Inherited IRA Distribution Rules for Beneficiaries

When an Individual Retirement Account (IRA) owner dies, the account becomes an inherited IRA for the named beneficiary. Federal regulations dictate how and when a beneficiary must withdraw the assets, and these rules vary based on the beneficiary’s relationship to the deceased, the deceased’s age at death, and the IRA type. The regulations were updated by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and the SECURE 2.0 Act of 2022, with the IRS issuing final regulations in 2024. Understanding these specific withdrawal requirements is necessary for compliance and properly managing the financial implications of the inheritance.

Determining Your Beneficiary Category

The first step after inheriting an IRA is to determine your beneficiary classification under IRS rules. The SECURE Act established three categories, and your relationship to the original account owner determines which one you fall into. This classification dictates the withdrawal options available to you.

An Eligible Designated Beneficiary (EDB) has the most flexible options. This category includes:

• A surviving spouse
• A minor child of the original account owner (under age 21)
• A disabled or chronically ill individual
• Any person not more than 10 years younger than the deceased IRA owner

For example, a 60-year-old who inherits an IRA from their 68-year-old sibling would qualify as an EDB.

A Designated Beneficiary (DB) is the default classification for most non-spouse individuals who do not qualify as an EDB. This includes adult children, grandchildren, or a sibling who is more than 10 years younger than the owner. DBs are subject to more restrictive withdrawal rules than EDBs.

A Non-Designated Beneficiary (NDB) is any beneficiary that is not a person, such as an estate, a charity, or a non-qualifying trust. The rules for NDBs require the fastest distribution of the inherited assets.

Distribution Rules for Eligible Designated Beneficiaries

Eligible Designated Beneficiaries (EDBs) can take distributions over their own single life expectancy, a method known as a “stretch IRA.” This allows for extended tax-deferred growth of the account’s assets. To use this option, the beneficiary must begin taking required minimum distributions (RMDs) by December 31 of the year after the owner’s death. The annual amount is calculated using the IRS’s Single Life Table.

A surviving spouse has options not available to other beneficiaries. One choice is to treat the inherited IRA as their own by rolling the assets into a personal IRA. This makes the funds subject to RMD rules based on the surviving spouse’s age, which can delay withdrawals.

Alternatively, a surviving spouse can remain a beneficiary of the inherited IRA and use the life expectancy payout method. This allows the spouse to delay distributions until the year the deceased owner would have been required to take their own RMDs. This can be particularly advantageous if the deceased spouse was younger than the surviving spouse.

A minor child of the owner can take distributions based on their own life expectancy until reaching age 21. At that point, the 10-year rule is triggered, and the remaining balance must be withdrawn by the time the beneficiary turns 31.

Distribution Rules for Designated Beneficiaries

Designated Beneficiaries are subject to the 10-year rule. This rule requires the entire balance of the inherited IRA to be withdrawn by the end of the tenth year after the original owner’s death. For example, if the owner died in 2025, the beneficiary must empty the account by December 31, 2035.

The timing of withdrawals within the 10-year window depends on when the original owner died. If the owner died before their Required Beginning Date (RBD), the date they had to start their own RMDs, the beneficiary can take distributions at any time during the 10-year period. No annual distributions are required in years one through nine, as long as the account is empty by the deadline.

If the original owner died on or after their RBD, the rules are more stringent. The beneficiary must empty the account by the end of the 10th year and also take annual RMDs for years one through nine. These annual RMDs are based on the beneficiary’s own life expectancy factor from the IRS Single Life Table.

Distribution Rules for Non-Designated Beneficiaries

Non-Designated Beneficiaries (NDBs) like estates or charities have distribution timelines determined by whether the original account owner had started taking RMDs. These rules are designed to prevent indefinite tax deferral for entities without a life expectancy.

If the owner died before their Required Beginning Date (RBD), the NDB must follow the 5-year rule. This requires the entire IRA balance to be distributed by the end of the fifth year after the owner’s death. No annual RMDs are required during this period, as long as the account is empty by the deadline.

If the owner died on or after their RBD, the NDB must take distributions based on the deceased owner’s life expectancy. The beneficiary must take an annual RMD each year, starting the year after the owner’s death. This calculation uses the life expectancy factor the original owner would have used, reduced by one each year, continuing the deceased’s RMD schedule.

Tax Treatment of Inherited IRA Distributions

The tax implications of withdrawals depend on whether the inherited account is a traditional or Roth IRA. Distributions from an inherited traditional IRA are treated as ordinary income and are subject to federal and state income tax. The withdrawals are taxed in the year they are taken at the beneficiary’s income tax rate.

If the original owner made non-deductible contributions, a portion of each distribution is a tax-free return of principal. The beneficiary must file IRS Form 8606 to determine the taxable portion of each withdrawal. The 10% early withdrawal penalty does not apply to distributions from an inherited IRA.

Distributions from an inherited Roth IRA can be tax-free. For a withdrawal to be qualified and tax-free, the original Roth IRA must have been established for at least five years before any distributions are taken. This five-year holding period starts on January 1 of the tax year of the first contribution.

For distribution purposes, Roth IRA owners are always treated as having died before their RBD, so no annual RMDs are required during the 10-year period for Designated Beneficiaries. If a beneficiary takes a distribution before the five-year holding period is met, the earnings portion is subject to income tax. The contributions are always returned tax-free. Once the five-year rule is satisfied, all subsequent distributions are tax-free.