What are your options when you inherit an IRA?

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• Inherited IRAs have special rules for account beneficiaries and required distributions.
• These rules can be confusing, and different rules apply to various situations.
• Because IRA accounts also have special tax treatment, knowing how to apply these rules can be the difference in putting more of the inherited funds to work for your family vs. giving up thousands in taxes.
• The first step is understanding a beneficiary's options with an inherited IRA, which depend on their age and relationship to the owner.

Losing someone you love is never easy.

Whether it happened suddenly or came after a long illness, the grief can feel heavy - and on top of that, there's often a lot to take care of. You might find yourself making final arrangements, helping family members cope, or trying to sort out financial matters when your heart just isn't in it.

If you've inherited something, especially a retirement account, it can feel like one more thing to figure out. And while it may be a generous gift - left with care and love - it also comes with decisions, especially regarding taxes and how to manage the money in a way that honors your loved one's legacy.

This series of articles is here to help. We'll walk you through your options if you've inherited an IRA or an employer retirement plan like a 401(k) and how to approach the tax consequences of distributions. We hope to make things a little easier during a difficult time and help you make choices that feel right for you and your family.

Pre-tax money is taxed when it is distributed.

If you've inherited a Traditional IRA, Rollover IRA, or pre-tax retirement plan, remember that all money distributed from that account is taxed to you, the beneficiary, on your individual tax return. Looking at it another way, you own most of the inherited account. However, the government also owns a portion via income tax, and how much they own depends on your specific tax situation. If you're in the 12% bracket, as much as 12% of your distribution is lost to tax. If you're in the 35% bracket, up to 35% of the distribution can be lost to tax. Let's look at an example:

• Sally inherits an IRA from her mother worth $40,000.
• Sally is single, and her taxable income for 2025 is $125,000, which puts her in the 24% tax bracket.
• If Sally withdraws the entire $40,000 in 2025, her taxable income will be $165,000, still in the 24% tax bracket, and she will owe $9,600 in income tax (24%). Sally "keeps" $30,400 of the inherited IRA. 

When does the money have to be distributed?

The IRS has its eye on this account. The taxes on the inherited money can be deferred or delayed into the future until the money is distributed. But the IRS wants their money eventually, and they don't let you defer it forever. As a beneficiary, you likely fall into one of these categories, each with its own set of rules. 

Important Note: These rules apply to an account inherited from an account owner who died after 01/01/2020. This marks the start of laws that apply under the SECURE Act, which was passed in 2019. Different rules apply to accounts where the owner passed before 01/01/2020. Specifically, the SECURE Act introduced the "10-Year Rule" mentioned below and the concept of an "Eligible Designated Beneficiary."

• You are the surviving spouse and the 100% beneficiary.
  • Surviving spouses have an option no other beneficiary has, which is to treat the IRA as their own.
  • This option allows the spouse to continue delaying required minimum distributions (RMDs) until their required age but retain the flexibility to withdraw as much or as little as they want until then. All IRA rules apply as if the IRA were their own. 
  • While this is probably the most common way for a spouse to handle inheritance, it's not the best in all cases. For example, a surviving spouse under age 59 ½ may want to use one of the options listed below if they need to take distributions to avoid the 10% early withdrawal penalty that would apply if it were their own IRA. 

Example: Let's revisit Sally's inheritance. Let's assume Sally inherited her $40,000 IRA from her spouse instead of from her mother. Sally could open her own IRA if she doesn't already have one, move her late spouse's IRA into her own IRA, and treat the IRA almost like it was hers all along. The same IRA rules around early withdrawal and RMDs apply, including a 10% penalty on early withdrawals before age 59 ½ and RMDs beginning at age 73 (assuming she is not yet RMD age).

• You are what the IRS calls an "eligible designated beneficiary."
  • An Eligible Designated Beneficiary is a definition introduced by the SECURE Act that is considered when the IRA owner passed on or after 01/01/2020.
  • Eligible Designated Beneficiaries are:
    • A spouse or minor child of the deceased account holder
      • (Note the minor child is no longer an "eligible" designated beneficiary once they reach the age of majority.)
    • A disabled or chronically ill individual
    • An individual who is not more than 10 years younger than the IRA owner or plan participant
  • Eligible designated beneficiaries must take an annual minimum distribution. The calculation is complicated as it involves the age of the original IRA owner at death, the number of years since passing, and the end-of-year balance of the IRA. An online calculator like this one from Charles Schwab can help you get to the correct number. 

Example: Coming back to Sally, let's say she inherited the $40,000 IRA from her spouse at age 45, but she is deep in debt and struggling to find work and needs some of the IRA funds now. She chooses to move the money to an Inherited IRA instead of her own so she can access funds without a 10% early withdrawal penalty. She can take as much as she needs now (paying income tax but no penalty) but will have to ensure that she takes at least the minimum required by the IRS every year by running the inherited IRA RMD calculation. 

• You are a designated IRA beneficiary who does not meet the criteria of an "eligible" designated beneficiary. This would typically apply when an IRA is inherited by a beneficiary of the following and future generations (children, grandchildren, nieces and nephews, etc.).
  • The SECURE Act introduced a new rule that makes things more complicated from a tax perspective.
  • Designated beneficiaries must follow the "10-year rule" and deplete the entire IRA by the end of the 10th year following the account owner's death. 
  • These beneficiaries also may or may not have to take required distributions. Recent guidance from the IRS says that if the original IRA owner was subject to required distributions, the beneficiary must continue them. Failure to follow this rule could lead to additional tax and penalties. 

Example: Going back to Sally and our original fact pattern, she inherited her $40,000 IRA from her mother, who was age 75. If Sally's mom passed in 2024, she would need to fully deplete the IRA by 12/31/2034. Additionally, Sally would need to take RMDs based on her life expectancy.

Tax Planning for IRA Beneficiaries

Now that we have the ground rules for IRA beneficiaries, our next article will explore how to think about taxes when distributing from an inherited IRA. How much of your inherited IRA you and your family keep vs. how much you give up in taxes may depend on how and when you take your required distributions.