Everything You Need To Know

Inherited IRA

Video Overview | Page last updated July 2024

An Inherited Individual Retirement Account (IRA) is a retirement account established when you inherit an IRA—either a Traditional IRA or a Roth IRA—from a deceased account holder. These accounts are governed by specialized regulations that distinguish them from standard IRAs, offering unique benefits—such as potential tax-deferred or tax-free growth—alongside specific requirements, including mandatory withdrawals, distribution deadlines, and tax implications that vary based on your relationship to the decedent and the type of IRA inherited.

Navigating the complexities of an inherited IRA can be daunting, particularly during a time of grief, when emotional strain and intricate financial choices often intersect. Decisions you make now could significantly impact your tax obligations and long-term financial security. Our team is here to provide clarity and tailored support for your unique circumstances. To discuss your options or seek assistance, please schedule a consultation.

Spousal Options

When you inherit an IRA from your spouse, you’re faced with a range of choices that can shape your financial future during an already challenging time. Whether it’s a Traditional IRA or a Roth IRA, you have unique spousal options—like rolling the account into your own, stretching distributions over your lifetime, following a 10-year withdrawal rule if applicable, or taking a lump sum. Each path comes with its own tax implications, growth potential, and flexibility, tailored to your needs – which are described in detail below.

What did you inherit ↴

↳ Traditional IRA: Inherited Before RMD

When you inherit a Traditional IRA from your spouse before the decedent was required to begin RMDs (currently age 73), you have several spousal options. Each choice affects tax deferral, withdrawal timing, and your tax liability differently. These options assume the decedent passed away before their RMD start date and are detailed below.

Option 1 : Roll Over The Account - Treat It As Your Own

If you’re the sole beneficiary, you may transfer the inherited IRA assets into your own existing Traditional IRA or establish a new one in your name, effectively treating it as your own account. The funds continue to grow tax-deferred, subject to the same rules as any Traditional IRA you originally established. Withdrawals before age 59½ incur a 10% penalty unless an exception applies, mirroring standard Traditional IRA rules.

RMD Impact: You are not required to take RMDs until you reach your own RMD age (currently 73), providing maximum flexibility over withdrawal timing.

Best For: Those seeking to integrate the inherited funds into their long-term retirement strategy.

Option 2: Keep As An Inherited Account – Life Expectancy Method

You transfer the assets into an inherited IRA titled in your name as beneficiary (e.g., “Jane Doe, beneficiary of John Doe”), maintaining its distinct status separate from your own retirement accounts. You can delay taking the mandatory RMD until the later of:

December 31 of the year the decedent would have reached age 73, or
December 31 of the year following the decedent’s death.

Once started, annual RMDs are calculated using your single life expectancy from IRS Uniform Lifetime Tables (recalculated annually), allowing you to stretch payments over your lifetime.

Tax Treatment: Distributions are taxed as ordinary income, but no 10% early withdrawal penalty applies, even if you’re under 59½. The remaining balance grows tax-deferred, and you can designate your own beneficiaries for any unwithdrawn funds.

Best For: Those aiming to minimize taxable income by spreading distributions over time.

Option 3: Keep as an Inherited Account – Follow the 10 Year Rule

You transfer the assets into an inherited IRA in your name and must withdraw the entire balance by December 31 of the 10th year following the decedent’s death. Unlike the life expectancy method, there are no annual RMDs during this period—you have full flexibility to withdraw funds at any time (e.g., incrementally or all in year 10), provided the account is fully depleted by the deadline.

Tax Treatment: Withdrawals are taxed as ordinary income, with no 10% penalty regardless of your age. The account continues tax-deferred growth until funds are withdrawn.

Best For: Those wanting flexibility to time withdrawals based on tax planning or financial needs.

Option 4: Lump sum

You can liquidate the entire inherited IRA immediately by taking a lump-sum distribution. The full amount is included in your taxable income for the year of withdrawal, potentially pushing you into a higher tax bracket depending on the account size and your other income sources. No 10% early withdrawal penalty applies, even if you’re under 59½, due to the inherited status of the account.

Growth Impact: This option terminates tax-deferred growth, as the account is closed upon withdrawal.

Best For: Those needing immediate access to funds, such as to pay off debt or cover significant expenses.

↳ Traditional IRA: Inherited After RMD

When you inherit a Traditional IRA from your spouse after they were required to begin RMDs (currently age 73), you have distinct spousal options. These apply if the decedent passed away on or after their RMD start date, meaning RMDs were already in effect. Each choice involves addressing any unmet RMD for the year of death and carries unique tax and growth implications, detailed below.

Option 1: Roll Over the Account - Treat It as Your Own

As the sole beneficiary, you may roll the inherited IRA assets into your own existing Traditional IRA or a new one in your name, treating it as your own account. Before completing the rollover, you must withdraw any RMD the decedent was required to take for their year of death if they hadn’t already done so (e.g., if they died in June without taking it, you must withdraw it by December 31 of that year; otherwise, it becomes taxable to their estate).

Tax and Growth: Once rolled over, the funds continue to grow tax-deferred. Withdrawals before age 59½ incur a 10% penalty unless an exception applies, consistent with standard Traditional IRA rules.

RMD Impact: Your own RMDs begin when you reach age 73, offering flexibility over withdrawal timing until then.

Best For: Those wanting to integrate the inherited funds into their personal retirement plan.

Option 2: Keep as an inherited account - Life expectancy method

You transfer the assets into an inherited IRA titled in your name as beneficiary (e.g., “Jane Doe, beneficiary of John Doe”) and must begin RMDs no later than December 31 of the year following the decedent’s death. If the decedent did not take their RMD for the year of death, you must withdraw that amount by year-end before proceeding. Subsequent annual RMDs are calculated using your single life expectancy from IRS Uniform Lifetime Tables, recalculated annually, allowing distributions to stretch over your lifetime.

Tax Treatment: Distributions are taxed as ordinary income, with no 10% early withdrawal penalty, even if you’re under 59½. The remaining balance continues to grow tax-deferred, and you may designate your own beneficiaries for any unwithdrawn funds.

Best For: Those seeking to minimize annual taxable income while preserving tax-deferred growth.

Option 3: Lump sum

You may withdraw the entire inherited IRA balance as a lump-sum distribution. If the decedent did not take their required RMD for the year of death, you must satisfy that obligation separately by December 31 of that year; the remaining balance can then be withdrawn immediately. The full amount is included in your taxable income for the year of distribution, potentially elevating your tax bracket depending on the account size and your other income.

Tax and Growth: No 10% early withdrawal penalty applies, regardless of your age, due to the inherited status. This option terminates tax-deferred growth by closing the account.

Best For: Those needing immediate access to funds for significant expenses or preferring to simplify their financial portfolio.

↳ Roth IRA

When you inherit a Roth IRA from your spouse, you have several options as the surviving spouse. These choices leverage the Roth IRA’s tax-free growth potential and lack of lifetime RMDs, offering flexibility for both immediate needs and long-term planning. Each option assumes the decedent met Roth contribution eligibility, and the tax-free status of distributions hinges on the 5-year holding period, detailed below.

Option 1 : Roll Over the Account - Treat It as Your Own

If you’re the sole beneficiary, you may roll the inherited Roth IRA assets into your own existing Roth IRA or a new one in your name, treating it as your own account. The funds continue to grow tax-free, and qualified distributions—after you reach age 59½ and the 5-year holding period is satisfied—remain tax-free, following standard Roth IRA distribution rules as if you had originally established the account.

RMD Impact: Roth IRAs have no required minimum distributions (RMDs) during your lifetime, allowing the assets to remain invested indefinitely—a significant advantage for wealth transfer.

5-Year Rule: The holding period begins when the decedent first established their Roth IRA, not the rollover date. If you already have an existing Roth IRA, the earliest establishment date (yours or the decedent’s) determines the 5-year period for tax-free withdrawals. Verify this history to confirm qualification.

Best For: Those prioritizing long-term, tax-free growth and estate planning flexibility.

Option 2: Keep as an Inherited Account – Life Expectancy Method

You transfer the assets into an inherited Roth IRA titled in your name as beneficiary (e.g., “Jane Doe, beneficiary of John Doe”). Distributions must begin by the later of:

December 31 of the year the decedent would have reached age 73, or
December 31 of the year following the decedent’s death.

Annual RMDs are then calculated using your single life expectancy from IRS Uniform Lifetime Tables, recalculated annually, stretching withdrawals over your lifetime.

Tax Treatment: Earnings distributions are tax-free if the Roth IRA meets the 5-year rule (established by the decedent at least 5 years before withdrawals begin), with no 10% early withdrawal penalty regardless of your age. The remaining balance continues to grow tax-free.

Best For: Those seeking a balance between accessing funds and preserving tax-free growth over time.

Option 3: Keep as an Inherited Account – Follow the 10 Year Rule

You transfer the assets into an inherited Roth IRA in your name and must withdraw the entire balance by December 31 of the 10th year following the decedent’s death. There are no annual RMDs—you have flexibility to withdraw funds at any time (e.g., incrementally or all in year 10), as long as the account is depleted by the deadline.

Tax Treatment: Earnings distributions are tax-free if the 5-year rule is satisfied (counted from the decedent’s original Roth IRA establishment), with no 10% penalty regardless of your age. The account continues tax-free growth until withdrawn.

Best For: Those wanting flexibility to time tax-free withdrawals based on financial or tax planning needs.

Option 4: Lump sum

You may withdraw the entire inherited Roth IRA balance as a lump-sum distribution. If the 5-year rule is met (the decedent’s Roth IRA was established at least 5 years prior), the full amount is tax-free, with no 10% early withdrawal penalty regardless of your age. If the 5-year rule isn’t met, only earnings (not contributions) may be taxable.

Growth Impact: This option terminates tax-free growth by closing the account. Verify the 5-year history with account records to ensure tax-free status.

Best For: Those needing immediate liquidity for significant expenses or investments.

Non-spouse Options

Non-spouse beneficiaries of an Individual Retirement Account (IRA) face distribution options that vary based on their classification under IRS rules. These options hinge on whether you qualify as an Eligible Designated Beneficiary (EDB), a status granting more flexible withdrawal timelines, or as a standard Designated Beneficiary, subject to stricter rules. Your classification significantly affects how long you can extend distributions—potentially over decades for EDBs versus a fixed 10-year period for others—and how you can manage the tax consequences.

An EDB includes the following:

Minor Children of the Deceased:
- Eligible only until reaching age 21 (the age of majority), after which the 10-year rule applies to any remaining balance.
Disabled or Chronically Ill Individuals
Individuals Not More Than 10 Years Younger: Applies to those within 10 years of the decedent’s age (e.g., siblings or close friends)

Those who do not qualify as EDBs—such as adult children, nieces, nephews, or others more than 10 years younger than the decedent—fall into the broader Designated Beneficiary category. These beneficiaries must fully withdraw the IRA assets by December 31 of the 10th year following the account owner’s death, with no annual distribution requirements during that period. The options below detail the specific rules for both EDBs and Designated Beneficiaries, outlining how each group can manage their inherited Traditional or Roth IRA based on their circumstances and tax planning needs.

↳‘Eligible Designated Beneficiary’ (EDB)

Eligible Designated Beneficiaries (EDBs)—such as minor children (until age 21), disabled or chronically ill individuals, or those not more than 10 years younger than the decedent—have access to more flexible distribution options than other non-spouse beneficiaries. The following outlines the choices available when inheriting a Traditional IRA (before or after RMDs) or a Roth IRA, tailored to each scenario.

Traditional IRA: Inherited Before RMDs

Option 1: Keep as an Inherited Account – Life Expectancy Method

You transfer the assets into an inherited IRA titled to reflect both the decedent and yourself (e.g., “John Doe, deceased, for the benefit of Jane Smith”). Distributions must begin no later than December 31 of the year following the decedent’s death. Annual RMDs are required, calculated using your single life expectancy from IRS Uniform Lifetime Tables, recalculated annually to stretch payments over your lifetime.

Tax Treatment: Distributions are taxed as ordinary income, with no 10% early withdrawal penalty, even if you’re under 59½. The remaining balance continues to grow tax-deferred, and you may name your own beneficiaries for any unwithdrawn funds.

Best For: Those seeking to minimize taxable income while preserving tax-deferred growth.

Option 2: Keep as an Inherited Account – Follow the 10 Year Rule

You transfer the assets into an inherited IRA in your name and must withdraw the entire balance by December 31 of the 10th year following the decedent’s death. No annual RMDs are required—you may withdraw funds at any time (e.g., incrementally or all in year 10), provided the account is emptied by the deadline.

Tax Treatment: Distributions are taxed as ordinary income, with no 10% penalty regardless of your age. The account continues tax-deferred growth until withdrawn.

Best For: Those wanting flexibility to time withdrawals based on tax or financial planning.

Option 3: Lump sum

You withdraw the entire inherited IRA balance immediately. The full amount is taxed as ordinary income in the year of distribution, potentially increasing your tax liability significantly if the account is large.

Tax and Growth: No 10% early withdrawal penalty applies due to the inherited status. This option terminates tax-deferred growth by closing the account.

Best For: Those needing immediate funds for major expenses or debt repayment.

Traditional IRA: Inherited After RMDs

Option 1: Keep as an Inherited Account – Life Expectancy Method

You transfer the assets into an inherited IRA in your name, maintaining its inherited status. Distributions must begin no later than December 31 of the year following the decedent’s death. If the decedent did not take their RMD for the year of death, you must withdraw that amount by December 31 of that year to avoid estate tax complications. Annual RMDs are then calculated using your single life expectancy, recalculated annually from IRS tables.

Tax Treatment: Distributions are taxed as ordinary income, with no 10% penalty, even if you’re under 59½. The remaining balance grows tax-deferred.

Best For: Those aiming to spread taxable income over time while retaining growth potential.

Option 2: Lump sum

You withdraw the entire inherited IRA balance at once. If the decedent missed their year-of-death RMD, you must satisfy that requirement separately by year-end. The full distribution is taxed as ordinary income in the year received, potentially elevating your tax bracket.

Tax and Growth: No 10% penalty applies. This closes the account, ending tax-deferred growth.

Best For: Those prioritizing immediate liquidity over long-term growth.

Roth IRA: Inherited

Option 1: Keep as an Inherited Account – Life Expectancy Method

You transfer the assets into an inherited Roth IRA in your name (e.g., “John Doe, deceased, for the benefit of Jane Smith”). Distributions must begin no later than December 31 of the year following the decedent’s death. Annual RMDs are required, calculated using your single life expectancy, recalculated annually by the IRS.

Tax Treatment: Earnings distributions are tax-free if the Roth IRA meets the 5-year rule (the decedent established the account at least 5 years before withdrawals begin), with no 10% penalty at any age. The remaining balance grows tax-free.

Best For: Those balancing access to funds with prolonged tax-free growth.

Option 2: Keep as an Inherited Account – Follow the 10-Year Rule

You transfer the assets into an inherited Roth IRA in your name and must withdraw the full balance by December 31 of the 10th year following the decedent’s death. No annual RMDs are required—you may withdraw funds at your discretion, as long as the account is depleted by the deadline.

Tax Treatment: Earnings distributions are tax-free if the 5-year rule (descendant opened the account for at least 5 years) is met, with no 10% penalty. The account continues tax-free growth until withdrawn.

Best For: Those seeking flexibility for tax-free withdrawals over a decade.

Option 3: Lump sum

You withdraw the entire inherited Roth IRA balance immediately. If the 5-year rule is satisfied (decedent established the account at least 5 years prior), the distribution is tax-free, with no 10% penalty. If unmet, earnings (not contributions) may be taxable—verify the account’s history.

Tax and Growth: This terminates tax-free growth by closing the account.

Best For: Those needing immediate tax-free funds for investments or legacy planning.

↳‘Designated Beneficiaries’ (DB)

Designated Beneficiaries—non-spouse heirs who do not qualify as Eligible Designated Beneficiaries (EDBs), such as adult children or individuals more than 10 years younger than the decedent—are subject to stricter distribution rules. Unlike EDBs, they cannot use the life expectancy method and must fully withdraw the inherited IRA within 10 years. The options below detail the choices for inheriting a Traditional IRA (before or after RMDs) or a Roth IRA.

Traditional IRA: Inherited Before RMDs

Option 1: Keep as an Inherited Account – Follow the 10-Year Rule

You transfer the assets into an inherited IRA titled to reflect both the decedent and yourself (e.g., “John Doe, deceased, for the benefit of Jane Smith”). The entire balance must be withdrawn by December 31 of the 10th year following the decedent’s death. No annual RMDs are required—you may withdraw funds at any time (e.g., gradually or all in year 10), offering flexibility to align with your tax or financial needs.

Tax Treatment: Distributions are taxed as ordinary income, with no 10% early withdrawal penalty, even if you’re under 59½. The remaining balance grows tax-deferred until withdrawn.

Best For: Those seeking flexibility in timing taxable withdrawals over a decade.

Option 2: Lump sum

You withdraw the entire inherited IRA balance immediately. The full amount is taxed as ordinary income in the year of distribution, potentially pushing you into a higher tax bracket if the account is substantial.

Tax and Growth: No 10% penalty applies due to the inherited status. This terminates tax-deferred growth by closing the account.

Best For: Those needing immediate funds for significant expenses, such as debt repayment or major life events.

Traditional IRA: Inherited After RMDs

Option 1: Keep as an Inherited Account – Follow the 10-Year Rule

You transfer the assets into an inherited IRA in your name, maintaining its inherited status. The entire balance must be withdrawn by December 31 of the 10th year following the decedent’s death, with no annual RMDs required during this period. If the decedent did not take their RMD for the year of death, you must withdraw that amount by December 31 of that year to avoid estate tax issues.

Tax Treatment: Distributions are taxed as ordinary income, with no 10% penalty, even if you’re under 59½. The account continues tax-deferred growth until withdrawn.

Best For: Those wanting penalty-free access to funds with flexibility over a 10-year period.

Option 2: Lump sum

Tax and Growth: No 10% penalty applies. This closes the account, ending tax-deferred growth.

Best For: Those prioritizing immediate liquidity for investments or debt settlement.

Roth IRA: Inherited

Option 1: Keep as an inherited account – Follow the 10 year rule

You transfer the assets into an inherited Roth IRA in your name, distinct from your personal Roth accounts. The full balance must be withdrawn by December 31 of the 10th year following the decedent’s death. No annual withdrawals are mandated—you may take funds at your discretion (e.g., incrementally or all in year 10).

Tax Treatment: Earning distributions are tax-free if the Roth IRA meets the 5-year rule (the descendant established the account for at least 5 years before withdrawals begin), with no 10% penalty at any age. The remaining balance grows tax-free until withdrawn.

Best For: Those seeking tax-free flexibility over a decade.

Option 2: Lump sum

You withdraw the entire inherited Roth IRA balance immediately. If the 5-year rule is met (decedent established the account at least 5 years prior), the distribution is tax-free, with no 10% penalty. If unmet, earnings (not contributions) may be taxable—verify the account’s history.

Tax and Growth: This terminates tax-free growth by closing the account.

Best For: Those needing immediate tax-free funds for purposes like a home purchase or legacy planning.

FAQs

What is an inherited IRA, and how is it different from a regular IRA?

An inherited Individual Retirement Account (IRA) is a retirement account established when you inherit a Traditional or Roth IRA from a deceased individual, such as a spouse, parent, or other family member. Unlike a regular IRA, which you open and fund yourself for personal retirement savings, an inherited IRA is subject to specialized IRS regulations that dictate withdrawal requirements and timelines. These rules vary based on your relationship to the decedent (spouse or non-spouse) and whether the original owner had reached their Required Minimum Distribution (RMD) age—currently 73—at the time of death.

Can I just treat my spouse’s IRA like it’s mine?

Yes, if you’re the sole beneficiary, you can roll your spouse’s Traditional or Roth IRA into your own IRA and treat it as yours. For a Traditional IRA, you won’t have to take required minimum distributions (RMDs) until you turn 73, and withdrawals before 59½ might have a penalty unless an exception applies. For a Roth IRA, there are no RMDs during your lifetime, and withdrawals are tax-free if the account’s been open at least five years. This option gives you the most control over the timing of withdrawals.

What happens if I inherit an IRA from someone who isn’t my spouse?

If you’re not the spouse, your options depend on whether you’re an “eligible designated beneficiary” (EDB)—like a minor child (until 21), a disabled person, or someone close in age to the deceased—or a “designated beneficiary” (DB), like an adult child. EDBs can stretch withdrawals over their lifetime or take up to 10 years, while DBs must empty the account within 10 years of the death. You can always take a lump sum instead, taxed for Traditional IRAs but tax-free for Roth IRAs if the five-year rule is met.

Do I have to pay taxes or penalties on money I take out of an inherited IRA?

It depends on the type of IRA. For a Traditional IRA, withdrawals are taxed as ordinary income, but there’s no 10% early withdrawal penalty, even if you’re under 59½—whether you’re a spouse, EDB, or DB. For a Roth IRA, withdrawals are tax-free if the account was opened at least five years ago by the original owner, and there’s no penalty either. The only exception is if you roll a Traditional IRA into your own and withdraw before 59½ without an exception, which could trigger a penalty.

How long can I keep the money in an inherited IRA before I have to take it out?

It varies by who you are. Spouses can delay Traditional IRA RMDs until the deceased would’ve turned 73 or the year after death if using life expectancy, or keep it until age 73 if rolled over—or 10 years if using that rule. EDBs start RMDs the year after death (life expectancy) or have 10 years if they choose that option (minors switch to 10 years at 21). DBs must withdraw everything within 10 years of death, no annual RMDs required. You can always take a lump sum anytime to cash out sooner.

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