Inheriting an Individual Retirement Account (IRA) brings significant financial opportunity but comes with specific rules mandated by the IRS to manage withdrawals and tax obligations properly. These inherited IRA rules are designed to govern how beneficiaries distribute funds, aiming to balance tax deferral benefits with eventual tax collection. Crucially, the rules changed substantially with the SECURE Act of 2019, which affects most non-spouse beneficiaries.
Understanding the SECURE Act and the 10-Year Rule
Before 2020, non-spouse beneficiaries of IRAs often benefited from “stretch IRA” rules, allowing distributions to be spread over their lifetime, maximizing tax deferral. However, the SECURE Act, signed into law in December 2019, eliminated this option for most non-spouse beneficiaries who inherited IRAs from owners who died after December 31, 2019.
Under the new framework, the majority of non-spouse beneficiaries are subject to the “10-year rule,” which requires them to fully distribute the inherited IRA balance within 10 years following the year of the original owner’s death. This rule provides flexibility in timing but mandates full distribution by the end of the 10th year.
It’s important to note nuances clarified by the IRS in Publication 590-B (2025): if the deceased IRA owner had begun taking Required Minimum Distributions (RMDs) before death, non-eligible designated beneficiaries must take annual RMDs during the 10-year period. If the owner had not begun RMDs, the beneficiary may delay distributions until the end of the 10 years but cannot exceed it.
Beneficiary Categories and Distribution Rules
1. Spousal Beneficiaries
Spouses have the most favorable options. They may:
- Treat the inherited IRA as their own by rolling it into their personal IRA.
- Keep it as an inherited IRA, taking RMDs based on their own age and the original owner’s distribution schedule.
- Take a lump-sum distribution, which would be taxable as ordinary income for Traditional IRAs.
Spousal rollover allows the IRA funds to continue growing tax-deferred or tax-free in the case of Roth IRAs until the spouse reaches the applicable RMD age.
2. Eligible Designated Beneficiaries (EDBs)
These include:
- Minor children of the deceased (until reaching the age of majority, typically 18 or 21 depending on state law).
- Disabled or chronically ill individuals as defined by IRS standards.
- Individuals not more than 10 years younger than the IRA owner.
- Surviving spouses.
EDBs can continue to take distributions based on their life expectancy, effectively preserving the tax deferral benefits similar to pre-SECURE Act rules, until the minor child reaches the age of majority, after which the 10-year rule applies.
3. Non-Eligible Designated Beneficiaries (NEDBs)
This group, including most adult children, other individuals, and many trusts, must adhere to the 10-year rule.
If the original owner had started RMDs, annual RMDs during the 10-year period are required.
4. Non-Person Beneficiaries (Estate, Charity, Trusts)
- Estates usually must distribute under the 5-year rule unless the owner had started RMDs, in which case distributions follow the owner’s remaining life expectancy.
- Charitable organizations receiving IRA assets are tax-exempt and typically do not owe taxes on distributions.
- Trusts need careful review to determine if they qualify as “see-through” trusts, allowing beneficiaries to stretch distributions, or else they face accelerated distribution rules.
Tax Implications and Common Mistakes
Distributions from inherited Traditional IRAs are subject to ordinary income tax in the year taken. Roth IRAs offer tax-free qualified distributions but still require compliance with distribution rules.
Common mistakes include missing distribution deadlines, treating inherited IRAs as owner IRAs (which triggers penalties), and failing to recognize when annual RMDs are required.
Practical Examples
Example 1: Sarah inherits her husband’s Roth IRA and rolls it over into her own Roth IRA. She avoids RMDs during her lifetime, and the funds continue to grow tax-free.
Example 2: David, a non-spouse beneficiary, inherits a Traditional IRA from his mother who was already taking RMDs. David must take annual RMDs during the 10 years and fully distribute the account by the end of the 10th year.
Example 3: Maria, a minor child inheriting a Traditional IRA, takes lifetime RMDs until reaching majority, then follows the 10-year rule.
Managing an Inherited IRA Successfully
- Identify beneficiary status: Whether spouse, EDB, or NEDB affects your rights and obligations.
- Understand deadlines: Keep track of the 10-year rule or annual RMD requirements.
- Plan withdrawals to minimize taxes: Large lump sums can increase tax burdens.
- Consult professionals: Tax and financial advisors help ensure compliance and effective strategies.
For detailed IRS rules, consult IRS Publication 590-B. See also our related articles on Individual Retirement Account (IRA), Beneficiaries, and Required Minimum Distribution (RMD) for deeper insights.
By thoroughly understanding inherited IRA rules, beneficiaries can make informed decisions that optimize their tax situation and maximize the value of their inheritance.