What to Do With an Inherited IRA: Your Options Explained

The tax consequences after inheritance of an IRA are mild when you inherit and larger afterward: receiving the account triggers no federal income tax, but almost every dollar you later withdraw from an inherited traditional IRA is taxed as ordinary income at your own rate, and most non-spouse beneficiaries must empty the account within 10 years. How and when you take those distributions decides the bill.

Last reviewed: August 2026 | Written and reviewed by Craig Wear, CFP®, founder of Q3 Advisors

Do you pay taxes when you inherit an IRA?

No. Inheriting an IRA is not a taxable event, so no federal income tax is due in the year you become the beneficiary. Tax applies only when money leaves the account. For an inherited traditional IRA, each distribution is taxed to you as ordinary income. For an inherited Roth IRA, qualified distributions come out completely tax free.

Because the taxable event is the withdrawal, timing drives everything: the same inherited traditional IRA can produce a small tax bill spread across years or a large one crammed into a single year, depending on how you schedule distributions.

How are inherited traditional IRA distributions taxed?

Distributions from an inherited traditional IRA are taxed as ordinary income at your marginal rate, added on top of your wages, Social Security, and other income for the year. There is no special inheritance rate. In 2026, ordinary rates run from 10% to 37%, with the 24% bracket reaching $201,775 for single filers and $403,550 for married couples filing jointly.

Every dollar you withdraw stacks on top of your existing income, so a single filer with $90,000 of wages who takes a $30,000 distribution reports $120,000 and pays on that $30,000 largely in the 22% and 24% brackets. The 2026 federal ordinary-income brackets below apply once distributions layer on your income. Figures are taxable income, after the 2026 standard deduction of $16,100 single or $32,200 joint.

Are inherited Roth IRA withdrawals tax-free?

Inherited Roth IRA withdrawals are generally tax free when the account is qualified, meaning at least five years have passed since the original owner first funded any Roth IRA. Qualified distributions include both contributions and earnings and carry no federal income tax. Non-spouse beneficiaries of a Roth IRA still face the 10-year emptying rule, but the money comes out without tax.

An inherited Roth IRA keeps its tax-free character but is not exempt from distribution deadlines the way the owner’s own Roth was during life. Most non-spouse beneficiaries must still drain a Roth inherited from a 2020-or-later death within 10 years, though no annual RMDs apply during those years.

How does the 5-year rule affect inherited Roth taxes?

The 5-year rule decides whether the earnings inside an inherited Roth IRA are tax free. If five tax years have passed since the original owner’s first Roth contribution or conversion, all distributions to you are qualified and tax free. If the account is younger than five years, earnings you withdraw are taxable, though contributions and converted amounts still come out tax free first.

The clock counts from January 1 of the year the deceased first funded any Roth IRA and does not restart at death. A Roth opened in 2019 is already past five years, so a beneficiary in 2026 takes everything tax free. A Roth opened in 2024 keeps its earnings taxable until 2029, so a beneficiary who needs cash sooner can withdraw contributions and conversions first and leave the earnings to season.

How does the 10-year rule change your tax bill?

The 10-year rule requires most non-spouse beneficiaries to fully distribute an IRA inherited from a 2020-or-later death by December 31 of the tenth year after death. Compressing decades of tax-deferred money into 10 years often forces larger annual distributions and higher brackets than the old lifetime stretch. The SECURE Act ended that stretch for deaths on or after January 1, 2020.

A $500,000 inherited traditional IRA that once stretched over a lifetime can now add $50,000 or more to taxable income every year. The timing risk is real: waiting until year 10 to withdraw the whole balance can stack a six-figure distribution on a single return and drive it into the 32% or 35% bracket. Spreading withdrawals across all 10 years, reviewed against your required minimum distribution plan for 2026, usually keeps more of the money out of the top brackets.

When are annual RMDs required during the 10 years?

Annual RMDs are required during the 10-year window only when the original owner died on or after their required beginning date, generally April 1 after age 73. In that case you must take a minimum each year based on your single life expectancy and still empty the account by year 10. If the owner died before that date, no annual RMDs apply and only the year-10 deadline matters.

The IRS waived the penalty for missed annual distributions from 2021 through 2024 while it finalized the rules, but that grace period is over. Final regulations took effect in 2025, so beneficiaries who inherited from an owner already past the required beginning date must take annual RMDs for 2025 and 2026 or face the excise penalty described below.

Will an inherited IRA push you into a higher tax bracket?

Yes, a large inherited IRA distribution can push you into a higher federal tax bracket, because the withdrawal stacks on top of your existing income. A lump-sum distribution is the most common trap: taking a full six-figure balance in one year can move a taxpayer from the 22% or 24% bracket into the 32% or 35% bracket, raising the effective rate on the inheritance.

For example, a married couple filing jointly with $150,000 of income who withdraws a $300,000 inherited IRA all at once lifts taxable income to roughly $450,000 and taxes the top slice at 32%. Spreading that $300,000 across the 10-year window keeps most of it inside the 24% bracket, which reaches $403,550 for joint filers.

The hidden tax costs: Medicare (IRMAA), Social Security, and NIIT

Inherited IRA distributions raise your modified adjusted gross income, which can trigger second-order costs that the headline tax rate hides. The three most common are IRMAA surcharges on Medicare Part B and Part D, a larger taxable share of Social Security benefits, and exposure of your other investment income to the 3.8% Net Investment Income Tax. These ripple effects often cost more than the bracket change itself.

For 2026, IRMAA surcharges begin once MAGI passes $109,000 single or $218,000 joint, on top of the standard Medicare Part B premium of $202.90 per month. IRMAA uses a two-year lookback, so a distribution taken in 2026 can raise your 2028 premiums. The last withdrawal year that cannot affect a future premium is generally the year you turn 62.

An inherited IRA distribution is not itself net investment income, so it is not directly hit by the 3.8% NIIT. It does raise MAGI, though, which can push your interest, dividends, and capital gains above the $200,000 single or $250,000 joint threshold and expose that other income to the tax; our explainer on the Net Investment Income Tax in 2026 covers the mechanics. Rising MAGI can also lift the taxable portion of Social Security toward the 85% ceiling.

Do you owe state income tax on an inherited IRA?

In most states, yes. Inherited traditional IRA distributions are usually taxable on your state return as well as your federal return, since states generally follow federal adjusted gross income. States with no broad income tax, such as Florida, Texas, Tennessee, Nevada, and Washington, impose no state tax on the distributions, and several states exempt part of retirement income. Rates and rules vary widely.

State treatment can change the math meaningfully, so where you live in the year you withdraw matters, and beneficiaries expecting a retirement relocation sometimes time distributions around the move. A few states also levy a separate inheritance tax on the transfer itself, distinct from income tax on distributions.

Can you deduct estate tax already paid? The IRD deduction (IRC 691(c))

Yes. When a decedent’s estate paid federal estate tax on an IRA, the beneficiary can claim an itemized deduction under IRC 691(c) for the portion of that estate tax attributable to the IRA, taken as the income is reported. This “income in respect of a decedent” deduction prevents the same dollars from being taxed by both the estate tax and the income tax.

The deduction applies only when federal estate tax was actually owed, which in 2026 means a taxable estate above the $15,000,000 federal exemption. If the estate paid tax, each inherited IRA distribution carries a matching slice of the IRD deduction, claimed on Schedule A. A tax professional can compute the exact figure from the estate’s Form 706.

What is the penalty for missing an inherited IRA RMD?

The penalty for missing a required minimum distribution from an inherited IRA is a 25% excise tax on the amount you failed to withdraw. That penalty drops to 10% if you correct the shortfall within two years by taking the missed distribution and filing IRS Form 5329. The IRS may waive the penalty entirely if you show the miss was due to reasonable error and you are fixing it.

You report the shortfall and request any waiver on Form 5329 with a short statement of reasonable cause. Because the 2021 through 2024 penalty relief has expired, a missed annual RMD for 2025 or 2026 now faces the full excise tax, so withdraw any missed amount promptly and file Form 5329 for that year.

Spouse vs non-spouse: how the tax options differ

A surviving spouse has options no other beneficiary gets: rolling the inherited IRA into their own IRA, delaying distributions to their own RMD age, and keeping the account growing tax deferred. Non-spouse beneficiaries cannot roll the account into their own and are usually bound by the 10-year rule. Both pay ordinary income tax on traditional IRA distributions, and neither owes the 10% early-withdrawal penalty on inherited-IRA distributions.

A spouse who treats the IRA as their own delays RMDs until age 73, or age 75 for those born in 1960 or later (first age-75 RMD year 2035). A spouse who instead keeps the account titled as inherited gets penalty-free access before age 59.5, useful for a younger survivor who needs the funds.

How to minimize taxes on an inherited IRA

The main way to reduce taxes on an inherited IRA is to spread distributions across the full 10-year window instead of taking a lump sum, and to time larger withdrawals for years when your other income is low. Filling the lower brackets deliberately, using early-retirement “gap” years, and coordinating with your own Roth conversion plan can blunt the tax spike the 10-year rule creates.

The strategies below are educational examples, not personalized advice. Combining several across the decade often lowers total tax versus reacting year by year.

1. Spread distributions evenly. Roughly equal amounts each year keep any single return from spiking into a higher bracket and avoid a forced six-figure withdrawal in year 10.
2. Fill the lower brackets on purpose. In a low-income year, withdraw enough to reach the top of the 12%, 22%, or 24% bracket so more of the account leaves at a modest rate.
3. Use early-retirement gap years. The years after you stop working but before Social Security and your own RMDs begin often carry low income, making them efficient windows for larger distributions.
4. Coordinate with your own Roth conversion plan. Inherited IRA distributions and a personal Roth conversion draw on the same brackets, so they need a shared budget. Reviewing your Roth conversion amount and your Roth conversion break-even timeline alongside the inherited account keeps them from colliding.
5. Mind the December 31 deadlines. Both distributions and conversions are fixed to the calendar year; see the Roth conversion deadline for 2026 and how a Roth conversion plan fits an inherited account.

Frequently asked questions

How do I avoid paying taxes on an inherited IRA?

You cannot fully avoid tax on an inherited traditional IRA, but you can reduce it. Spreading distributions across the 10-year window, taking larger amounts in low-income years, and coordinating withdrawals with your other income keeps more dollars in lower brackets. An inherited Roth IRA is different: qualified distributions are already tax free once the 5-year holding rule is met.

Do beneficiaries pay taxes on inherited IRA distributions?

Yes, in most cases. Distributions from an inherited traditional IRA are taxed as ordinary income at the beneficiary’s marginal rate in the year of withdrawal. Inherited Roth IRA distributions are generally tax free once the account meets the 5-year rule. No beneficiary owes the 10% early-withdrawal penalty, regardless of age.

How much tax will I pay on an inherited IRA?

The tax depends on your bracket and how much you withdraw each year. Inherited traditional IRA distributions are taxed as ordinary income at 2026 rates of 10% to 37%, stacked on your other income. A distribution that stays inside the 24% bracket, which reaches $201,775 single and $403,550 joint, is taxed far more lightly than a lump sum that reaches the 32% or 35% bracket.

Is it better to take a lump sum or spread out an inherited IRA?

For most beneficiaries, spreading distributions across the 10-year window results in a lower total tax than a lump sum, because a single large withdrawal can push income into the 32% or 35% bracket and raise Medicare IRMAA surcharges. A lump sum may make sense only for a small balance, a very low-income year, or when offsetting deductions apply. The right pattern depends on your income each year.

Do I have to report an inherited IRA on my tax return?

You report inherited IRA distributions, not the inheritance itself. The custodian issues Form 1099-R for any amount you withdraw, and you enter it as income on your Form 1040. Simply inheriting the account creates nothing to report until money comes out. If you owe a missed-RMD excise tax, you also file Form 5329 for that year.

Does an inherited IRA count as income?

Inheriting the account is not income, but distributions from an inherited traditional IRA count as ordinary income in the year you take them, raising your AGI and MAGI. That higher MAGI can affect Medicare premiums and the taxable share of Social Security. Qualified inherited Roth distributions are tax free and do not count as taxable income.

About Q3 Advisors and how to get help

Q3 Advisors is a registered investment adviser focused on retirement tax planning, including distribution timing for inherited IRAs and coordination with Roth conversion strategy. Our work looks at how withdrawals interact with brackets, Medicare, and Social Security across a full retirement. Founder Craig Wear, CFP® writes and reviews the firm’s educational guidance on these rules.