Inheriting an IRA can feel overwhelming, especially when you’re already dealing with the loss of a loved one. The decisions you make in the weeks and months following an inheritance can have significant tax consequences for years to come. Understanding what to do with an inherited IRA is essential for preserving the value of this asset and avoiding costly penalties.
The rules governing inherited IRAs have changed dramatically in recent years. What worked for previous generations of beneficiaries may no longer apply to you. Your options depend on several factors, including your relationship to the deceased, when they passed away, and whether they had already begun taking required minimum distributions. This guide walks through each scenario so you can make informed decisions about your inherited retirement account.
How Inherited IRA Rules Have Changed
The SECURE Act of 2019 fundamentally transformed how inherited IRAs work for most beneficiaries. Before this legislation, non-spouse beneficiaries could stretch distributions from an inherited IRA over their entire lifetime, allowing decades of continued tax-deferred growth. This strategy, known as the “stretch IRA,” was particularly valuable for younger beneficiaries who could let the account compound for 30, 40, or even 50 years.
That option is now gone for most beneficiaries. The SECURE Act replaced the lifetime stretch with a 10-year rule requiring most non-spouse beneficiaries to fully distribute inherited IRA assets within 10 years of the original owner’s death. This change applies to IRAs inherited from individuals who died on or after January 1, 2020.
The IRS spent several years clarifying exactly how this 10-year rule works, particularly regarding whether annual distributions are required during that decade. Final regulations released in 2024, which took effect in 2025, confirmed that beneficiaries who inherited from someone already taking required minimum distributions must take annual RMDs during the 10-year period. The IRS waived penalties for missed RMDs from 2021 through 2024 while these rules were being finalized, but that grace period has ended. For a deeper look at these regulations, see our guide on inherited IRA rules and tax strategies.
Spouse Beneficiary Options
Surviving spouses have more flexibility than any other type of beneficiary when inheriting an IRA. You have several distinct options, each with different implications for taxes, access to funds, and required distributions.
Treat the IRA as Your Own
As a spouse, you can roll the inherited IRA into your own existing IRA or designate yourself as the account owner. This effectively makes the inherited assets yours, subject to all the same rules as any IRA you would own. You can continue making contributions if eligible, and you won’t need to take required minimum distributions until you reach age 73 (or 75 for those born in 1960 or later).
This option works well if you don’t need immediate access to the funds and want to maximize tax-deferred growth. However, if you’re under age 59½ and need to access the money, withdrawals from your own IRA would be subject to a 10% early withdrawal penalty in addition to income taxes.
Remain as Beneficiary
Alternatively, you can keep the account titled as an inherited IRA with yourself as the beneficiary. This approach offers penalty-free access to the funds at any age, which can be valuable if you’re younger than 59½ and may need the money.
If your spouse died before reaching their required beginning date for RMDs, you can delay distributions until the year they would have turned 73 (or 75 for those born in 1960 or later). If they died after beginning RMDs, you must continue taking annual distributions based on your life expectancy. You can always convert from beneficiary status to treating the IRA as your own later, but you cannot go back the other way.
Lump Sum Distribution
You can withdraw the entire inherited IRA balance immediately. While this provides full access to the funds, the entire amount becomes taxable income in the year of withdrawal. For large IRAs, this could push you into a much higher tax bracket and result in a significantly larger tax bill than spreading distributions over time.
Disclaim the Inheritance
Within nine months of your spouse’s death, you can disclaim part or all of the inherited IRA. The assets would then pass to the contingent beneficiaries named on the account. This strategy might make sense if you don’t need the funds and want them to go directly to your children or other heirs, or if accepting the inheritance would create estate tax issues.
Non-Spouse Beneficiary Options
If you inherit an IRA from someone other than your spouse, such as a parent, sibling, or friend, your options are more limited. You cannot treat the IRA as your own or roll it into your existing retirement accounts. Instead, you must open an inherited IRA and follow specific distribution rules.
The 10-Year Rule
Most non-spouse beneficiaries who inherited an IRA from someone who died in 2020 or later are subject to the 10-year rule. You must withdraw the entire account balance by December 31 of the year containing the 10th anniversary of the original owner’s death.
Whether you must take annual distributions during those 10 years depends on whether the original owner had reached their required beginning date before dying. If they had already started RMDs, you must take annual distributions each year based on your life expectancy, with the account fully depleted by year 10. If they died before their required beginning date, you have the flexibility to withdraw any amount at any time, as long as the account is empty by the end of year 10.
| Factor | Owner Died Before RMD Age | Owner Died After RMD Age |
| Annual RMDs Required | No | Yes |
| Withdrawal Flexibility | Any amount, any time | Must take annual minimum |
| Final Deadline | End of year 10 | End of year 10 |
| Penalty for Missed RMD | None (if emptied by year 10) | Up to 25% of missed amount |
Lump Sum Distribution
Like spouse beneficiaries, non-spouse beneficiaries can take a lump sum distribution at any time. The distribution is fully taxable but not subject to the 10% early withdrawal penalty, regardless of your age. This option makes sense only in limited circumstances, such as when the inherited IRA balance is small or you have offsetting deductions or losses.
Eligible Designated Beneficiaries: The Exceptions
Certain non-spouse beneficiaries qualify as “eligible designated beneficiaries” and can stretch distributions over their life expectancy rather than following the 10-year rule. This category includes:
- Minor children of the deceased can take distributions based on their life expectancy until they reach the age of majority (age 21 for inherited IRA purposes under the SECURE Act). Once they reach age 21, the 10-year clock begins, and they must empty the account within 10 years.
- Disabled individuals who meet the IRS definition of disability can stretch distributions over their lifetime. The disability must be a medically determinable physical or mental impairment that prevents substantial gainful activity and is expected to last indefinitely or result in death.
- Chronically ill individuals who are unable to perform at least two activities of daily living or require substantial supervision due to cognitive impairment also qualify for the lifetime stretch.
- Beneficiaries not more than 10 years younger than the deceased can use life expectancy distributions. This exception often applies to siblings, partners, or close friends of similar age.
If you believe you qualify as an eligible designated beneficiary, consult with a tax professional to confirm your status and understand the specific distribution requirements that apply to your situation.
Understanding the 10-Year Rule
The 10-year rule sounds straightforward, but its application has caused significant confusion among beneficiaries and advisors alike. The key distinction is whether annual RMDs apply during the 10-year period.
If the original IRA owner died before their required beginning date (generally April 1 of the year after turning 73), you have complete flexibility during the 10-year window. You could take nothing for nine years and then withdraw the entire balance in year 10, or you could take equal distributions each year, or any other pattern that works for your situation.
If the original owner died after their required beginning date, you must take annual RMDs each year, calculated using your single life expectancy. The remaining balance must still be fully distributed by the end of year 10. Missing these annual RMDs can trigger a penalty of up to 25% of the amount you should have withdrawn, though this can be reduced to 10% if you correct the mistake within two years.
For beneficiaries who inherited in 2020-2023 and missed RMDs during the years of IRS uncertainty, the penalty waivers have ended. If you’ve been waiting to take action, 2025 requires catching up on any missed distributions to avoid penalties going forward. For help calculating what you owe, our RMD calculator can assist with the math.
Tax Implications of Inherited IRAs
Distributions from an inherited traditional IRA are taxed as ordinary income, just like distributions from any traditional IRA. The amount you withdraw each year is added to your other taxable income and taxed at your marginal rate. This can have significant implications for your overall tax picture.
Large distributions can push you into higher tax brackets, potentially resulting in more taxes than if you spread the withdrawals over multiple years. For example, a beneficiary in the 22% bracket who takes a $200,000 lump sum distribution could see much of that amount taxed at 24%, 32%, or even higher rates.
Inherited IRA distributions can also affect other areas of your finances. The additional income may increase your Medicare Part B and Part D premiums through IRMAA surcharges, reduce eligibility for certain tax credits, increase the taxable portion of Social Security benefits, or affect financial aid calculations for college-bound children. Understanding the tax impact of Roth conversions provides helpful context for managing taxable income from retirement accounts.
Strategies for Managing an Inherited IRA
How you withdraw funds from an inherited IRA can significantly impact your lifetime tax bill. Several strategies can help you manage the tax consequences effectively.
Spread Distributions Strategically
Rather than waiting until year 10 to take a massive distribution, consider spreading withdrawals across the full 10-year period. Taking roughly equal amounts each year prevents any single year from having a dramatically higher taxable income. You might also time larger withdrawals for years when your other income is lower, such as between jobs or before Social Security begins.
Fill Lower Tax Brackets
If you have years with unusually low income, consider taking larger inherited IRA distributions to “fill up” lower tax brackets. Paying 12% or 22% on distributions now may be preferable to paying 24% or higher on a large distribution in year 10.
Coordinate With Other Income Sources
Consider how inherited IRA distributions interact with your other income. If you’re still working with high earnings, smaller distributions might make sense. Once you retire and your income drops, larger distributions could be taxed at lower rates. Understanding the relationship between Roth conversions and RMDs can inform your overall retirement income strategy.
Consider the Impact on Your Estate Plan
If you don’t need the inherited IRA funds for living expenses, think about how your distribution strategy affects what you’ll eventually leave to your own heirs. Taking distributions and investing them in taxable accounts, Roth IRAs, or life insurance can provide more flexibility for your beneficiaries. For more on this topic, see our article on estate planning and Roth conversions.
Inherited Roth IRAs: Special Considerations
Inheriting a Roth IRA offers significant advantages because qualified distributions are completely tax-free. However, inherited Roth IRAs are still subject to distribution requirements, even though the original owner’s Roth IRA had no RMDs during their lifetime.
Non-spouse beneficiaries of inherited Roth IRAs must follow the same 10-year rule that applies to traditional inherited IRAs. The key difference is that the distributions themselves are tax-free, assuming the original Roth IRA satisfied the 5-year holding requirement. If the original owner had the Roth IRA for fewer than five years before death, the earnings portion of early withdrawals may be taxable.
Spouse beneficiaries can roll an inherited Roth IRA into their own Roth IRA, eliminating any distribution requirements during their lifetime. This allows the assets to continue growing tax-free indefinitely. For more details on how these accounts work, see our guide on inherited Roth IRAs and the ten-year rule.
Understanding the 5-year rule for Roth IRAs is important when inheriting these accounts, as it affects whether distributions of earnings are tax-free.
Conclusion
Deciding what to do with an inherited IRA requires careful consideration of your relationship to the deceased, the type of account inherited, and your own financial circumstances. The rules have become more complex since the SECURE Act eliminated the stretch IRA for most beneficiaries, and the stakes for getting it wrong, both missed tax planning opportunities and potential penalties, are significant.
Spouse beneficiaries have the most flexibility and should carefully weigh whether to treat the IRA as their own or remain as a beneficiary based on their age and need for funds. Non-spouse beneficiaries must navigate the 10-year rule and determine whether annual RMDs apply to their situation. All beneficiaries should develop a distribution strategy that minimizes taxes over the full withdrawal period rather than simply reacting year by year.
Given the complexity of inherited IRA rules and the potential for costly mistakes, working with a qualified financial advisor or tax professional is strongly recommended. The right guidance can help you preserve more of your inheritance and avoid penalties that could significantly reduce the value of this important asset.
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Frequently Asked Questions
What is the first thing I should do when I inherit an IRA?
Contact the financial institution holding the IRA to understand the account transfer process and your distribution options. You’ll need to provide a death certificate and complete paperwork to establish an inherited IRA in your name. Avoid taking any distributions until you fully understand the tax implications and have developed a strategy.
Can I roll an inherited IRA into my own IRA?
Only spouse beneficiaries can roll an inherited IRA into their own IRA or treat it as their own. Non-spouse beneficiaries must keep the assets in an inherited IRA and cannot combine them with their own retirement accounts.
What happens if I miss an RMD from an inherited IRA?
The IRS can impose a penalty of up to 25% of the amount you should have withdrawn. This penalty can be reduced to 10% if you correct the mistake and withdraw the missed amount within two years. Filing Form 5329 and providing a reasonable explanation may allow the IRS to waive the penalty entirely.
Do I have to take distributions from an inherited Roth IRA?
Yes. Even though the original owner had no lifetime RMD requirement, inherited Roth IRAs are subject to distribution rules. Non-spouse beneficiaries must follow the 10-year rule, though the distributions themselves are typically tax-free.
Can I convert an inherited traditional IRA to a Roth IRA?
Non-spouse beneficiaries cannot convert inherited IRA assets to a Roth. Spouse beneficiaries who roll the inherited IRA into their own IRA can then convert those assets to a Roth, paying taxes on the converted amount.
What if I inherited an IRA before 2020?
If the original owner died before January 1, 2020, the old rules still apply. You can continue stretching distributions over your life expectancy as calculated when you inherited the account. The 10-year rule does not apply retroactively to these inheritances.
How do I calculate RMDs on an inherited IRA?
For beneficiaries subject to annual RMDs, divide the account balance as of December 31 of the prior year by your life expectancy factor from IRS tables. The factor depends on your age and is found in IRS Publication 590-B. Our RMD calculator can help you determine the correct amount.
Can I disclaim an inherited IRA?
Yes, you can disclaim part or all of an inherited IRA within nine months of the original owner’s death. The disclaimed assets pass to the contingent beneficiaries. This might make sense if you don’t need the funds or if accepting them would create tax or estate planning complications.
Get Help Managing Your Inherited IRA Now!
The decisions you make about an inherited IRA can affect your taxes for years to come. Q3 Advisors helps beneficiaries develop tax-efficient distribution strategies that preserve more of their inheritance. To discuss your specific situation and explore your options, schedule a consultation with our team.
