What to Do When You Inherit an IRA?

Inheriting an Individual Retirement Account (IRA) can be a significant financial event, often arriving during a time of personal loss. Understanding the rules and making informed decisions about an inherited IRA is important to manage the assets effectively and minimize potential tax burdens.

Understanding Inherited IRA Rules

The rules governing inherited IRAs depend primarily on the relationship of the beneficiary to the original account owner and the date of the owner’s death, particularly whether it occurred before or after January 1, 2020. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 significantly altered these regulations. Different categories of beneficiaries face distinct distribution requirements.

Beneficiaries are broadly categorized into three types: eligible designated beneficiaries (EDBs), designated beneficiaries (DBs), and non-designated beneficiaries (NDBs). An eligible designated beneficiary qualifies for more flexible distribution rules, often allowing them to “stretch” distributions over their own life expectancy. This group includes the surviving spouse, the original IRA owner’s minor child (until they reach the age of majority, typically 21), a disabled individual, a chronically ill individual, or an individual not more than 10 years younger than the deceased IRA owner.

For most designated beneficiaries who are not eligible designated beneficiaries, the primary rule is the “10-year rule.” If the IRA owner died on or after January 1, 2020, these beneficiaries must fully withdraw all assets from the inherited IRA by December 31 of the tenth year following the year of the original owner’s death. This rule eliminated the ability for many non-spousal beneficiaries to stretch distributions over their lifetime, a strategy common before the SECURE Act. Annual required minimum distributions (RMDs) may also apply during this 10-year period.

If the original IRA owner died before their required beginning date (RBD) for RMDs, the designated beneficiary subject to the 10-year rule does not have to take annual RMDs during the 10-year period but must empty the account by the end of the tenth year. If the original owner died on or after their RBD, the designated beneficiary must take annual RMDs in years one through nine, with the entire balance distributed by the end of the tenth year. The IRS issued guidance in 2024 confirming that RMDs for these beneficiaries are required starting in 2025 for those who inherited IRAs after December 31, 2019.

Non-designated beneficiaries include non-individuals such as estates, charities, or certain trusts that do not meet specific “see-through” trust rules. For these beneficiaries, if the IRA owner died before their RBD, the “5-year rule” applies, requiring the account to be fully distributed by the end of the fifth year following the owner’s death. If the IRA owner died on or after their RBD, non-designated beneficiaries must take distributions based on the original IRA owner’s remaining life expectancy.

Deciding on Your Distribution Strategy

Choosing a distribution strategy for an inherited IRA requires understanding the options available based on your beneficiary status and the associated tax implications.

A surviving spouse has the most flexibility when inheriting an IRA. They can choose to treat the inherited IRA as their own, rolling it over into their existing IRA or a new IRA in their name. This option allows for continued tax-deferred growth and RMDs based on the spouse’s own age, potentially delaying distributions until their own required beginning date. Alternatively, a surviving spouse can keep the IRA as an inherited IRA, taking distributions based on their own life expectancy or the 10-year rule, or delaying RMDs until the deceased spouse would have reached their RMD age. This can be advantageous if the surviving spouse is under age 59½ and needs access to funds without incurring the 10% early withdrawal penalty that would apply to their own IRA.

For eligible designated beneficiaries, such as a minor child of the deceased, a disabled or chronically ill individual, or someone not more than 10 years younger than the original owner, the ability to “stretch” distributions over their life expectancy. This allows the inherited funds to continue growing tax-deferred for a longer period, with RMDs calculated annually based on the beneficiary’s life expectancy. However, a minor child will become subject to the 10-year rule once they reach the age of majority, typically age 21, requiring the remaining balance to be distributed within 10 years from that point.

Most non-spousal designated beneficiaries, including adult children, are subject to the 10-year rule. This means the entire inherited IRA balance must be distributed by the end of the tenth calendar year following the original owner’s death. While you can take a lump-sum distribution at any time, this could result in a significant tax liability as the entire amount is taxed as ordinary income in that year, potentially pushing you into a higher tax bracket. Alternatively, you can take distributions incrementally over the 10-year period.

Opening Your Inherited IRA Account and Taking Distributions

After determining the appropriate distribution strategy, the next step involves establishing the inherited IRA account and initiating distributions. This requires interaction with a financial institution and adherence to specific documentation and reporting requirements.

To establish an inherited IRA, you need to contact the financial institution where the deceased individual held their IRA. They will guide you through their process, which involves completing an inherited IRA application or transfer form. Documents required include a certified copy of the death certificate of the original IRA owner and proof of your identity, such as a driver’s license or state ID. The financial institution will also verify your status as a beneficiary, often requiring a copy of the beneficiary designation form from the deceased’s account or relevant probate documents if the estate is the beneficiary.

Once the inherited IRA account is established in your name as the beneficiary, you can begin requesting distributions according to your chosen strategy. For a lump-sum distribution, you would submit a withdrawal request form to the custodian, specifying the full amount. If you plan to take periodic withdrawals, such as annual RMDs or other scheduled payments, you will need to set up a distribution schedule with the financial institution, often through their online portal or by submitting specific forms. Ensure you understand the custodian’s procedures for initiating these requests, which might involve online portals, written forms, or phone calls.

All distributions from inherited traditional IRAs are taxed as ordinary income in the year they are received, unless the original contributions were non-deductible. If you inherited a Roth IRA, qualified distributions are tax-free, provided the account was open for at least five years before the owner’s death. The financial institution will report distributions to the IRS and to you on Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.” This form details the amount of the distribution and any taxes withheld, which you will need for filing your annual income tax return.