Inherited IRAs: the basic rules

An inherited IRA is an individual retirement account that passes to a beneficiary after the owner dies. The beneficiary cannot leave the money there indefinitely. Federal rules set a timetable for taking it out, and the timetable depends on who the beneficiary is. This post covers owners who died in 2020 or later, after the SECURE Act changed the rules. Accounts inherited from someone who died earlier follow older rules.

The three questions that decide the rules

The IRS lists the factors that determine what a beneficiary must do:

1. Who is the beneficiary? A spouse, a minor child of the owner, a disabled or chronically ill person, another individual, or an entity such as an estate.
2. When did the owner die? Before 2020 or after 2019.
3. Had the owner reached the required beginning date? That is the date by which the owner had to start required minimum distributions (RMDs). For a traditional IRA it is generally April 1 of the year after the owner reaches age 73. See RMD basics.

Options for a surviving spouse

Under Publication 590-B, a spouse who inherits a traditional IRA can generally:

• Treat it as their own, by designating themselves as the account owner or rolling it over into their own IRA. The ordinary owner rules then apply.
• Remain a beneficiary and take distributions under the beneficiary rules.

Designating oneself as the owner is available only if the spouse is the sole beneficiary and has an unlimited right to withdraw from the account. A spouse who is not the sole beneficiary can generally still roll a distribution, other than a required distribution, into their own IRA within the 60-day limit.

The choice involves a tradeoff for a younger spouse. The IRS notes that when a surviving spouse elects to treat the IRA as their own, a later distribution taken before age 59½ may be subject to the 10% additional tax on early withdrawals. Distributions taken as a beneficiary are not subject to that tax.

Eligible designated beneficiaries

Publication 590-B defines a group called eligible designated beneficiaries:

• the owner's surviving spouse,
• the owner's minor child,
• a disabled individual,
• a chronically ill individual, and
• any other individual who is not more than 10 years younger than the owner, such as a sibling close in age.

These beneficiaries may generally take distributions over their life expectancy. For a minor child that treatment is temporary: once the child reaches the age of majority, the 10-year rule applies to whatever remains.

The 10-year rule

Individual beneficiaries who are not in the eligible group, including most adult children, fall under the 10-year rule. Publication 590-B states that it requires the beneficiary to withdraw the entire balance by December 31 of the year containing the 10th anniversary of the owner's death. In the IRS's example, if the owner died in 2025, the IRA would have to be fully distributed by December 31, 2035.

Whether withdrawals are also required along the way depends on when the owner died:

• Owner died before the required beginning date. No distribution is required for any year before the 10th year.
• Owner died on or after the required beginning date. Annual distributions generally continue during the 10 years, and the account must still be empty by the deadline. The final regulations issued in July 2024 kept this requirement.

If the owner died on or after the required beginning date without taking that year's RMD, the beneficiaries are also responsible for taking it.

When the beneficiary is not a person

If an estate or charity is the beneficiary, the older rules apply. When the owner died before the required beginning date, that generally means a 5-year rule: the account must be emptied by the end of the fifth year after the year of death. This is one reason a blank beneficiary designation can matter. Certain trusts are treated differently.

Inherited Roth IRAs

Roth IRA owners have no RMDs during life, but their beneficiaries do. Publication 590-B says the rules apply as though the Roth IRA owner died before the required beginning date. For a beneficiary under the 10-year rule, that generally means no annual requirement, with the account emptied by the end of the 10th year.

The IRS notes that withdrawals of contributions from an inherited Roth are tax free and most withdrawals of earnings are too, although earnings may be taxable if the Roth account is less than five years old at the time of the withdrawal. See the Roth IRA five-year rules.

Taxes and penalties

Beneficiaries of a traditional IRA must include taxable distributions in gross income for the year they come out, so timing matters under the 10-year rule.

A hypothetical illustration: suppose an adult child inherits a $300,000 traditional IRA from a parent who died before the required beginning date. Taking it all in the final year adds $300,000 to that one year's income. Taking $30,000 a year spreads the same total over ten tax years. Which pattern costs less depends on the beneficiary's other income each year, and the example ignores any change in the account's value.

If a required distribution is missed, or money remains after the 10-year deadline, the amount not withdrawn may be subject to a 25% excise tax, reduced to 10% if corrected in time.

Handling the account

For someone who inherits from anyone other than a spouse, Publication 590-B says:

• The beneficiary cannot treat the IRA as their own or make contributions to it.
• The beneficiary cannot roll amounts into or out of it.
• The account can be moved by trustee-to-trustee transfer, as long as the receiving IRA is set up in the name of the deceased owner for the benefit of the beneficiary.

For an inherited workplace account such as a 401(k), the plan document sets the available options, and the IRS suggests that beneficiaries contact the plan administrator.

These rules have many exceptions and individual tax situations vary, so a tax professional can advise on a specific inherited account. The post on receiving an inheritance covers other inherited assets.