Inherited IRA Withdrawal Rules: What You Need to Know
The rules for withdrawing from an inherited IRA depend on your relationship to the original owner. Learn about the timelines and tax rules that apply to you.
An inherited Individual Retirement Arrangement, or IRA, is an account established when a person receives retirement funds after the original owner’s death. Navigating the responsibilities of an inherited IRA can be a detailed process. Federal regulations dictate when and how a beneficiary must take distributions from the account, based on several factors. The process involves identifying your beneficiary status, which determines the timeline for withdrawals, ensuring the tax-deferred or tax-free growth does not continue indefinitely.
Determining Your Beneficiary Category
The first step in managing an inherited IRA is to determine your beneficiary category, as withdrawal rules are tied to your relationship with the deceased owner. The Internal Revenue Service (IRS) defines three distinct categories of beneficiaries. Correctly identifying your category is the foundation for understanding your specific obligations and options.
The most favored category is the “Eligible Designated Beneficiary” (EDB). This group is narrowly defined and includes five types of individuals:
- The surviving spouse of the original owner
- A minor child of the owner
- A disabled individual
- A chronically ill individual
- Any beneficiary who is not more than 10 years younger than the deceased owner
A surviving spouse has the most flexibility, while a minor child is considered an EDB only until they reach age 21.
If you are an individual beneficiary but do not meet any of the EDB criteria, you are classified as a “Designated Beneficiary” (DB). This is the most common category for non-spouse beneficiaries, such as adult children, grandchildren, or other relatives who are more than 10 years younger than the decedent.
The final category is “Non-Designated Beneficiaries” (NDBs). This classification applies to any entity that is not a person, such as the deceased owner’s estate, a charitable organization, or certain types of trusts. If the owner failed to name a living person as a beneficiary, the IRA is handled under the more restrictive NDB rules.
A key factor in many withdrawal rules is whether the original account owner passed away before or on/after their Required Beginning Date (RBD). The RBD is the date the owner must have started taking their own Required Minimum Distributions (RMDs), generally April 1 of the year after they turn 73. This detail influences the specific withdrawal schedule for beneficiaries.
Withdrawal Rules for Eligible Designated Beneficiaries
Once identified as an Eligible Designated Beneficiary (EDB), you have access to the most flexible withdrawal options. These rules allow for distributions to be spread over a longer period, and the options available are specific to each subcategory of EDB.
Surviving Spouses
A surviving spouse who is the sole beneficiary of an IRA has unique choices. The first option is to treat the inherited IRA as their own by rolling the assets into their existing IRA or establishing a new one. This allows the spouse to make contributions, and RMDs will be based on their own age. The second option is to remain a beneficiary of the IRA, which allows a surviving spouse to delay taking RMDs until the year the deceased spouse would have reached the age for their own RMDs.
Minor Children
A minor child of the original account owner is treated as an EDB until they reach age 21. During this period, the child can take distributions based on their own single life expectancy, a method often called a “stretch IRA.” This favorable treatment ends once the child turns 21, at which point the beneficiary becomes subject to the 10-year rule, requiring the entire remaining balance to be withdrawn by the end of the tenth year after they reach age 21.
Other EDBs
The remaining categories of EDBs—disabled individuals, chronically ill individuals, and beneficiaries not more than 10 years younger than the decedent—can take distributions from the inherited IRA over their own single life expectancy. This “stretch” capability allows them to take smaller annual RMDs based on calculations from IRS life expectancy tables, maximizing the tax-deferred growth potential.
Withdrawal Rules for Designated Beneficiaries
For individuals classified as Designated Beneficiaries (DBs), the withdrawal rules are less flexible. This category is primarily governed by the 10-year rule, which mandates that the entire balance of the inherited IRA must be fully distributed by December 31 of the 10th year following the year of the original owner’s death. Understanding this timeline is important to avoid significant tax penalties. For example, if the owner passed away in 2025, the beneficiary would have until December 31, 2035, to empty the account.
The rule has an important requirement that depends on when the original owner died. If the owner passed away on or after their RBD, the beneficiary must take annual RMDs for years one through nine of the 10-year period, based on their life expectancy. In contrast, if the owner died before their RBD, no annual withdrawals are required during the 10-year period, as long as the entire account is liquidated by the deadline.
Withdrawal Rules for Non-Designated Beneficiaries
When an IRA is inherited by a Non-Designated Beneficiary (NDB), such as an estate or a charity, the distribution rules are even more compressed. The specific timeline depends on whether the original account owner had started taking their own RMDs.
If the original owner died before their RBD, the NDB is subject to the 5-year rule. This rule requires the entire balance of the IRA to be distributed by the end of the fifth calendar year following the year of the owner’s death. For instance, if the owner died in 2025, the NDB would have until December 31, 2030, to liquidate the account.
A different rule applies if the original owner died on or after their RBD. In this scenario, the NDB must take distributions based on the deceased owner’s remaining life expectancy, often called the “ghost life expectancy” rule. This means the NDB must begin taking annual RMDs starting the year after the owner’s death, calculated using the life expectancy factor the original owner would have used.
Tax Reporting for Inherited IRA Distributions
The tax treatment of the withdrawn funds depends on whether a Traditional or Roth IRA was inherited. Distributions from an inherited Traditional IRA are generally subject to federal and state income tax. The amount withdrawn is taxed as ordinary income in the year the distribution is made, and while the financial institution may offer to withhold taxes, the beneficiary is ultimately responsible for the full tax liability.
In contrast, distributions from an inherited Roth IRA are typically tax-free. For a withdrawal of earnings to be considered a “qualified distribution” and thus completely tax-free, the original owner must have first funded any Roth IRA at least five years before the distribution occurs.
Regardless of the IRA type, the financial custodian will report any distribution to both you and the IRS on Form 1099-R. You will receive this form in January of the year following the withdrawal. You must use the information from Form 1099-R to report the distribution correctly on your personal income tax return.