Inherited IRA rules depend on who inherited the account, the type of IRA, when the original owner died and whether the owner had reached the required beginning date for required minimum distributions.
Before transferring assets or taking money out, confirm which rules apply. Many beneficiaries face a 10-year deadline, and some must also take annual distributions.
Identify your beneficiary category
Federal rules distinguish among surviving spouses, other eligible designated beneficiaries, other individual designated beneficiaries and non-individual beneficiaries such as estates. Special rules determine how a trust is treated.
Eligible designated beneficiaries can include:
● A surviving spouse.
● The account owner’s child who has not reached age 21.
● A qualifying disabled or chronically ill individual.
● An individual who is not more than ten years younger than the owner.
Different rules and elections may apply to each category. Trust arrangements require particular care because their treatment depends on the applicable requirements.
Understand the 10-year deadline
For owners who died after 2019, many individual beneficiaries who are not eligible designated beneficiaries must empty the inherited account by December 31 of the tenth year following the year of death.
That deadline does not mean everyone can leave the account untouched until the final year.
For an inherited traditional IRA subject to this rule, annual distributions generally also apply when the original owner died on or after the required beginning date. When the owner died before that date, annual distributions generally are not required during years one through nine.
Confirm the requirements for your beneficiary category and account.
Understand how inherited Roth IRAs differ
For an inherited Roth IRA subject to the 10-year rule, annual distributions generally are not required in years one through nine, but the account must be emptied by the applicable deadline.
Income-tax treatment is a separate question. Withdrawals of contributions are generally tax-free, while the treatment of earnings depends in part on whether the applicable five-year requirement has been met. Review the account history before assuming every distribution will be tax-free.
Review surviving-spouse options carefully
A surviving spouse may have choices unavailable to other beneficiaries, including treating an IRA as their own or making an eligible rollover. Available options can depend on whether the spouse is the sole beneficiary and other circumstances.
The consequences depend on age, distribution needs and other circumstances. A spouse who needs access before age 59½ should understand how changing the account’s treatment could affect early-distribution rules.
Avoid automatically retitling or combining accounts before reviewing the choices.
Keep inherited accounts properly registered
A non-spouse beneficiary generally cannot combine an inherited IRA with their own IRA or use a standard rollover into their own account.
A properly arranged trustee-to-trustee transfer may be possible, but the inherited registration must be maintained. Ask the receiving custodian to confirm the required title and process before moving assets.
Understand the tax treatment
Inherited traditional IRA distributions generally create ordinary taxable income to the extent they represent taxable amounts.
Distributions made to a beneficiary following the owner’s death generally are not subject to the additional 10% early-distribution tax.
Check outstanding requirements and document deadlines
If the owner had an unfinished RMD for the year of death, confirm the amount and applicable deadline with the custodian and tax professional.
Create a written record of any annual requirements, the final distribution deadline, account elections and withholding decisions. Review withdrawal timing alongside other income rather than assuming that either immediate distribution or waiting until the deadline is appropriate.
Frequently asked questions
Does every inherited IRA have to be emptied within ten years?
No. Treatment varies by beneficiary category, the owner’s date of death and other account facts.
Should I wait until year ten to take withdrawals?
That may not be permitted, and it may not fit your tax situation. Confirm annual requirements and compare withdrawal timing before deciding.
Sources and further reading
