The 5-Year Rule for Inherited IRAs: When It Applies and What It Requires

When the 5-year rule applies

The 5-year rule applies to a non-designated beneficiary (generally an estate, a charity, or a non-qualifying trust) when the original owner died before their required beginning date (before starting RMDs).

If the owner died on or after their required beginning date with a non-designated beneficiary, a different regime applies: annual distributions based on the deceased owner's remaining life expectancy (sometimes called the "ghost" rule), continuing until the account is empty. This is one of the least-understood corners of the RMD rules, professional guidance is strongly advised here.

What it requires

• The entire account balance must be distributed by December 31 of the calendar year containing the 5th anniversary of the owner's death.
• No annual minimum, distributions can be timed freely within the five years.
• The 25% excise tax applies to any amount still in the account after the deadline.

How this usually happens

• No beneficiary named. The IRA defaults to the estate, the most common way the 5-year rule gets triggered, and entirely avoidable with a beneficiary designation.
• Charity named directly. Charities don't pay the income tax, so bunching doesn't hurt them, but the 5-year deadline still governs.
• A trust that isn't "see-through." Only trusts meeting specific IRS requirements preserve the underlying individual's beneficiary treatment. A trust that fails the tests is a non-designated beneficiary. Trust drafting and beneficiary designations should be reviewed together, by an estate attorney, not just the IRA custodian.