Inherited IRA

An inherited IRA is a retirement account that a non-spouse beneficiary receives when the original account owner dies, subject to mandatory withdrawal schedules and holding restrictions. Unlike a spouse, who can treat the account as their own, other beneficiaries must follow specific distribution rules that force the depletion of the account within defined timeframes.

How beneficiary rules differ from spousal treatment

When a spouse inherits an IRA, they can roll it over into their own IRA as if they’d contributed the money themselves, deferring withdrawals until they reach the age when distributions become mandatory. Non-spouse beneficiaries—adult children, grandchildren, parents, siblings, or anyone else—face entirely different rules. They cannot treat the inherited account as their own, cannot make additional contributions, and cannot delay distributions indefinitely.

The distinction exists because spousal rollover preserves the tax-deferred status of the account while incorporating it into the spouse’s retirement timeline. Non-spouse beneficiaries, by contrast, represent a secondary claim on funds that were always meant to flow through the original owner’s estate. Tax law reflects this difference by accelerating when and how much they must withdraw.

The SECURE Act’s 10-year rule

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, implemented in 2020, reshaped inherited IRA rules for most non-spouse beneficiaries. The law now requires that inherited IRAs be depleted entirely within 10 years of the original owner’s death, with no annual required minimum distribution threshold. This means a beneficiary can take nothing for the first nine years, then withdraw the entire balance in year 10—or any distribution schedule in between, so long as the account reaches zero by the deadline.

This rule applies to non-spouse beneficiaries who inherited an IRA after December 31, 2019. Beneficiaries who inherited before that date remain subject to the older “stretch IRA” rules, which permitted withdrawals spread over the beneficiary’s entire life expectancy, a vastly longer timeline. Those grandfathered beneficiaries can keep the stretched withdrawal schedule; they cannot retroactively fall under the 10-year rule.

Exceptions to the 10-year rule

A narrow set of beneficiaries remains exempt from the 10-year deadline and retains the ability to stretch distributions over their lifetimes. Eligible designated beneficiaries include:

• The surviving spouse (though they have superior rollover options)
• Children of the deceased account owner who are still minors at death (the 10-year clock starts when they reach age of majority, usually 21)
• Disabled or chronically ill beneficiaries, as defined by tax law
• Beneficiaries who are no more than 10 years younger than the deceased

These exemptions are narrowly drawn. A 45-year-old inheriting from a 50-year-old parent, for example, is not an eligible designated beneficiary and must comply with the 10-year rule, even though the age gap is small by ordinary standards.

Practical mechanics of inherited IRA distributions

Once notified that they are a beneficiary, a non-spouse must act within a deadline (usually by December 31 of the year following death) to either take direct distribution or open a “beneficiary IRA” in their own name, retitled to reflect that it is inherited. The custodian (the bank or brokerage holding the account) typically manages this retitling.

For inherited traditional IRA accounts, distributions are ordinary income and taxable in full. If the original owner had made nondeductible IRA contributions, the beneficiary must calculate IRA basis using Form 8606 to avoid paying tax twice on the after-tax portion. This calculation can become complex if the original owner had multiple IRAs or a mix of deductible and nondeductible contributions.

For inherited Roth IRA accounts, distributions of earnings are tax-free if the Roth had been open for at least five years at the time of death. A beneficiary can simply withdraw contributions tax-free at any time; earnings require the five-year holding period.

The tax bill lands on the beneficiary

The most immediate pain point is that all ordinary income from inherited traditional IRAs flows to the beneficiary’s personal tax return. Inheriting a $500,000 IRA and taking a large distribution in one year can push the beneficiary into a much higher tax bracket, potentially triggering the net investment income tax or other phase-out penalties. Spreading withdrawals across multiple years often minimizes this tax burden, though beneficiaries can also take lump-sum distributions if they choose.

A few beneficiaries in high tax brackets have strategically withdrawn nothing in year 1 and year 2, then taken the entire balance in year 10, knowing they could have taken distributions at lower marginal rates in earlier years. This approach trades years of tax deferral for a single large tax hit, and it is only optimal in unusual circumstances.

State creditor protections vary

A secondary but important consideration is that inherited IRAs receive varying levels of creditor protection depending on the state where the beneficiary lives. Federal law grants some protection, but state law differs significantly. A beneficiary in one state might have strong creditor shielding on inherited assets; a beneficiary in another might not. Before inheriting a large IRA, it is worth consulting an attorney about state-specific rules.

Common pitfalls

The most frequent mistake non-spouse beneficiaries make is treating an inherited IRA like a regular brokerage account and forgetting that the 10-year clock is running. A beneficiary who takes no distributions for nine years and then faces a large lump sum in year 10 will owe a substantial income tax bill with no flexibility. Early planning—deciding whether to stretch withdrawals evenly or take them in larger chunks during lower-income years—is crucial.

A second error is commingling inherited IRA funds with personal money in a regular account, which can trigger confusing tax consequences. The inherited IRA must be held separately and tracked according to its source account’s basis and cost basis rules.

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