What Are the IRS Rules for an Inherited IRA?

An inherited Individual Retirement Arrangement (IRA) is a retirement account received after the original owner’s death. The Internal Revenue Service (IRS) has specific rules for accessing these funds, which were significantly changed by the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The regulations that apply depend on your relationship to the deceased and the date of their death. These factors determine your beneficiary classification, which dictates your options for taking distributions from the account.

Determining Your Beneficiary Status

The SECURE Act of 2019 established three categories of beneficiaries for retirement accounts. A spouse beneficiary is the surviving spouse of the IRA owner and is granted the most flexibility under IRS rules. This status allows a spouse to integrate the inherited assets into their own retirement planning.

A non-spouse beneficiary is any individual who is not the surviving spouse. This category is divided into two sub-groups with different distribution rules. The first is an “Eligible Designated Beneficiary” (EDB), which includes a minor child of the owner, a disabled or chronically ill individual, or any person not more than 10 years younger than the deceased IRA owner.

The second sub-group is the “Designated Beneficiary” (DB). This is the default category for most individual beneficiaries who are not the spouse and do not meet the EDB criteria. An adult child, a grandchild, a sibling who is more than 10 years younger, or a friend named on the IRA beneficiary form falls into this category.

The final category is a “Non-Designated Beneficiary” (NDB). This classification applies when the IRA is left to a non-person entity, such as the deceased’s estate, a charitable organization, or certain types of trusts.

Distribution Rules for Spousal Beneficiaries

A surviving spouse who inherits an IRA can treat the inherited IRA as their own. This is done by retitling the account into their name or by executing a direct rollover of the assets into their own existing or new IRA. Once the rollover is complete, the funds are subject to the same rules as the spouse’s own retirement savings.

This means the surviving spouse can make their own contributions to the account if they have earned income. Required Minimum Distributions (RMDs) will be calculated based on the surviving spouse’s own age and life expectancy, using the IRS Uniform Lifetime Table. This option is often selected by younger spouses who want to continue growing the funds tax-deferred.

Alternatively, a surviving spouse can remain a beneficiary of the IRA by establishing a new “inherited IRA” account. This account must be titled to identify both the deceased owner and the surviving spouse as the beneficiary. By choosing this path, the spouse cannot make additional contributions to the account.

The primary advantage of this option relates to the timing of RMDs. The age for the Required Beginning Date (RBD), when RMDs must start, is 73 and is scheduled to rise to 75 in 2033. If the deceased spouse died before their RBD, the surviving spouse can delay distributions until the year the deceased would have reached that age. If the deceased had already begun taking RMDs, the surviving spouse must continue them but can calculate the amounts based on their own longer life expectancy.

Distribution Rules for Non-Spousal Beneficiaries

For Eligible Designated Beneficiaries (EDBs), the rules allow them to take distributions over a longer period. This “stretch IRA” method permits the beneficiary to take RMDs based on their own single life expectancy, starting by December 31 of the year after the original owner’s death. This allows the funds to continue growing tax-deferred.

This EDB status is not always permanent. For a minor child of the account owner, the ability to stretch distributions only lasts until they reach age 21. Once the child turns 21, they become subject to the 10-year rule, meaning the remaining balance must be withdrawn by the end of the tenth year after they reach age 21.

Most non-spouse beneficiaries fall into the Designated Beneficiary (DB) category and are subject to the 10-Year Rule. This rule mandates that the entire balance of the inherited IRA must be distributed by December 31 of the 10th year following the year of the owner’s death. For several years after the rule was enacted, it was believed this meant a beneficiary could wait until the final year to withdraw the entire sum.

However, the IRS has since issued clarifying guidance that creates a distinction based on when the original owner died. If the original IRA owner died after their Required Beginning Date (RBD), the beneficiary must take annual RMDs for years one through nine, in addition to withdrawing the full remaining balance by the end of the 10th year. If the owner died before their RBD, no annual RMDs are required; the beneficiary only needs to empty the account by the final deadline. The IRS has waived penalties for beneficiaries who inherited an IRA in 2020 or later and failed to take these annual distributions, with this relief extended through 2024.

The rules for Non-Designated Beneficiaries (NDBs), such as an estate, are more accelerated. If the original IRA owner passed away before their RBD, the NDB must withdraw the entire account balance within five years. If the owner died on or after their RBD, the NDB must take distributions over what would have been the deceased owner’s remaining single life expectancy.

Tax Treatment of Roth vs Traditional Inherited IRAs

The tax implications of withdrawals from an inherited IRA depend on whether the original account was a Traditional IRA or a Roth IRA. This distinction is separate from the beneficiary type or the required distribution schedule.

When a beneficiary takes a distribution from an inherited Traditional IRA, the amount withdrawn is considered taxable income. These funds are taxed at the beneficiary’s ordinary income tax rate for the year the distribution is made. It is up to the beneficiary to plan for the potential tax liability, as no taxes are automatically withheld unless requested.

In contrast, distributions from an inherited Roth IRA are tax-free, provided a specific condition is met. For a withdrawal to be a “qualified distribution,” the original account owner must have first opened and funded any Roth IRA at least five full tax years before the beneficiary’s first distribution. This is known as the Roth 5-year rule.

A beneficiary can confirm with the IRA custodian whether this 5-year holding period has been satisfied. If it has not, the earnings portion of any withdrawal may be taxable until the 5-year clock is met, though contributions made by the original owner can always be withdrawn tax-free.

Establishing and Managing the Inherited IRA Account

To properly establish an inherited IRA, the account cannot simply be retitled into your name, unless you are a spouse executing a spousal rollover. Doing so would be considered a taxable distribution of the entire balance.

The account must be given a specific legal title that reflects its status as an inherited account. The IRS-preferred format is: “[Original Owner’s Name], Deceased [Date of Death], IRA for the benefit of [Beneficiary’s Name].” You must contact the financial institution that holds the original IRA to open this newly titled account and transfer the assets. When you are ready to take a distribution, you will provide instructions to the custodian, specifying the amount you wish to take.

At the end of the tax year, the custodian will send you Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.” This form details the gross distribution amount and indicates the taxable portion, if any. You must use the information on this form to accurately report the income on your federal tax return.