BACK
- What is an Inherited IRA?
An Inherited IRA is a retirement account passed to a beneficiary after the original owner’s death. It allows for continued tax-deferred (or tax-free) growth but comes with specific withdrawal rules.
- Can I roll an inherited IRA into my own IRA?
Only a spouse can roll an inherited IRA into their own IRA. All others must keep the funds in a separate Inherited IRA.
- Do I have to pay taxes on distributions?
Yes, for traditional IRAs—distributions are taxed as ordinary income. Roth IRA distributions are tax-free, assuming the 5-year rule is met.
- What is the 10-year rule?
Most non-spouse beneficiaries must fully withdraw the inherited IRA within 10 years of the original owner’s death. Whether RMDs are required during that period depends on whether the original owner had started RMDs.
- Are minor children subject to the 10-year rule?
Not until they reach the age of majority (typically 21). Until then, they qualify as EDBs and can use life expectancy distributions. Once they reach majority, the 10-year rule begins.
- What happens if I miss an RMD?
You may face a 25% penalty, reduced to 10% if corrected promptly. Relief is available for some missed RMDs from 2021–2024 due to IRS transitional guidance.
- How do I know if I’m an Eligible Designated Beneficiary (EDB)?
You’re an EDB if you’re:
- A minor child of the account holder
- Disabled or chronically ill
- Not more than 10 years younger than the deceased
- Do inherited Roth IRAs require distributions?
Yes. While Roth IRA owners don’t take RMDs during life, beneficiaries must withdraw all assets within 10 years. Most beneficiaries don’t need annual withdrawals, just full withdrawal by year 10. EDBs may stretch over life expectancy until they age out.
- Can I disclaim an inherited IRA?
Yes. To do so, your disclaimer must be in writing, irrevocable, and filed within 9 months of the owner’s death. You must not have accepted the assets.
- Why consult a financial advisor?
Inherited IRAs involve tax law, estate planning, and timing strategies. A professional can help you avoid penalties, minimize taxes, and build a plan tailored to your goals.
Losing a loved one is an emotional and life-changing event. Amid the grief, you may be tasked with navigating complex financial matters—such as what to do with their retirement accounts.
Inheriting an IRA often comes with unfamiliar rules, deadlines, and tax implications that can be overwhelming during an already difficult time. Fortunately, with thoughtful planning and the right guidance, you can avoid costly missteps and ensure that the assets passed down to you are preserved for the long term. This guide is designed to help you understand your rights, responsibilities, and strategic options when inheriting an IRA—whether you are a spouse, a minor child, or another type of beneficiary.
An Inherited Individual Retirement Account (IRA) enables a beneficiary to continue receiving the benefits of a tax-advantaged retirement account after the original account owner passes away. In contrast to personal IRAs, Inherited IRAs have their own set of rules, especially regarding withdrawals and distributions. Beneficiaries must follow these regulations to comply with IRS requirements and avoid penalties while maximizing the long-term value of the inheritance.
Recent legislation—most notably the SECURE Act of 2019 and SECURE 2.0 of 2022—has dramatically changed the rules around Inherited IRAs, increasing the importance of understanding the account’s structure and available options.
Initial Transition: What Happens When You Inherit an IRA?
Notification and Documentation
If you’re listed as a beneficiary of an IRA, the first step is to notify the financial institution managing the account. This will begin the documentation and transition process. You’ll typically need to provide:
- A copy of the original account holder’s death certificate
- Any necessary legal documentation (e.g., trust agreements)
A new Inherited IRA must then be created in your name—separate from your own personal IRA. This ensures the assets retain their tax-advantaged status under the appropriate rules for inherited accounts.
Titling the Inherited IRA
The account must be correctly titled to reflect its inherited status. For example:
“John Doe (deceased 01/01/2025) IRA F/B/O Jane Doe, Beneficiary”
Incorrect titling can lead to compliance issues, missed deadlines, or even forced distributions and penalties. Non-spouse beneficiaries are not allowed to roll the account into their own IRA, and doing so will eliminate the account’s inherited tax treatment.
Immediate Considerations
Final Year RMDs
One of the first things to determine is whether the original account owner had any Required Minimum Distributions (RMDs) due in the year of death. If so, the beneficiary is required to take that RMD by year-end to avoid penalties.
💡 Note: Beneficiaries are not subject to the 10% early withdrawal penalty, regardless of age. However, taking money out too early can lead to unnecessary income taxes and may disrupt longer-term planning.
Types of Beneficiaries and Their Options
The options and rules for Inherited IRAs depend on the relationship between the deceased and the beneficiary. The IRS classifies beneficiaries into the following categories:
Spouse Beneficiaries
Spouses have the most flexibility and can choose among:
- Roll Over into Your Own IRA: This treats the IRA as your own, allowing RMDs to begin at age 73. You can also make new contributions if eligible.
- Treat the Account as an Inherited IRA: This option allows RMDs based on your life expectancy (and avoids the 10% penalty if under age 59½).
- Take a Lump-Sum Distribution: While allowed, this strategy often triggers a significant tax bill and should generally be avoided unless needed for liquidity.
Planning Tip: If you’re under age 59½ and need access to funds, keeping the account as an inherited IRA avoids the early withdrawal penalty that a rollover would incur.
Non-Spouse Beneficiaries
The SECURE Act (2019) changed how most non-spouse beneficiaries must withdraw inherited IRA assets. There are now three main categories:
1. Eligible Designated Beneficiaries (EDBs)
- Minor children of the decedent (until age of majority)
- Individuals who are disabled or chronically ill
- Individuals not more than 10 years younger than the original account holder
➤ EDBs can still take distributions based on life expectancy (the “stretch” option). For minor children, the 10-year rule begins at age 21.
2. Designated Beneficiaries (DBs)
Most non-spouse heirs fall into this group. Under the 10-year rule, the entire account must be distributed within 10 years of the account holder’s death. RMDs may or may not be required during those years (see below).
3. Non-Designated Beneficiaries
This group includes charities, estates, and some trusts. If the original owner had not started RMDs, the account must be distributed within five years. If RMDs had begun, beneficiaries may use the deceased’s life expectancy.
RMD Rules: Then and Now
Pre-SECURE Act (Inherited Before 2020)
- Beneficiaries could take RMDs over their own life expectancy (Stretch IRA).
- Spouses and non-spouses could stretch distributions.
- Non-designated beneficiaries followed a 5-year or life expectancy rule.
This allowed tax-deferred growth over decades, especially for younger beneficiaries.
Post-SECURE Act (Inherited 2020–2022)
- Most non-spouse beneficiaries must use the 10-year rule.
- If the account holder had already started RMDs, annual RMDs must be taken in years 1–9, with the entire balance withdrawn by year 10.
- If the account holder had not started RMDs, no annual RMDs are required—just a full distribution by year 10.
- EDBs may still use the stretch option.
Post-SECURE 2.0 (Inherited in 2023 and beyond)
SECURE 2.0 clarified and expanded on existing rules:
- RMD age increased to 73 for individuals turning 72 after January 1, 2023.
- The age will increase again to 75 in 2033.
- Annual RMDs are required in years 1–9 if the deceased had already begun RMDs.
- No annual RMDs are required if the deceased had not begun RMDs—just complete distribution by year 10.
- Penalties for missed RMDs were reduced to 25% (10% if corrected in a timely manner), and the IRS granted relief for missed RMDs during 2021–2024.
💡 Planning Insight: Always verify whether the decedent had started RMDs—this affects the structure and tax timing of your withdrawals.
Tax Implications of Inherited IRA Distributions
- Traditional IRAs: Distributions are taxed as ordinary income.
- Roth IRAs: Qualified withdrawals are tax-free as long as the account was open at least five years.
Avoiding Penalties
Missing RMD deadlines can result in a 25% penalty on the undistributed amount. This is reduced to 10% if corrected quickly. Accurate timing and compliance are essential.
Income Tax Planning Tips
- Spread distributions across multiple years to avoid pushing yourself into a higher tax bracket.
- Consider Roth conversions, charitable giving, or coordinating with other income to manage your tax load effectively.
Practical Steps and Best Practices
- Consult a Financial Advisor: Navigating inherited IRAs requires expertise in estate planning, tax law, and investments.
- Know Your Beneficiary Type: Spouse? Non-spouse? EDB? It determines your options.
- Check RMD Status of Deceased: Were RMDs already in progress?
- Plan Withdrawals Thoughtfully: Lump sum or gradual distributions?
- Update Your Estate Plan: Now that you’ve inherited, it’s time to revise your own legacy strategy.
Common Mistakes to Avoid
- Failing to title the account correctly
- Missing RMD deadlines
- Treating the inherited account as your own (unless you’re a spouse)
- Ignoring tax planning strategies
Conclusion
Inherited IRAs can be a powerful financial tool, but they come with complex rules and deadlines. Legislative changes have added further nuance, and mistakes can lead to steep tax bills or penalties. The best course of action is to understand the type of beneficiary you are, follow IRS guidelines, and seek professional advice.
At Passive Capital Management, we help beneficiaries navigate these complexities with clarity and confidence. With thoughtful planning and an integrated approach to taxes, estate planning, and investments, we can help you make the most of the assets you’ve been entrusted with.
Frequently Asked Questions