Rules for Withdrawing Money From an Inherited IRA

When you receive an Individual Retirement Account (IRA) from a deceased person, it becomes an inherited IRA. This is a distinct account a beneficiary establishes to receive assets from the decedent’s original IRA. The regulations for withdrawing funds have undergone significant changes due to the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The timeline for withdrawing assets now depends heavily on the beneficiary’s relationship to the original account owner and the date of the owner’s death.

Determining Your Beneficiary Category

The rules for withdrawing funds from an inherited IRA are tied to your beneficiary category. The law, shaped by the SECURE Act, sorts beneficiaries into three groups, each with different timelines. Correctly identifying your category is the first step to understanding your obligations regarding the inherited assets.

Eligible Designated Beneficiary (EDB)

This category receives the most flexible withdrawal options. An Eligible Designated Beneficiary (EDB) is a surviving spouse, the deceased owner’s minor child, a disabled or chronically ill individual, or any person not more than 10 years younger than the IRA owner. A surviving spouse has unique options not available to other beneficiaries. A minor child is considered an EDB only until they reach age 21, at which point their status changes. Individuals who are disabled or chronically ill must meet specific legal definitions to qualify.

Designated Beneficiary (DB)

The most common category for individual beneficiaries is the Designated Beneficiary (DB). This group includes any individual named as a beneficiary who does not qualify as an EDB, such as an adult child, grandchild, or an unmarried partner more than 10 years younger than the deceased. Before the SECURE Act, these beneficiaries could “stretch” distributions over their own lifetime, but that option has been eliminated for most. Now, Designated Beneficiaries are subject to a more compressed withdrawal schedule.

Non-Designated Beneficiary (NDB)

The final category is for any beneficiary that is not a person. A Non-Designated Beneficiary (NDB) includes entities such as the deceased’s estate, a charity, or certain types of trusts. This situation occurs when an IRA owner fails to name a living person as a beneficiary or names their estate. The rules for NDBs are the most restrictive, requiring assets to be distributed much faster than for individual beneficiaries. The specific withdrawal rules depend on whether the original IRA owner had begun taking their own Required Minimum Distributions (RMDs).

Withdrawal Rules for Inherited Traditional IRAs

The regulations for taking money from an inherited Traditional IRA vary based on the beneficiary’s category and the original owner’s age at death. These distributions are considered taxable income to the beneficiary in the year they are received. The rules are designed to ensure the tax-deferred funds are eventually paid out and taxed.

Rules for Eligible Designated Beneficiaries (EDBs)

Surviving spouses who are EDBs have the most flexible options. A spouse can treat the inherited IRA as their own by rolling the assets into their personal IRA, which allows them to delay distributions until they reach the age for their own RMDs. Alternatively, a spouse can remain a beneficiary of the inherited IRA, which is advantageous if the surviving spouse is younger than 59½ and needs access to the funds without a 10% early withdrawal penalty.

Other EDBs, such as a minor child or a disabled individual, can take distributions based on their own life expectancy, a method called a “stretch” IRA. This allows them to take smaller annual RMDs, preserving the tax-deferred status of the account. However, minor children can use the life expectancy method only until they reach age 21, at which point they become subject to the 10-Year Rule.

Rules for Designated Beneficiaries (DBs)

Most Designated Beneficiaries are subject to the 10-Year Rule established by the SECURE Act. This rule mandates that the entire balance of the inherited IRA must be withdrawn by December 31 of the 10th year following the year of the original owner’s death. For instance, if the owner died in 2025, the beneficiary would have until December 31, 2035, to empty the account.

A complex point within this rule relates to annual RMDs. If the original IRA owner died after their Required Beginning Date for taking RMDs, the beneficiary must also take annual RMDs in years one through nine of the 10-year period. If the owner died before their Required Beginning Date, no annual RMDs are necessary during the 10-year window, as long as the account is empty by the final deadline. Failure to take a required distribution can result in a 25% penalty on the amount that should have been withdrawn, though this can be reduced to 10% if the error is corrected in a timely manner.

Rules for Non-Designated Beneficiaries (NDBs)

The rules for Non-Designated Beneficiaries are more accelerated. If the IRA owner died before their Required Beginning Date, the NDB is subject to a 5-Year Rule, meaning all assets must be distributed by the end of the fifth year after the owner’s death. If the owner died on or after their Required Beginning Date, the NDB must take distributions based on the deceased owner’s remaining single life expectancy. This requires the entity to take annual RMDs starting the year after the owner’s death over the remainder of the original owner’s life expectancy schedule.

Special Considerations for Inherited Roth IRAs

While many withdrawal timing rules for inherited Roth IRAs mirror those for Traditional IRAs, the tax treatment is a significant difference. For distribution schedule purposes, Roth IRA owners are always considered to have died before their Required Beginning Date. This simplifies the process for Designated Beneficiaries under the 10-Year Rule, as no annual distributions are required during the 10-year period; the beneficiary must simply withdraw the entire balance by the deadline.

Qualified distributions from an inherited Roth IRA are entirely tax-free. For a distribution to be qualified, it must meet the 5-year holding period. This rule requires that five years have passed since the original owner first contributed to any Roth IRA, and the clock does not restart for the beneficiary.

If the original owner satisfied the 5-year holding period, all distributions taken by the beneficiary are tax-free. If the owner had not met the 5-year holding period, contributions can still be withdrawn tax-free, but the earnings portion of any distribution will be subject to ordinary income tax. This tax on earnings continues until the original 5-year clock is met, after which all subsequent withdrawals become fully tax-free.

The Mechanics of Taking a Distribution

Once you understand your beneficiary category and withdrawal timeline, the next phase involves the practical steps of accessing the funds. This process requires establishing the inherited account, requesting withdrawals, and managing tax obligations.

Step 1: Establishing the Inherited IRA Account

Before any funds can be withdrawn, you must establish a new, properly titled inherited IRA. Do not simply move the money into your own existing IRA, as this is only an option for spousal beneficiaries and doing so incorrectly could trigger a full tax liability. The account must be set up as a direct trustee-to-trustee transfer from the deceased’s IRA custodian.

The titling of the account is a specific requirement. The new account must include the name of the deceased owner, the date of death, and your name as the beneficiary, such as: “[Deceased’s Name], Deceased [Date of Death], IRA FBO [Beneficiary’s Name], Beneficiary.” You will need to provide the financial institution with a copy of the death certificate and an inherited IRA application.

Step 2: Requesting a Withdrawal

After the inherited IRA is established, you can begin taking distributions. To do this, contact the financial institution that acts as the custodian for the account and complete their distribution request form. This form will ask for your personal information, the account number, and the amount you wish to withdraw. You may request a one-time distribution or set up a schedule for recurring payments, which can be helpful for satisfying annual RMDs. Initiate the request well before any deadlines to ensure timely processing.

Step 3: Managing Tax Withholding (for Traditional IRAs)

Distributions from an inherited Traditional IRA are taxable income in the year you receive them. To avoid a large tax bill, you have the option to have taxes withheld directly from the distribution. The distribution request form will have a section to specify federal and, if applicable, state tax withholding. You can choose to have a percentage of the withdrawal withheld or a specific dollar amount. If you do not make an election, the custodian may be required to withhold a default amount, typically 10% for federal taxes.