inherited ira rules
Updated October 08, 2021

Inherited IRA Rules: Everything You Need to Know

Personal Taxes

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You have spent years saving for your retirement and have amassed a good sum, but now you need to figure out what to do with it when you pass away. Your Individual Retirement Account (IRA) may be sizable, and you might want to give it to someone who can really use it. But if you’re not careful, your beneficiary might face heavy tax penalties and even lose some of their inheritance.

Here is everything you need to know about inherited IRAs.

IRA Basics

The two primary types of IRAs are traditional IRAs and Roth IRAs. The type of account you have determines how taxes are treated. Both types offer tax advantages, but they are taxed at different times.

Traditional IRAs

For traditional IRAs, contributions are tax deductible. When you withdraw from the account, this is considered taxable income.

Roth IRAs

Roth IRAs are the converse: contributions are not tax deductible but withdraws are usually tax-free. The tax impact of an inherited IRA will largely depend on which type of IRA you inherit and your relationship to the account owner.

SECURE Act Provisions

The Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”) is a law lawmakers passed at the end of 2019 that dramatically changed how certain beneficiaries of IRAs would have to treat inherited IRAs from account owners who died after Dec. 31, 2019.

Before the SECURE Act

Generally, before the SECURE Act, beneficiaries could minimize the tax impact of inheriting an IRA by only taking out required minimum distributions (RMDs) over their life expectancy. This was a common strategy that advisors recommended to minimize the tax impact of inheriting an IRA.

RMDs are the bare minimum amounts you are required by tax laws to take out each period. They are required to ensure that your investments do not grow tax-deferred forever.

Amounts for RMDs are based on a number of factors, including the beneficiary’s age, life expectancy, and the account balance. If you don’t take out RMDs, you could be charged as much as a 50% penalty tax on the difference between what you took out and the amount you were required to take out.

Being able to take RMDs over your life expectancy allows you to take advantage of the tax deferral. For example, if you are 30 years old, IRS life expectancy tables would allow you to stretch your distributions over 53.3 years.

Using the strategy of stretching RMDs over your lifetime allowed you to keep most of the principal in the account so that it could continue to grow tax-deferred until your later age.

Changes Caused by the SECURE Act

The Secure ACT made the following changes to IRAs:

Traditional IRAs 

The SECURE Act changed the rules for certain beneficiaries who are now required to withdraw all of the money out of these accounts within 10 years instead of over the course of their lifetime. Required minimum distributions are no longer required to be made by beneficiaries, but all of the funds must be removed and the account closed by the tenth year.

Due to the SECURE Act, some beneficiaries may have to pay more in taxes since they have to take the money out sooner. Withdrawals are taxed at the time the money is withdrawn from the account.

If you haven’t taken any withdrawals from the account, you will have to pay taxes on the full balance in the tenth year, regardless of the tax consequences.

Roth IRAs

Roth IRAs are also subject to the ten-year rule. However, since tax has already been taken on the contributions, there is no tax applied to distributions.

SECURE Act Exceptions

Fortunately, the SECURE Act carved out some exceptions that allows you to pass your IRA to certain types of beneficiaries who can continue to use the old method of stretching out RMDs over their life expectancy. These people are called “eligible designated beneficiaries” and include:

Surviving Spouses

Surviving spouses have several options to handle an inherited IRA (see below). If the account is a Roth IRA, you don’t have to take required minimum distributions during your lifetime.

If the account is a traditional IRA, your required distributions will begin at the age of 72.

Minor Children

Minor children are not subject to the 10-year rule until they become legal adults. Once they are 18 (or 26 if they are still enrolled in school), they are required to observe the 10-year rule.

Disabled Beneficiaries

Disabled beneficiaries can continue to receive the RMDs over their lifetimes.

Chronically Ill Beneficiaries

Chronically ill beneficiaries can also receive RMDs over their lifetimes.

Beneficiaries Less than Ten Years Younger than the Account Owner

Beneficiaries who are not more than 10 years younger than the owner of the account, like a younger sibling, are not subject to the provisions.

Beneficiaries Who Inherited IRAs before 2020

Individuals who inherited IRAs before 2020 are grandfathered under the old rules.

Options for Spousal Beneficiaries

Spousal beneficiaries have the most flexibility with inherited IRAs. The IRS states that spouses have the following three options in handling their inherited IRA:

Treat It as Your Own

The first option is to treat the account as your own by naming yourself as the account owner.

If you use this option, the IRS will act as though the account was always yours.

Roll It Over

The second option is to roll the account over to a:

  • Traditional IRA
  • Qualified employer plan
  • 403(a) or 403(b) plan
  • Deferred compensation plan of a state or local government

It is important to consider the tax treatment of the deceased’s account and the other retirement plan options that you have in place.

You must roll the account into your IRA within 60 days to avoid tax penalties. You can do this even if you are not the only beneficiary of your spouse’s IRA.

Be the Beneficiary

The final option is to treat yourself as the beneficiary of the account.

Options for Non-Spousal Beneficiaries

Non-spousal beneficiaries cannot treat the IRA as his or her own, make contributions to it or roll over amounts to or from the account.

Make a Trustee-to-Trustee Transfer

It may be possible for the beneficiary to make a trustee-to-trustee transfer if the new IRA is set up and maintained in the deceased owner’s name for the benefit of the named beneficiary. If you receive a check for the amount in the IRA, this will be taxed as ordinary income and you cannot deposit it into the original or inherited IRA, so be sure that it is a direct transfer from one account to another.

Set Up an Inherited IRA Account

Non-spouse beneficiaries or spouses who are not the sole beneficiary will have to establish an inherited IRA account. No additional contributions are permitted in these accounts.

Beneficiaries will not owe tax on the assets in the IRA. However, they are taxed when they receive distributions from it.

Under the 10-year rule, most beneficiaries will be required to withdraw all of the money in the IRA within 10 years unless they are eligible designated beneficiaries (see above). They can withdraw the money at any time, including immediately after inheriting it, in the tenth year, or in sporadic payments over the next decade.

Each withdrawal will be counted as income during that tax year and taxes will need to be paid when claiming this income.

Take RMDs

If the beneficiary is allowed to take RMDs or if the death of the account owner occurred before Dec 31., 2019, the IRS requires the RMDs to be taken out no later than Dec. 31 in the year after the death of the original account owner.

If the account owner died before reaching age 70 ½,, you can choose to take  RMDs no later than Dec. 31 of the year following the death. Alternatively, you can elect to withdraw all of the funds within five years.

If the account owner was 70 ½ or older at the time of his or her death before Dec. 31, 2019, you can receive RMDs based on the account owner’s life expectancy or your own.

Understand the Rules for Roth IRAs

If the account you are inheriting is a Roth IRA, you must have the entire amount distributed by the end of the tenth year after the account owner died unless the account is payable to a designated beneficiary over his or her life expectancy because the beneficiary is a spouse or designated eligible beneficiary. Since taxes have already been applied to contributions, the beneficiary can distribute the funds without incurring additional tax, so different planning is necessary with Roth IRAs.

Other Rules

Some other rules you should be familiar with include:

When a Spouse and Non-Spouse Are Beneficiaries

An IRA can name more than one beneficiary. Some account owners may list their spouse along with other beneficiaries, such as their adult children.

If this is the case with an IRA you inherited, you need to separate your portion of the decedent’s IRA into your name.

If you will be taking RMDs, you must complete your first RMD by December 31 of the year following the original account owner’s death. If you do not make this RMD, future RMDs will be calculated based on the oldest beneficiary’s life expectancy.

This can result in you being required to take a larger distribution and incurring more tax liability than necessary.

No Bankruptcy or Creditor Protection

It is important that you know that if you are a nonspouse beneficiary, you will not receive bankruptcy protection from the inherited IRA. Therefore, if a creditor sues you, it could potentially attach your inherited IRA to pay off a debt for which it received a judgment.

Unless there is a state law that prohibits it, the creditor can treat your inherited IRA like any other account. Additionally, if you file bankruptcy, an inherited to a nonspouse beneficiary is not treated the same as your own retirement account.

Unless there is a state law that says otherwise, your inherited IRA can’t be protected under bankruptcy.

Commingling of Inherited IRAs

If you happen to receive more than one inherited IRA, it is important that you understand you can’t combine them into a single account unless you receive them from the same owner and they are the same type of account. You will need to have a separate inherited IRA account if you received accounts from multiple account owners.

Tax-Saving Strategies

Some ways that you can save money on taxes include:

Make Distributions When Your Income is Lower

Those beneficiaries who are subject to the 10-year rule have flexibility in when they take funds out of the account. They can take more funds out during years when they earn less money so that they are taxed at a lower rate.

One tax-savings strategy is for the beneficiary to take withdrawals in years when his or her other income is lower since he or she might be in a lower tax bracket and have a lower tax rate.

Similarly, a person may wait until they reach retirement during the 10-year window and then start withdrawing funds from the account since their retirement income may be much less than their income during their working years. This type of planning can help minimize taxes.

Take Tax-Free Contributions from Roth IRAs

Roth IRA beneficiaries can withdraw contributions from the account at any time without incurring additional taxes. Interest can also be withdrawn from these accounts tax-free as long as the account has been open for a minimum of five years before the account owner died.

Otherwise, the beneficiary would owe taxes on any earnings they withdraw.

Name Your Spouse as Your Beneficiary

If you are the owner of an IRA account and are concerned about the tax treatment after your death, you may want to consider naming your spouse as the beneficiary instead of someone else because your spouse can continue to invest the account on a tax-deferred basis for their lifetime.

While your spouse will be required to take RMDs, the tax consequences of this are relatively minor compared to the income tax effect that a nonspouse beneficiary would be subjected to.

Your spouse can then use other strategies to reroute funds to your children, grandchildren or other heirs, such as making lifetime gifts to them up to the federal tax gift exclusion limit.

Convert to a Roth IRA

Another option is to convert your IRA into a Roth IRA before your death. Nonspousal beneficiaries must have the contributions distributed to them within 10 years, but these distributions are tax-free.

Your beneficiaries could, in theory, leave the funds in the account until the end of the tenth year to enjoy a longer tax deferral and then take out all of the funds at one time. However, making this conversion could cause you to owe taxes on the transfer amounts, so be sure you discuss this option with a tax advisor to determine how best to minimize taxes on you and your beneficiaries.

You may be able to convert funds a little at a time over the course of several years to minimize the tax burden.

Make Qualified Charitable Deductions

Another option is to make qualified charitable deductions with your IRA. These are direct transfers and are excluded from your income.

These contributions can also satisfy your annual RMDs. If you give to charity any way and don’t itemize your deductions, this is one way to get a tax benefit since you won’t have to pay taxes on your RMDs for that year.

You can only make qualified charitable deductions if you are age 70 ½ or older.

Disclaim Your Inheritance

If an inherited IRA may increase the total amount of your estate to go beyond the federal tax exemption limit or if you live in a state with a lower estate or inheritance tax, it may make sense to disclaim all or part of the account assets. If your tax liability will be worse by accepting the inheritance, it doesn’t make sense to receive the funds.

If you disclaim your portion of an inherited IRA, the assets will pass to other eligible beneficiaries. You must decide to disclaim the IRA within nine months of the account owner’s death.

Once you make this decision, you can’t go back and change your mind, so it’s important to talk to a tax adviser before disclaiming IRA assets left to you.

What to Do with Inherited Funds

A big question that you might have is what to do with funds you receive from an inherited IRA. The answer to this question largely depends on your particular situation. Some options include:

Let the Money Grow Tax-Deferred

If you don’t have an immediate need for the money, you might simply want to leave the funds into the IRA so that the money can continue to enjoy tax-deferred growth. However, you must keep in consideration the potential impact of when you make withdrawals or RMDs.

Make Other Investments

You can also invest distributions you receive from the IRA into other accounts that may provide you with greater growth to fund your own retirement. Once you receive a distribution from the account, it is your money to do with as you please.

Learn More

Inheriting an IRA can be a great way to supplement your income or save for your own retirement. However, it is prudent to talk to a tax expert or financial advisor to make practical decisions about your inheritance.


Valerie Keene, J.D.

Valerie graduated magna cum laude from the University of Arkansas School of Law where she also participated in Moot Court and the Arkansas Law Review. She practices law in Arkansas, focusing primarily on estate planning and elder law. She has prepared countless estate planning documents and has participated in a number of guardianship cases since she was admitted to the bar. She is a regular contributor to Nolo.


Logan Allec, CPA

Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.

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