What Is a BDA IRA? RMDs, the 10-Year Rule, and Penalties

A BDA IRA, or beneficiary distribution account IRA, is the account a financial institution opens in your name to hold the assets of an IRA you inherited. It keeps the money in a tax-advantaged wrapper instead of forcing an immediate cash-out, and it distributes those assets to you on a schedule the IRS sets. How long that schedule runs, and whether you owe annual withdrawals along the way, depends almost entirely on your relationship to the person who died and when they died relative to their required beginning date for distributions.

How a BDA IRA Is Different From Your Own IRA

The account is titled with the deceased owner’s name and a notation that the funds are held for your benefit as the heir. That titling is how the custodian and the IRS keep inherited assets separate from your own retirement savings. If you commingle inherited funds with a personal IRA, the entire inherited balance can be treated as a taxable distribution.

Two hard restrictions apply. You cannot make new contributions to an inherited IRA, and non-spouse beneficiaries cannot roll the funds into their own IRA or transfer them to another retirement plan.¹ The account has one job: distributing the inherited assets to you.

Which Beneficiary Category You Fall Into

The IRS sorts heirs into three groups, and that classification controls your entire distribution timeline.

Eligible Designated Beneficiaries

This is the most favorable group. Eligible designated beneficiaries can stretch distributions over their own life expectancy instead of emptying the account within ten years. The IRS recognizes five types:²

A surviving spouse, who has the most flexibility of any beneficiary.
A minor child of the deceased owner, who can use life expectancy distributions until turning 21. At that point the ten-year clock starts and the balance must come out within the following decade.
A disabled individual, under the IRS definition of disability.
A chronically ill individual, unable to perform daily living activities or requiring substantial supervision.
A person not more than 10 years younger than the deceased, such as a sibling close in age.

“Minor child” here means the account owner’s own child, not a grandchild, niece, or nephew. And for inherited IRA purposes the age of majority is 21, not 18.

Designated Beneficiaries

This covers most other individual heirs: adult children, grandchildren, friends, or anyone else named on the account who doesn’t fit the eligible categories. Designated beneficiaries follow the ten-year rule and must withdraw the entire balance by December 31 of the tenth year after the owner’s death.²

Non-Individual Beneficiaries

When an estate, a charity, or a trust that doesn’t qualify for look-through treatment inherits an IRA, the rules are less generous. If the original owner died before their required beginning date, the account must be emptied within five years. If the owner died after that date, distributions continue based on the deceased owner’s remaining life expectancy.

Special Options for Surviving Spouses

A surviving spouse has an option no other beneficiary gets: electing to treat the inherited IRA as their own.³ For a spouse who doesn’t need the money right away, this is usually the better choice, because required distributions then don’t start until you reach age 73, the same rule that would have applied if you’d earned the money yourself.⁴

To make the election you must be the sole beneficiary and have an unlimited right to withdraw. If a trust is named as the beneficiary, the spousal election isn’t available even if you are the only trust beneficiary.³ Families who set up trusts for estate planning purposes sometimes lose this option without realizing it.

A spouse who doesn’t want to treat the IRA as their own can keep it as a BDA IRA and take distributions based on their own life expectancy. That approach can work for a younger spouse who needs income before age 59½, because withdrawals from an inherited IRA aren’t subject to the 10% early withdrawal penalty that applies to your own IRA.

The 10-Year Rule and When Annual RMDs Apply

Before 2020, beneficiaries could stretch inherited IRA distributions across their entire lifetime. The SECURE Act eliminated that option for most heirs and replaced it with a ten-year window: the balance must be withdrawn by December 31 of the year containing the tenth anniversary of the owner’s death.²

Whether you also owe annual required minimum distributions during those ten years depends on whether the original owner had already reached their required beginning date for RMDs, currently age 73.⁴

If the owner died before their required beginning date, there is no annual distribution requirement in years one through nine. Take money out whenever and in whatever amounts you want, as long as the account is empty by the end of year ten.
If the owner died on or after their required beginning date, you must take annual distributions in each of the first nine years, calculated using your single life expectancy, and the remaining balance must still come out by the end of year ten.⁵

The IRS waived penalties for missed annual RMDs during a transition period from 2021 through 2024 while final regulations were developed.⁶ That grace period is over. Starting in 2025, the final regulations apply and missing an annual RMD triggers a 25% excise tax on the amount you should have withdrawn.⁴

Inherited Roth IRAs

Inheriting a Roth IRA is the better deal, tax-wise. The ten-year deadline still applies for non-eligible designated beneficiaries, but with two advantages over a traditional inherited IRA.

First, no annual RMDs are required during the ten-year window, regardless of when the original owner died. The IRS treats all inherited Roth IRAs as though the owner died before their required beginning date.¹ You just need to empty the account by the end of year ten.

Second, distributions from a Roth BDA IRA are generally tax-free as long as the original owner opened their first Roth IRA at least five years before dying. The five-year clock runs from the tax year of the owner’s first Roth contribution, not from the date you inherited. If the owner hadn’t held any Roth IRA for five years, distributions attributable to contributions still come out tax-free, but earnings may be taxable until that threshold passes.¹

Because of the tax-free treatment, the usual strategy with a Roth is to let the money grow and take the full distribution in year ten. Every year the balance stays invested is a year of tax-free growth you’d give up by withdrawing early.

When a Trust Is the Beneficiary

Naming a trust as the IRA beneficiary adds complexity. If the trust meets the IRS “look-through” or “see-through” requirements, the IRS treats the trust’s underlying individual beneficiaries as if they inherited directly, so the trust can qualify for the ten-year rule (or for life expectancy distributions if the underlying beneficiary is an eligible designated beneficiary).

To qualify, the trust must be valid under state law, be irrevocable or become irrevocable at the owner’s death, have identifiable beneficiaries, and provide a copy of the trust document to the plan administrator by October 31 of the year following the owner’s death. A trust that fails any of these requirements is treated as a non-individual beneficiary, which means either the five-year rule or the deceased owner’s remaining life expectancy applies. Both are shorter timelines.

Penalties for Missing a Required Distribution

The IRS imposes a 25% excise tax on any required amount you should have withdrawn but didn’t.⁴ If your required distribution was $20,000 and you took nothing, that’s a $5,000 penalty on top of the income tax you’ll owe when you eventually withdraw.

The penalty drops to 10% if you catch the mistake and take the missed distribution within a two-year correction window.⁴ That same $20,000 miss would cost $2,000 instead of $5,000.

If a genuine error caused the shortfall, you can request a full waiver of the excise tax by filing Form 5329 with a written explanation showing reasonable error and the corrective steps you took. The IRS reviews each request individually and will notify you if additional tax is owed.⁷

Opening the Account

To set up the BDA IRA, contact the custodian holding the original IRA and ask for their Inherited IRA Application (sometimes labeled a BDA Application). Gather the deceased owner’s full legal name, date of birth, date of death, Social Security number, and original account number from a recent statement. The custodian will also require a certified copy of the death certificate, not a photocopy. Names and numbers need to match the custodian’s records exactly; mismatches are the most common cause of processing delays. Once the account is open, the assets are separated from the deceased owner’s estate and appear under your profile, where you can manage investment selections and schedule distributions.

Tax Planning Across the Distribution Window

Distributions from a traditional BDA IRA count as ordinary income in the year you take them.² Withdrawing a large balance in a single year can push you into a much higher tax bracket. A $500,000 inherited IRA taken all at once on top of your regular salary could easily mean losing 30% or more to federal taxes.

Spreading withdrawals across the ten-year window is almost always the better approach for traditional accounts. Even when annual RMDs aren’t required, roughly equal distributions each year keep your tax bracket more stable. Some beneficiaries time larger withdrawals for years when their other income drops, such as a sabbatical, a gap between jobs, or early retirement before Social Security starts.

The custodian withholds federal taxes on distributions at whatever rate you selected when the account was set up. If you didn’t pick one, the default is typically 10%, which often isn’t enough to cover the tax actually owed. Adjusting your withholding or making estimated tax payments during the year can prevent a shortfall at filing time.

1
Internal Revenue Service. Publication 590-B (2025), Distributions From Individual Retirement Arrangements (IRAs)
2
Internal Revenue Service. Retirement Topics – Beneficiary
3
eCFR. 26 CFR 1.408-8 – Distribution Requirements for Individual Retirement Plans
4
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
5
Federal Register. Required Minimum Distributions
6
Internal Revenue Service. Notice 2024-35, Certain Required Minimum Distributions for 2024
7
Internal Revenue Service. 2025 Instructions for Form 5329