Inherited IRA and the 10-Year Rule in California

If you’ve inherited an IRA, the rules changed in 2020, and getting them wrong can hand a large slice of the account to the IRS instead of to your family. Here’s the plain-English version first, then the detail.

Whether you must take a withdrawal every year during the inherited-IRA 10-year rule depends on one fact: whether the original owner died on or after their required beginning date, the age at which they had to start taking withdrawals. If the owner died on or after that date, a non-spouse heir must take an annual required minimum distribution (RMD) in years 1 through 9 and empty the account by the end of year 10 (IRC §401(a)(9)(H)). If the owner died before that date, there are no annual RMDs. You just have to fully distribute by the end of year 10. This is now settled by Treasury’s final regulations (T.D. 10001), which apply to RMDs for years beginning on or after January 1, 2025 (current as of 2026).

Your retirement accounts do not follow your trust or your will. A 401(k) and an IRA pass by the beneficiary designation on the account: the form that says who inherits it. That form beats every document in your binder. You can have a perfect trust, signed and notarized, and the account still goes to whoever is named on the form at the bank or brokerage.

The 10-year rule, and whether you owe annual RMDs

Under the SECURE Act, most heirs other than a surviving spouse (“non-eligible designated beneficiaries”) must empty an inherited traditional IRA or 401(k) by December 31 of the tenth year after the owner’s death (IRC §401(a)(9)(H), effective for deaths after December 31, 2019). Every dollar that comes out of a traditional account counts as income to the person taking it.

The part people, and AI answers, get wrong is whether you also owe a withdrawal each year inside that window. Early readings said no annual RMDs, just empty by year 10. Treasury rejected that for one situation. Under the final regulations:

• Owner died on or after their required beginning date. You must take an annual RMD in years 1 through 9, and still empty the account by the end of year 10 (T.D. 10001; Treas. Reg. §1.401(a)(9)-5).
• Owner died before their required beginning date. No annual RMDs are required. You may take distributions on any schedule you like, as long as the account is empty by the end of year 10 (IRC §401(a)(9)(H)).

The annual RMDs are first enforced beginning in 2025: the IRS waived the penalty for missed annual RMDs for 2021 through 2024. A missed RMD carries a 25% excise tax, reduced to 10% if you correct it in time (IRC §4974).

Eligible designated beneficiaries escape the strict 10-year rule

Some heirs are “eligible designated beneficiaries” and get to stretch withdrawals over their own life expectancy instead of being forced into the 10-year window. Under IRC §401(a)(9)(E)(ii), these are: a surviving spouse, a minor child of the owner, a disabled person, a chronically ill person, and a beneficiary who is not more than 10 years younger than the owner.

Surviving spouses get the most room of all. A spouse can often roll the inherited account into their own and treat it as theirs, which sidesteps the 10-year clock entirely. Your children, in most cases, do not get that option.

Why “equal” is not always fair after tax

Say you leave one child a $500,000 traditional IRA and the other a $500,000 Roth IRA. On paper that is a clean, even split.

After tax, it is not. The child with the traditional IRA has to pull that $500,000 out within ten years and pay income tax on every dollar, often during their peak earning years, stacked on top of their salary. The child with the Roth generally takes it out tax free. Same starting number, very different amount actually kept: one child can lose six figures to taxes the other never pays. The fix is to compare the after-tax value of each piece, not the sticker number: split each account between the kids, or use other assets to even things out.

California income tax still applies

There is no California-specific inherited-IRA rule: the 10-year rule and the RMD timing are purely federal. But California income tax does apply to distributions from an inherited traditional IRA, on top of the federal tax, at California’s marginal rate of up to 13.3%. So a California heir emptying a large traditional account inside ten years should plan the timing of withdrawals with both federal and state tax in mind. A Roth account inherited under the same rules generally comes out tax free.

Naming a trust as the IRA beneficiary

Sometimes it makes sense to name your trust as the beneficiary instead of a person: to hold the money for a minor, keep it from a child who is bad with money, or protect an heir with special needs who relies on benefits. The catch is that a retirement account paid to a trust has to meet specific federal “see-through” rules, and those rules interact with the eligible-designated-beneficiary categories above. Get it right and the trust can stretch withdrawals as the law allows; get it wrong and it can force the whole account out faster and into a higher bracket. This is not a do-it-yourself form.

Not sure your forms and your trust agree? The free Trust Health Check is built to catch exactly that.

Frequently asked questions

Do I have to take RMDs every year during the inherited-IRA 10-year rule?

Only if the original owner died on or after their required beginning date: then you take an annual RMD in years 1 through 9 and empty the account by the end of year 10 (IRC §401(a)(9)(H); T.D. 10001). If the owner died before that date, there are no annual RMDs; you just have to fully distribute by the end of year 10. The annual RMDs are enforced starting in 2025.

Does my IRA beneficiary form override my trust?

Yes. The beneficiary form on the account controls who inherits it, and it beats your will and your trust. That is why the forms have to be reviewed alongside the rest of your plan, not left in a drawer. A stale form naming an ex-spouse or a deceased person will send the account to the wrong place regardless of what your other documents say.

Who is exempt from the 10-year rule?

Eligible designated beneficiaries can stretch withdrawals over their own life expectancy instead of the 10-year window: a surviving spouse, a minor child of the owner, a disabled person, a chronically ill person, and anyone not more than 10 years younger than the owner (IRC §401(a)(9)(E)(ii)). A surviving spouse can also often roll the account into their own IRA and avoid the clock entirely.

Do I pay California tax on inherited IRA withdrawals?

Yes on a traditional account. There is no California-specific inherited-IRA rule, but distributions from an inherited traditional IRA are taxable income in California at up to a 13.3% marginal rate, on top of the federal tax. A Roth account inherited under the same rules generally comes out tax free. Plan the timing of withdrawals with both taxes in mind.

What happens if I miss an annual RMD?

A missed required minimum distribution carries a 25% excise tax, reduced to 10% if you correct it within the IRS’s correction window (IRC §4974). The IRS waived the penalty for missed annual RMDs for 2021 through 2024, but annual RMDs are enforced beginning in 2025 for heirs whose owner died on or after the required beginning date.

Related reading: what a successor trustee has to do, moving assets into your trust, how to choose a trustee, and living trusts and wills in California.

Whether you’ve inherited an account or you’re deciding who inherits yours, the beneficiary forms and the trust have to point the same direction, and a 30-minute call is enough to see whether they do. Talk to Eric: a free 30-minute call. Or call (805) 244-5291. (This is general information, not legal or tax advice. The 10-year rule and other retirement-account tax rules are federal and change over time, so confirm the current rules for your situation.)

Written by Eric D. Ridley. Estate Planning Attorney at Ridley Law, serving Ventura County since 2010. Learn more about Eric →