What Are the IRS Rules for an Inherited IRA?

An inherited Individual Retirement Account (IRA) is a retirement account that passes to a beneficiary after the original owner’s death. Its purpose is to allow for the continued tax-deferred or tax-free growth of retirement assets for an heir. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 significantly altered the regulations for these accounts, creating new timelines for withdrawing funds. The rules are based on the beneficiary’s relationship to the decedent, so you must first identify your beneficiary category to understand your withdrawal obligations and avoid penalties.

Determining Your Beneficiary Category

The Internal Revenue Service (IRS) establishes four categories for IRA beneficiaries, and your classification dictates the rules you must follow.

• Spouse Beneficiary: This applies to the individual who was legally married to the IRA owner at the time of death. Spouses are granted the most flexibility under the law.
• Eligible Designated Beneficiary (EDB): Created by the SECURE Act, this group includes specific non-spouse individuals. It covers the decedent’s minor children (until they reach the age of 21), disabled or chronically ill individuals, and anyone not more than 10 years younger than the deceased IRA owner.
• Designated Beneficiary (DB): This is the default category for most non-spouse beneficiaries who are not EDBs. Adult children, grandchildren, and other relatives or friends fall into this group. The ability for these beneficiaries to “stretch” distributions over their own lifetimes was largely eliminated by the SECURE Act.
• Non-Designated Beneficiary (NDB): This classification applies when the recipient is not a person. Common examples include the decedent’s estate, a charitable organization, or certain types of trusts.

Distribution Rules for Inherited IRAs

Rules for Spouses

A surviving spouse has several options when inheriting an IRA. One choice is to treat the IRA as their own by rolling the assets into a personal IRA. This allows the spouse to delay taking required minimum distributions (RMDs) until they reach their own RMD age, which is 73 and scheduled to increase to 75 in 2033. This path is often chosen by younger spouses who want to maximize tax-deferred growth.

Alternatively, a spouse can remain a beneficiary of the inherited IRA. If the original owner died before their required beginning date (RBD) for RMDs, the spouse can delay distributions until the year the decedent would have turned 73. If the owner died after their RBD, the spouse must begin taking distributions based on their own life expectancy or use the 10-year rule.

Rules for EDBs

Eligible Designated Beneficiaries can take RMDs over their own life expectancy, which resembles the pre-SECURE Act “stretch” provision. This allows for smaller annual withdrawals and extends the period of tax-deferred growth. The annual RMD is calculated using the IRS’s Single Life Expectancy Table.

A special rule applies to a decedent’s minor child who qualifies as an EDB. The child can use the life expectancy method for distributions only until they reach the age of 21. Once the child reaches this age, their EDB status ends, and they become subject to the 10-year rule. The 10-year clock starts at that point, requiring the entire remaining balance to be withdrawn by the time the child turns 31.

Rules for DBs

Designated Beneficiaries are subject to 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 account owner’s death. For example, if the owner died in 2025, the beneficiary must empty the account by the end of 2035.

Under this rule, the treatment of distributions within the 10-year window depends on when the original owner died. If the owner died before their Required Beginning Date (RBD) for taking RMDs, the beneficiary is not required to take annual distributions. However, if the owner died after their RBD, the beneficiary must take annual RMDs in years one through nine, with the final balance withdrawn by the end of the tenth year. Beginning in 2025, beneficiaries must take these required annual distributions to avoid penalties.

Rules for NDBs

Non-Designated Beneficiaries, such as an estate or a charity, face the most restrictive distribution timelines. If the owner died before their RBD, the NDB is subject to the 5-Year Rule. This requires the entire IRA to be distributed by the end of the fifth year following the year of death.

A different rule applies if the owner died on or after their RBD. In this scenario, the NDB must take distributions over the deceased owner’s remaining single life expectancy. This is calculated based on the owner’s age in the year of their death, reduced by one for each subsequent year.

Tax Implications of Withdrawals

The tax treatment of distributions depends on whether the account is a Traditional or Roth IRA. For a traditional inherited IRA, all withdrawals are considered taxable income at the beneficiary’s ordinary income tax rate for the year the money is received. A large withdrawal can push a beneficiary into a higher tax bracket. The financial institution, or custodian, will report these distributions to you and the IRS on Form 1099-R, and you are responsible for reporting this income on your tax return.

In contrast, distributions from an inherited Roth IRA are generally tax-free. For a withdrawal to be a “qualified distribution” and entirely tax-free, the original Roth IRA must have been established for at least five years. This holding period begins on January 1 of the tax year for which the original owner made their first contribution to any Roth IRA.

If the five-year period was not met at the time of death, withdrawals of the original owner’s contributions are still tax-free. However, any distributions of the account’s earnings will be subject to ordinary income tax until the five-year holding period is satisfied. Be aware that some states may also impose their own income taxes on IRA distributions.

Establishing and Titling the Inherited IRA

To establish an inherited IRA, you must contact the financial institution holding the account. You will need to provide a certified copy of the death certificate, the decedent’s account number, and your personal identifying information.

Correctly titling the new account is necessary to preserve its tax-advantaged status. The funds cannot be moved directly into a personal bank or brokerage account. Doing so would be considered a full distribution of the account, making the entire balance immediately taxable and potentially subject to penalties. The account must be set up as an inherited IRA.

The standard IRS-approved format is: “[Decedent’s Name], Deceased [Date of Death], Inherited IRA for the benefit of [Beneficiary’s Name], Beneficiary.” This titling identifies the account as an inherited asset subject to special rules. While the financial institution will guide you, ensuring the account is titled correctly is the beneficiary’s responsibility.

After the account is established, you must manage it according to the rules for your beneficiary category. Careful record-keeping is needed to track distributions and ensure compliance with the 5-year, 10-year, or life expectancy rules that apply to your situation.