How to Handle Inherited Retirement Accounts: Options and Deadlines

Quick overview

Inheriting a retirement account creates choices that affect taxes, cash flow, and long-term growth. Rules changed materially with the SECURE Act (2019), and later amendments to retirement law affect RMD ages for original owners — but the core rule for most inherited accounts after 2019 is the 10‑year distribution requirement. Follow a step-by-step plan, confirm beneficiary status, and talk to a tax or financial professional before taking large distributions.

References: see IRS guidance on beneficiaries and IRAs (IRS Publication 590‑B and Retirement Plans FAQs) (https://www.irs.gov/retirement-plans) and U.S. Department of Labor guidance for employer plans (https://www.dol.gov/agencies/ebsa).

Who is an “eligible designated beneficiary” and why that matters

Under current federal rules the options you have depend on whether you qualify as an “eligible designated beneficiary” (EDB). EDBs may stretch distributions over their life expectancy; most other beneficiaries must use the 10‑year rule.

Typical EDB categories:

• Surviving spouse — has the broadest options (treat as own, roll into own IRA, or remain an inherited account).
• Disabled or chronically ill individuals (as defined by IRS rules).
• Minor child of the decedent (only until they reach the age of majority; then the 10‑year rule applies).
• Individuals who are no more than 10 years younger than the deceased plan owner.

If you do not fall into one of these EDB categories, the account balance generally must be distributed within 10 years of the owner’s death (the “10‑year rule”). See IRS guidance for beneficiaries: https://www.irs.gov/retirement-plans.

Core options, by beneficiary type

Spouse

• Treat the account as your own: you become the account owner, delay RMDs until your own required beginning date (RBD), and make contributions (if eligible) to IRAs.
• Roll the inherited employer plan into your own plan or IRA (direct trustee-to-trustee rollovers are safest).
• Remain a beneficiary (inherited IRA) and take distributions based on your life expectancy — useful in some tax/estate planning scenarios.
• Disclaimer: converting a traditional inherited IRA to a Roth has tax consequences; evaluate timing, taxable income, and Medicare IRMAA effects.

Non-spouse designated beneficiaries

• Inherited IRA (most common): You cannot treat the account as your own. Options are limited by beneficiary category. For most non-EDBs, follow the 10‑year rule: empty the account by Dec. 31 of the 10th year after death.
• If the decedent already required RMDs at death, some years within the 10‑year window may require annual RMDs; confirm with custodian and IRS guidance.

Employer plans (401(k), 403(b))

• If permitted by the plan, roll the funds to an inherited IRA — this often gives more investment choices and simpler beneficiary rules.
• Some plans allow beneficiaries to remain in the plan; plan documents control terms. Check with the plan administrator and the Department of Labor guidance (https://www.dol.gov/agencies/ebsa).

Roth IRAs

• Roth IRAs are usually distributed tax‑free to beneficiaries, but the 10‑year rule typically still applies for non‑EDBs. The five‑year qualified distribution rule for converting/starting a Roth can affect whether earnings are tax‑free.

Trusts as beneficiaries

• Naming a trust complicates timing and tax outcomes. If a trust is the beneficiary, it must be drafted to qualify as a “look‑through” or designated beneficiary to preserve life‑expectancy payouts. Two common structures: conduit trusts and accumulation trusts — each has pros/cons. Work with an estate attorney.

Important deadlines and timing rules

• Death date is Day 0: The 10‑year countdown for most non‑eligible beneficiaries starts on the year after the owner’s death. The account must be fully distributed by December 31 of the 10th year following the year of death.
• Account transfers: Use direct trustee‑to‑trustee transfers when moving assets to an inherited IRA to avoid taxable withholding and the 60‑day rollover pitfall.
• 60‑day rollover rules: Generally, beneficiaries should avoid relying on the 60‑day rollover when inheriting retirement accounts — trustees can usually transfer directly and the rules differ for inherited accounts.
• RMD timing for decedent who already started RMDs: If the owner had begun RMDs before death, beneficiaries may still be required to take annual RMDs during the 10‑year period rather than a single lump sum at year 10. Check the plan/IRA custodian and IRS guidance.

See the detailed rules in IRS Publication 590‑B and the Retirement Plans FAQs (https://www.irs.gov/retirement-plans).

Tax consequences and practical tax strategies

• Traditional accounts: Distributions are generally taxable as ordinary income to the beneficiary in the year taken.
• Roth accounts: Qualified distributions are tax‑free, but beneficiaries must still follow distribution timing rules. Confirm the account met the 5‑year holding period for qualified Roth treatment.
• Managing tax brackets: Spreading distributions over several years (when allowed) can reduce overall tax by preventing one large distribution from pushing you into a higher marginal tax bracket.
• Roth conversions: A surviving spouse may convert inherited traditional IRAs to Roths — conversions create immediate taxable income but can reduce future RMDs and taxable distributions for heirs.
• Social Security, Medicare, and means‑tested benefits: Large distributions may raise MAGI and affect Medicare Part B/D IRMAA surcharges or phaseouts of tax credits; coordinate with tax and benefits planning.

Example: If you inherit a $500,000 traditional IRA and are subject to the 10‑year rule, taking $50,000 per year for 10 years may keep you in a lower bracket than cashing out in year one, depending on your other income.

Practical steps to take immediately after inheriting an account

1. Obtain a certified death certificate and contact the plan custodian or employer plan administrator. They will explain the plan’s beneficiary procedures.
2. Confirm beneficiary status and request the plan’s death‑beneficiary package (forms/instructions).
3. Do not rush to withdraw — map tax and cash needs first. Use a direct trustee‑to‑trustee transfer to move funds to an inherited IRA if you plan to preserve tax deferral.
4. Check whether you qualify as an EDB (spouse, disabled, etc.). If so, evaluate the stretch option vs. other strategies.
5. Review estate documents and beneficiary designations. If a trust is involved, get legal review of the trust language.
6. Update your financial plan and name contingent beneficiaries.

Common mistakes and how to avoid them

• Cashing out immediately without tax planning: leads to large tax bills and lost deferral.
• Ignoring the 10‑year deadline: missing the deadline can cause tax penalties or force acceleration.
• Failing to confirm whether the plan allows rollovers or requires lump‑sum distributions.
• Naming a poorly drafted trust as beneficiary: can accelerate taxation or create unintended estate tax consequences.

Case examples (realistic scenarios)

Scenario A — Surviving spouse: Jane inherits her husband’s traditional 401(k). She elects to roll it into her own IRA to consolidate accounts and delay RMDs until her RBD, then later converts smaller amounts to Roths each year to manage taxes.

Scenario B — Non‑spouse adult child: Mike inherits a traditional IRA and is not an EDB. He moves the assets into an inherited IRA and sets a 10‑year distribution plan that aligns with his projected income needs and tax brackets, avoiding a single lump‑sum distribution.

Scenario C — Trust beneficiary: The family trust inherits the decedent’s IRA but the trust language doesn’t qualify as a designated beneficiary. The trustee must take the 10‑year distribution, accelerating taxes. The family consults an estate attorney to correct the trust for future planning.

Checklist: What to bring to your advisor or tax preparer

• Death certificate and account statements
• Plan or IRA statements showing balance and designation documentation
• Copy of the plan’s death‑beneficiary forms and summary plan description (for employer plans)
• Trust documents, will, and any beneficiary designation forms
• Recent tax returns and projected income for the next 1–3 years

Further reading and internal resources

• Read our practical guide to inherited IRA rules for a focused breakdown: Inherited IRA Rules (https://finhelp.io/glossary/inherited-ira-rules/).
• For timing and exceptions related to required distributions, see Required Minimum Distribution Basics and Common Exceptions (https://finhelp.io/glossary/required-minimum-distribution-basics-and-common-exceptions/).
• If you need to move plan assets safely, review Rollovers and Consolidation: Moving Retirement Accounts Safely (https://finhelp.io/glossary/how-rollovers-work-avoiding-tax-pitfalls/).

Professional disclaimer

This article is educational and does not replace personalized advice from a qualified tax professional, CPA, or estate attorney. Rules for inherited retirement accounts are technical and can change; consult the IRS site (https://www.irs.gov/retirement-plans) and your advisors before acting.

Author note

In my practice I see avoidable tax costs when beneficiaries cash out without planning. A few targeted moves — timely transfers, spreading income, and checking trust language — typically preserve more of the inheritance for heirs.

Authoritative sources

• IRS — Retirement Plans FAQs and Publication 590‑B: https://www.irs.gov/retirement-plans
• U.S. Department of Labor — Employee Benefits Security Administration: https://www.dol.gov/agencies/ebsa
• SECURE Act (2019) summary and subsequent guidance: U.S. Congress and IRS releases