Inherited IRA rules in Arizona, and the ten-year clock that started without you

If the owner died in 2023, the account has to reach zero by December 31, 2033. The old "stretch IRA," which let a beneficiary spread withdrawals across their own life expectancy, was closed by the SECURE Act of 2019 for most people who inherit.

There is no penalty for taking more than the minimum in any year, and no credit for taking it early. The only hard deadline is the tenth year, which is exactly why the schedule is a planning decision rather than a filing decision.

If they had already started taking required minimum distributions, you must take an annual distribution in years one through nine and empty the account in year ten. If they died before their required beginning date, no annual distribution is required and only the year-ten deadline applies.

The IRS final regulations issued in July 2024 confirmed the annual requirement, and it applies for calendar years beginning in 2025. A great many beneficiaries who inherited in 2020 through 2023 were told during the waiver years that nothing was due, and never heard that it changed.

The correction runs on Form 5329, filed with a statement of the reason and proof that you have since taken the missed amount. SECURE 2.0 cut this penalty from the old 50%, and the waiver request is granted routinely when the shortfall is corrected promptly and explained honestly.

As an Enrolled Agent, Aaron can prepare the correction and represent you before the IRS on it directly, rather than handing it to an outside preparer.

• A surviving spouse, who also has options no other beneficiary has.
• A minor child of the person who died, until they reach 21, after which the ten-year clock starts. A grandchild does not qualify.
• A disabled beneficiary, under the tax code's definition.
• A chronically ill beneficiary, certified as such.
• Anyone not more than 10 years younger than the person who died, which often covers a sibling or a partner.

Trusts named as beneficiary are their own subject. Whether the trust qualifies as a see-through, and whether it is a conduit or accumulation trust, changes both the timing and who pays the tax. Bring the trust document.

Rolling it into your own IRA is usually right when you are older than 59½ and do not need the money soon, since it delays required distributions until your own required beginning age. Staying a beneficiary is usually right when you are under 59½ and may need withdrawals, because beneficiary distributions avoid the 10% early withdrawal penalty.

The SECURE 2.0 election to be treated as the deceased spouse helps when the spouse who died was younger, because required distributions then track their age instead of yours.

That reverses the usual strategy. With an inherited traditional IRA, spreading withdrawals across the ten years generally keeps you out of higher brackets. With an inherited Roth, the money grows tax-free the entire time, so the default is to leave it alone and take the whole balance in year ten.

Inherit both and treat them the same way, and you either pay tax years earlier than you needed to or give up years of tax-free growth.

Arizona is one of nine community property states. When the first spouse dies, community property generally receives a basis adjustment on both halves under Internal Revenue Code section 1014(b)(6), not only on the half belonging to the person who died. In a common-law state, the surviving spouse keeps their original basis on their half.

On a Scottsdale or Paradise Valley home bought decades ago, or a brokerage account with forty years of unrealized gain, that difference is frequently the largest single number in the estate. Establishing and documenting the character of the property is worth doing while the records still exist.

Arizona also imposes no state estate tax and no inheritance tax.

If you moved to the Valley from a high-tax state and inherited afterward, the arithmetic that would have applied back home no longer does. Front-loading distributions is often better here than it would have been there.