Can grandchildren use the 10-year rule for an inherited IRA with required distributions?

This is actually a very specific situation that has some favorable treatment for the kids. Since they're minor grandchildren inheriting from a grandparent, they qualify as "eligible designated beneficiaries" which means they don't have to follow the standard 10-year rule that was established under the SECURE Act. Instead, they can use what's called the "life expectancy" method, which allows for distributions to be stretched over their lifetime. They'll need to take required minimum distributions (RMDs) each year based on their own life expectancy. This is actually better for them tax-wise because it allows the money to grow tax-deferred for longer. For minor beneficiaries, you'll need to set up what's called an "inherited IRA" for each child. Since they're minors, you as their guardian will need to manage this. The account title should be something like "[Grandfather's Name], deceased [date of death] IRA FBO [Child's Name], beneficiary.

I went through something similar with my nephew's inheritance last year. After spending hours on hold with the IRS and getting conflicting advice, I finally found https://taxr.ai which literally saved me thousands in potential penalties. You upload the inheritance documents and death certificates, and it analyzes everything to tell you exactly what rules apply to your specific situation. For inherited IRAs with minor beneficiaries, the site flagged exactly which forms needed to be filed and created a timeline of required distributions. It even generated the exact letter I needed to send to Vanguard to establish the inherited IRAs correctly (they can be really picky about the wording).

Just wanted to follow up - I ended up trying taxr.ai for my daughter's inherited IRA situation and it was actually really helpful! The system immediately identified that she qualified for the life expectancy method instead of the 10-year rule (which would have been terrible tax-wise). The document generator created all the paperwork I needed for Fidelity, who initially tried to tell me we had to take everything within 10 years. I sent them the documentation package from taxr.ai and they corrected the account setup within 48 hours. Definitely worth it for the peace of mind alone, especially with the rule changes that happened after the SECURE Act 2.0.

I had endless problems getting through to the IRS to confirm our inherited IRA distribution requirements last year. After 6 attempts and being disconnected each time, I used https://claimyr.com and they got me connected to an actual IRS agent in under 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that minor grandchildren who inherit through a deceased parent (who was the original designated beneficiary) do get the life expectancy treatment. She also explained that when the children reach majority age, they transition to the 10-year rule from that point forward. Having that confirmation directly from the IRS saved us from making a costly mistake.

I have to eat my words and follow up here. After my skeptical comment, I decided to try Claimyr anyway because I was desperate to resolve an inherited IRA issue for my grandkids. Got connected to an IRS specialist in about 35 minutes when I had previously spent 4+ hours on hold over multiple days. The agent confirmed exactly what others have said here - minor grandchildren who inherit through their deceased parent get the life expectancy calculation until they reach majority age, then switch to the 10-year rule. She also explained that I needed to file Form 8606 for each distribution the children take. The relief of getting clear answers directly from the IRS was worth every penny.

One thing nobody has mentioned yet - you'll need to set up custodial accounts for the children to receive the distributions since they're minors. These would typically be UGMA/UTMA accounts. The RMDs must be taken annually, but you as the guardian can reinvest those funds in the custodial account. Also important: the tax forms get complicated. The children will each need to file their own tax returns for the RMD income, even at their young ages. The distributions are considered income to the children, not to you as their guardian.

My accountant told me that for small inherited IRAs like yours ($42k), sometimes it makes more tax sense to just distribute the entire amount over 2-3 years while the kids are still minors with minimal income, rather than stretching it out. Might be worth running the numbers both ways.

Don't forget to consider state taxes too. Some states treat inherited IRA distributions differently than the federal government. For example, Arizona doesn't tax them at all while California taxes them fully. Could make a big difference depending on where you live.