumulation trust can keep the funds protected inside the trust, though trust income is taxed at compressed rates that reach the top federal bracket at a low threshold, so retained distributions can carry a heavy tax cost. Neither structure is automatically right or wrong. The point is that a trust drafted before these rules took effect may now do close to the opposite of what the family wanted.

Steps Indiana Families Should Take

Start by confirming the beneficiary designation on each retirement account directly with the custodian. That designation, not the will, controls who inherits the account. Designations made long ago are easy to forget and frequently out of date.

If a trust is named as beneficiary, have the trust language reviewed against the current rules. A conduit provision that made sense a decade ago may need to become an accumulation provision, or the better answer may be to name individuals directly. The right choice depends on who the beneficiaries are and what you are trying to protect against.

Coordinate the retirement accounts with the rest of the plan rather than treating them as an afterthought. The size of these accounts, the income tax that comes with them, and the ten-year deadline all interact with decisions about trusts, other assets, and which heirs receive what. My earlier writing on coordinating beneficiary designations and transfer-on-death arrangements explains how a single overlooked designation can pull an asset in a direction the plan never intended.

Retirement accounts reward attention to detail, and the rules that govern them have shifted under families who set their plans years ago. A focused review can tell you whether your beneficiary designations, and any trust named to receive these accounts, still match your goals under the current law. Attorney Burton Padove has spent nearly four decades helping Indiana families coordinate these pieces, and Padove Law offers free, in-home consultations across Indiana. To go over your retirement accounts and how they fit your plan, call the office at (219) 836-2200.