Can You Inherit an Inherited IRA? What You Need to Know
Learn the specific rules for inheriting an IRA that has already been passed down. Understand successor beneficiary distributions and tax impacts.
Inheriting an Individual Retirement Account (IRA) can offer significant financial support, yet the regulations governing these accounts, particularly when they are passed on a second time, are notably complex. An IRA is a tax-advantaged retirement savings vehicle; an inherited IRA is a specialized account established when a beneficiary receives these assets after the original owner’s death. Understanding the specific rules for these unique financial assets is important, as they dictate distribution timelines and tax implications. The intricacies increase substantially when an inherited IRA itself is inherited, creating a chain of succession that demands careful navigation.
Understanding Initial Inherited IRA Rules
The SECURE Act of 2019 significantly altered inherited IRA rules, especially for those inherited from original owners who died after December 31, 2019. This legislation introduced clearer classifications for beneficiaries, each with distinct distribution requirements. The primary goal of these changes was to accelerate the distribution of inherited retirement assets, thereby limiting the period of tax-deferred growth.
One category is the Eligible Designated Beneficiaries (EDBs), which includes the surviving spouse of the IRA owner, minor children of the deceased IRA owner, disabled or chronically ill individuals, and individuals who are not more than 10 years younger than the IRA owner. These beneficiaries generally have more flexible distribution options. For instance, a surviving spouse can often roll over the inherited IRA into their own IRA or treat it as their own, or take distributions based on their life expectancy. Minor children can stretch distributions over their life expectancy until they reach the age of majority (21), then they become subject to the 10-year rule. Disabled and chronically ill individuals, and those not more than 10 years younger than the IRA owner, can continue distributions over their life expectancy.
Another category is Designated Beneficiaries (DBs), which primarily includes non-spouse beneficiaries who do not meet the EDB criteria, such as adult children or grandchildren. For IRAs inherited from owners who died after 2019, these beneficiaries are generally subject to the 10-year rule. This rule requires the entire inherited IRA balance to be distributed by December 31st of the 10th year following the original IRA owner’s death. If the original IRA owner had already begun taking required minimum distributions (RMDs) before their death, the designated beneficiary may also be required to take annual RMDs during years 1-9 of the 10-year period, with the full balance distributed by the end of the 10th year.
Lastly, Non-Designated Beneficiaries include entities such as estates, charities, or certain trusts that do not have a life expectancy. The distribution rules for these beneficiaries depend on whether the original IRA owner died before or after their required beginning date (RBD) for RMDs, which is generally April 1st of the year after the IRA owner reaches age 73 (or 72 for those who turned 72 before 2023). If the owner died before their RBD, the account must generally be fully distributed within five years. If the owner died on or after their RBD, distributions must be taken over the remaining life expectancy of the original IRA owner.
Inheriting an Already Inherited IRA
An Individual Retirement Account (IRA) that has already been inherited can indeed be inherited again, though the rules become more specific and often more restrictive. The individual receiving an already inherited IRA is known as a “successor beneficiary.” This scenario arises when the primary beneficiary of an inherited IRA dies before fully distributing the account balance and has designated their own beneficiary to receive the remaining funds.
Generally, successor beneficiaries are subject to the 10-year rule, regardless of the original beneficiary’s status or their prior distribution schedule. This means the entire balance of the inherited inherited IRA must typically be distributed by the end of the 10th year following the death of the original IRA owner, not the death of the first beneficiary.
A significant aspect of these rules is that the “stretch” option, which allowed distributions over a beneficiary’s life expectancy, generally does not pass to a successor beneficiary. Even if the first beneficiary was an Eligible Designated Beneficiary (EDB) who was using the stretch provision, the successor beneficiary will typically be limited to the 10-year rule.
There are extremely limited exceptions where a successor beneficiary might continue the original beneficiary’s distribution schedule. For example, if the successor beneficiary themselves meets the criteria of an EDB of the original IRA owner, which is a rare occurrence. However, even in such cases, if the original beneficiary was an EDB using the life expectancy method, the successor beneficiary will often switch to the 10-year rule based on the original IRA owner’s death.
Distribution and Tax Rules for Successor Beneficiaries
The 10-year distribution period for a successor beneficiary begins from the date of the original IRA owner’s death. For example, if the original owner died in 2020 and the first beneficiary died in 2025, the successor beneficiary would typically have until the end of 2030 to fully distribute the inherited IRA.
Under the 10-year rule, successor beneficiaries are generally not required to take annual Required Minimum Distributions (RMDs) in years one through nine, provided the original IRA owner died before their required beginning date (RBD) for RMDs. However, the entire account balance must be fully distributed by December 31st of the 10th year following the original IRA owner’s death. If the original IRA owner died on or after their RBD, or if the first beneficiary was taking RMDs, the successor beneficiary may be required to take annual RMDs during the 10-year period, in addition to fully depleting the account by the 10th year. Recent IRS guidance has clarified that these annual RMDs for certain beneficiaries under the 10-year rule are generally applicable starting in 2025.
Distributions from an inherited traditional IRA are generally taxed as ordinary income to the successor beneficiary in the year they are received. For an inherited Roth IRA, distributions are generally tax-free, provided the original owner met the five-year holding period requirement for the Roth IRA.
If the original beneficiary was already under the 10-year rule, the successor beneficiary typically continues that same original 10-year clock. If the original beneficiary was an EDB using the life expectancy method, the successor beneficiary will generally be subject to the 10-year rule that started from the original IRA owner’s death, effectively ending the life expectancy stretch. The process of transferring the inherited IRA involves retitling the account into the successor beneficiary’s name, clearly indicating that it is an inherited IRA for the benefit of the successor beneficiary. For instance, an account might be titled “John Doe (deceased June 2019) Inherited IRA FBO of Jane Doe, Beneficiary.”