What Are the IRS Rules for an Inherited IRA?

An inherited Individual Retirement Arrangement (IRA) is a retirement account received from a deceased owner. The rules have seen significant changes, particularly following the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The specific actions a beneficiary must take are determined by several factors. The beneficiary’s relationship to the original account holder is a primary consideration, and the age of the original owner at the time of their death also plays a role in dictating the available options and required timelines for distributions.

Determining Your Beneficiary Type

The Internal Revenue Service (IRS) establishes distinct categories for IRA beneficiaries, and the rules for each are different. Correctly identifying your beneficiary type dictates all subsequent withdrawal requirements. Your specific relationship to the deceased account owner places you into one of three groups.

The first category is the “Eligible Designated Beneficiary” (EDB), a specific group of individuals granted more flexible withdrawal options. The five types of EDBs are:

• The surviving spouse of the account owner.
• A minor child of the original owner, but not a grandchild.
• An individual who is disabled or chronically ill.
• An individual who is not more than 10 years younger than the deceased account owner, such as a sibling or a partner.
• Certain trusts set up for the benefit of disabled or chronically ill individuals.

The next classification is a “Designated Beneficiary” who is not an EDB. This is the default category for most individual beneficiaries who do not meet the specific criteria of an EDB. This group commonly includes adult children, grandchildren, or other relatives who are more than 10 years younger than the decedent.

The final group is the “Non-Designated Beneficiary.” This category applies when the recipient of the IRA is not a person, such as the deceased owner’s estate, a charitable organization, or a non-qualifying trust. This situation often arises if the account owner failed to name a living person as a beneficiary.

Distribution Rules for Eligible Designated Beneficiaries

Eligible Designated Beneficiaries (EDBs) are afforded the most flexibility in how they can take distributions from an inherited IRA. The options available depend on whether the EDB is a surviving spouse or falls into one of the other EDB categories.

A surviving spouse has unique options not available to any other beneficiary type. The first choice is to treat the inherited IRA as their own by rolling the assets into their personal IRA. This allows the spouse to consolidate retirement funds and delay taking Required Minimum Distributions (RMDs) until they reach the age of 73.

The second option is to open a new inherited IRA account in their name. This path might be chosen if the surviving spouse is younger than 59½ and needs to access the funds, as distributions from an inherited IRA avoid the 10% early withdrawal penalty.

Other non-spouse EDBs, such as a disabled individual or a person not more than 10 years younger than the decedent, have a different primary option. They can take distributions over their own life expectancy. To do this, they must set up a properly titled inherited IRA and begin taking annual RMDs by December 31 of the year following the original owner’s death. This method allows the funds to remain in the tax-advantaged account for a longer period.

A special rule applies to a minor child of the account owner who qualifies as an EDB. The child can use the life expectancy method to take distributions during their minority. However, once the child reaches the age of majority, defined as age 21 for these purposes, the 10-year rule is triggered. The entire remaining balance must be distributed by the end of the tenth year after the child turns 21.

The 10-Year Rule for Other Designated Beneficiaries

For designated beneficiaries who are not EDBs, such as an adult child or a grandchild, the SECURE Act established the 10-year rule. This rule applies to individuals inheriting from account owners who passed away in 2020 or later. The rule requires the entire balance of the inherited IRA to be fully withdrawn by December 31 of the 10th year that follows the year of the original owner’s death. For example, if the owner died in 2025, the beneficiary would have until December 31, 2035, to empty the account.

Within this 10-year period, the beneficiary has flexibility. The funds can be withdrawn in any pattern the beneficiary chooses, such as periodic installments, a single lump-sum distribution, or waiting until the final year. This allows for tax planning, as the beneficiary can time withdrawals to coincide with years of lower personal income.

Whether annual RMDs are required during the 10-year period depends on the age of the original account owner at death. If the original owner died before their Required Beginning Date (RBD) for taking RMDs, then no annual RMDs are due during the 10-year window. If the owner died on or after their RBD, the beneficiary must take annual RMDs in years one through nine, based on their own life expectancy, and still withdraw the remainder by the end of the 10th year.

Rules for Non-Designated Beneficiaries

When an IRA is left to a non-designated beneficiary, such as the decedent’s estate or a charity, the distribution rules are less flexible. The specific requirements depend on whether the original account owner had started taking their own RMDs before they passed away.

If the original owner died before their Required Beginning Date (RBD), the non-designated beneficiary is subject to the 5-year rule. This rule mandates that the entire balance of the IRA must be distributed by December 31 of the fifth year following the year of the owner’s death. For instance, if the owner passed away in 2025, the estate or charity would need to fully liquidate the account by the end of 2030. No annual distributions are required during this five-year period.

A different set of regulations applies if the owner died on or after their RBD. In this scenario, the non-designated beneficiary must take distributions based on the deceased owner’s remaining single life expectancy. The beneficiary must take an RMD each year, starting by December 31 of the year after the owner’s death, calculated using the life expectancy factor the original owner would have used.

Taxation and Reporting of Inherited IRAs

Receiving distributions from an inherited IRA has direct tax consequences that depend on the type of IRA inherited.

Distributions from an inherited traditional IRA are generally considered taxable income to the beneficiary. These withdrawals are taxed at the beneficiary’s ordinary income tax rate for the year the distribution is taken. These distributions are not subject to the 10% early withdrawal penalty, even if the beneficiary is under age 59½.

In contrast, qualified distributions from an inherited Roth IRA are completely tax-free. For a distribution to be qualified, the original Roth IRA must have been established for at least five years before the first distribution is taken after the owner’s death. Since the original contributions to a Roth IRA are made with after-tax money, the subsequent withdrawals are not taxed.

Financial institutions report any distribution from an inherited IRA to the beneficiary and the IRS on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This form details the gross distribution amount and the taxable portion. The distribution code in Box 7 for a beneficiary is Code 4, indicating a death distribution, which signals to the IRS that the 10% early withdrawal penalty does not apply.