I Inherited an IRA From My Mother. What Are My Distribution Rules?

Receiving an inherited IRA from a parent comes with specific rules that determine how and when you must take distributions. These rules depend on factors like the type of IRA, your relationship to the original owner, and recent tax law changes. Failing to follow them can lead to unnecessary taxes or penalties.

Distribution Timelines

The timeline for withdrawing funds from an inherited IRA depends on whether the account owner passed away before or after January 1, 2020. The SECURE Act, which took effect that year, changed distribution rules for most non-spouse beneficiaries. Previously, heirs could “stretch” withdrawals over their lifetime to minimize annual tax burdens. Now, most must fully distribute the account within ten years of the original owner’s death.

Certain beneficiaries, including minor children, disabled or chronically ill individuals, and those not more than ten years younger than the original account holder, are exempt from the ten-year rule and can take distributions based on life expectancy. However, once a minor child reaches the age of majority, the ten-year rule begins.

If the original account owner had already started required minimum distributions (RMDs), the beneficiary must continue taking at least the amount the owner would have withdrawn each year. Missing these withdrawals results in a penalty of 25% of the amount that should have been taken, though this can be reduced to 10% if corrected in a timely manner.

Different Tax Treatments

The tax implications of an inherited IRA depend on whether the account is a traditional or Roth IRA.

Traditional

Withdrawals from an inherited traditional IRA are taxed as ordinary income at the beneficiary’s marginal tax rate. For example, a beneficiary in the 22% tax bracket who withdraws $10,000 would owe $2,200 in federal taxes, not including potential state taxes.

Beneficiaries cannot make new contributions to an inherited IRA. If the original owner had already started RMDs, the beneficiary must continue taking at least the required amount each year. Since the account must be emptied within ten years, careful planning is necessary to avoid being pushed into a higher tax bracket.

Roth

Distributions from an inherited Roth IRA are tax-free if the account has been open for at least five years before the original owner’s death. If not, earnings withdrawn may be subject to income tax, though contributions remain tax-free.

Because Roth IRAs are funded with after-tax dollars, beneficiaries do not owe taxes on qualified withdrawals. However, the ten-year rule still applies in most cases, requiring the entire balance to be withdrawn within a decade. Those who do not need immediate funds may let the account grow tax-free before taking distributions.

Rollover or Transfer Options

Non-spouse beneficiaries cannot roll an inherited IRA into their own IRA. Instead, the funds must be transferred into a new account titled as an “Inherited IRA” or “Beneficiary IRA” to maintain tax advantages. Failing to follow this process correctly can result in the entire balance being treated as a taxable distribution in the year of transfer.

To avoid unintended tax consequences, beneficiaries should use a direct trustee-to-trustee transfer rather than withdrawing the funds and depositing them into a new account. If a beneficiary mistakenly takes possession of the funds before moving them, the IRS considers it a full distribution, which cannot be reversed. A lump-sum withdrawal could push a beneficiary into a higher tax bracket, increasing the overall tax burden.

Financial institutions have different procedures for setting up an inherited IRA, so beneficiaries should confirm specific requirements with their provider. Some firms may require a death certificate or account verification before processing the transfer. Beneficiaries should also review investment options, as inherited IRAs allow continued tax-advantaged growth until distributions are taken.

Penalties for Missing Required Withdrawals

Failure to withdraw the required amount from an inherited IRA can lead to financial penalties, which were adjusted under the SECURE 2.0 Act. Previously, the IRS imposed a 50% excise tax on any missed withdrawal, but this has been reduced to 25%. If corrected within the IRS’s correction window, the penalty may be further reduced to 10%. To qualify for this lower penalty, the beneficiary must take the missed distribution and file Form 5329 with their tax return in a timely manner.

The IRS may waive the penalty if the beneficiary can demonstrate reasonable cause, such as serious illness or an error by the financial institution. In such cases, a written explanation must be provided when filing Form 5329, outlining the circumstances and steps taken to correct the mistake. While approval is not guaranteed, waivers have been granted when beneficiaries acted in good faith and promptly addressed the issue.