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The distribution rules for inheriting an IRA are complicated, and the SECURE Act of 2019 introduced some significant changes. Consequently, the inherited IRA rules are different for certain beneficiaries if the account holder died in 2020 or later, compared to the rules before that time.

An inherited IRA is governed by IRS rules about how and when the money can be distributed, and whether the beneficiary is an eligible designated beneficiary or a designated beneficiary.

Other factors that influence inherited IRA distributions include the age of the original account holder when they died and whether the account holder had started taking required minimum distributions (RMDs) before their death. The SECURE 2.0 Act added some new changes to this factor.

Read on to learn about inherited IRA distribution rules, the recent changes, and how they might affect you.

What Is an Inherited IRA?

When an IRA owner passes away, the funds in their account are bequeathed to their beneficiary (or beneficiaries), who then have several options to choose from when considering what to do with the funds. The original account could be any type of IRA, such as a Roth IRA, traditional IRA, SEP IRA, or SIMPLE IRA.

If you inherit an IRA, the following conditions determine what you can do with the funds:

•   Your relationship to the deceased account holder (e.g., are you a spouse or non-spouse)

•   The original account holder’s age when they died

•   Whether they had started taking their required minimum distributions (RMDs) before they died

•   The type of IRA involved

Basic Rules About Withdrawals

There are a number of options available for taking inherited IRA distributions, depending on your relationship to the deceased. At minimum, most beneficiaries can either take the inherited funds as a lump sum, or they can follow the 10-year rule, which is one of the changes to the inherited IRA distribution rules that went into effect with the SECURE Act of 2019. (The previous rules allowed beneficiaries of inherited IRAs to stretch out withdrawals over their lifetime. Those rules are still in place if the original IRA account owner died before January 1, 2020.)

The 10-year rule regarding inherited IRAs means that the account must be emptied by the 10th year following the year of death of the original account holder.

The tax rules governing the type of IRA — Roth vs. traditional IRA — apply to the inherited IRA as well. So withdrawals from an inherited traditional IRA are taxed as income. Withdrawals from an inherited Roth IRA are generally tax-free (see more details about this below).

Exceptions for Eligible Designated Beneficiaries

Withdrawal rules for inherited IRAs are different for beneficiaries called “eligible designated beneficiaries” that they are for designated beneficiaries.

According to the IRS, an eligible designated beneficiary refers to:

•   The spouse of the original account holder.

•   A minor child under age 18.

•   An individual who meets the IRS criteria for being disabled or chronically ill.

•   A person who is no more than 10 years younger than the IRA owner.

If you qualify as an eligible designated beneficiary, and you are a non-spouse, here are the options that pertain to your situation:

•   If you’re a minor child, you can extend withdrawals from the IRA until you turn 18.

•   If you’re disabled or chronically ill, or not more than 10 years younger than the deceased, you can extend withdrawals throughout your lifetime.

What Are the RMD Rules for Inherited IRAs?

Assuming the original account holder had not started taking RMDs, and you are the surviving spouse and sole beneficiary of the IRA, you have a few options:

•   If you roll over the funds to your own IRA. With this option, you have to do an apples-to-apples rollover IRA (tax deferred IRA to tax deferred IRA, Roth to Roth.) Once rolled over, inherited funds become subject to regular IRA rules, based on your age. That means you have to wait to take distributions until you’re 59 ½ or potentially face a 10% penalty in the case of a tax-deferred account rollover.

   RMDs from your own IRA are subject to your life expectancy (you can use the IRS Life Expectancy Table to determine what yours is) and generally begin once you reach age 73.

•   If you move the funds to an inherited IRA. You can also set up an inherited IRA in order to receive the funds you’ve inherited. Again the accounts must match — so funds from a regular Roth IRA must be moved to an inherited Roth IRA.

   Inherited IRAs follow slightly different rules. For example, you must take RMDs every year, but these can be based on your own life expectancy. Distributions from a tax-deferred account are taxable, but the 10% penalty for early withdrawals before age 59 ½ doesn’t apply.

   If the original account holder had started taking RMDs, the spouse has to take RMDs in the year in which they died. After that, the spouse switches to taking their own RMDs from there on out every year.

   Some people prefer to open their inherited IRA account with the same firm that initially held the money for the deceased. However, you can open an IRA with almost any bank or brokerage.

RMD Rules for Non-Spouses

If you are a non-spouse beneficiary, first determine whether you meet the criteria for an eligible designated beneficiary or a designated beneficiary.

•   Eligible designated beneficiaries: As mentioned above, eligible designated beneficiaries include: chronically ill or disabled non-spouse beneficiaries; non-spouse beneficiaries not more than 10 years younger than the original deceased account holder; or a minor child of the account owner.

   Most eligible designated beneficiaries can stretch withdrawals from the inherited IRA over their lifetime. However, once a minor child beneficiary reaches 18, they have 10 years to empty the account.

•   Designated beneficiaries: These individuals must follow the 10-year rule and deplete the account by the 10th year following the year of death of the account holder. After that 10-year period, the IRS will impose a 25% penalty tax on any funds remaining.

   In addition, because of changes introduced by SECURE 2.0 Act, if the original account holder had begun RMDs, beneficiaries must continue to take RMDs yearly, based on their own life expectancy, while emptying the account within 10 years. However, if the account holder had not started taking RMDs, beneficiaries don’t need to make annual withdrawals, but they still must take all of the money out of the account within 10 years.

Multiple Beneficiaries

If there is more than one beneficiary of an inherited IRA, the IRA can be split into different accounts so that there is one for each person.

Then, generally speaking, you must each start taking RMDs based on the type of beneficiary you are, as outlined above, and all assets must be withdrawn from each account within 10 years (aside from the exceptions noted above).

Recommended: Retirement Planning Guide

Inherited IRA Examples

These are some of the different instances of inherited IRAs and how they can be handled.

Spouse inherits and becomes the owner of the IRA: When the surviving spouse is the sole beneficiary of the IRA, they can opt to become the owner of it by rolling over the funds into their own IRA. The rollover must be done within 60 days.

This could be a good option if the original account holder had already started taking RMDs, because it delays the RMDs until the surviving spouse turns 73.

Non-spouse designated beneficiaries: An adult child or friend of the original IRA owner can open an inherited IRA account and transfer the inherited funds into it.

If the original account holder had begun RMDs, the beneficiary must take RMDs yearly, based on their own life expectancy, while emptying the account within 10 years. However, if the account holder had not started taking RMDs, the beneficiary does not need to make annual withdrawals, but they still must take all of the money out of the account within 10 years.

Both a spouse and a non-spouse inherit the IRA: In this instance of multiple beneficiaries, the original account can be split into two new accounts. That way, each person can proceed by following the RMD and distribution rules for their specific situation.

How Do I Avoid Taxes on an Inherited IRA?

Money from IRAs is generally taxed upon withdrawal, so your ordinary tax rate would apply to any tax-deferred IRA that was inherited, such as a traditional IRA, SEP IRA, or SIMPLE IRA.

However, if you have inherited the deceased’s Roth IRA, which allows for tax-free distributions, you should be able to make tax-free withdrawals of contributions and earnings, as long as the original account was set up at least five years ago (this is known as the five-year rule). As with an ordinary Roth account, you can withdraw contributions tax free at any time.

Common Mistakes to Avoid with Inherited IRAs

Because the rules for inherited IRAs are complex, it can be easy to make a mistake. Here are some common missteps to avoid.

Taking a lump-sum distribution. If you withdraw the entire amount of the IRA at once, you may be pushed into a higher tax bracket and get hit by a significant tax bill. Spreading out the distributions could help you stay in lower tax brackets.

Mixing up the inherited IRA rules before 2020 and after 2020. The rules are complicated and confusing. You need to know what kind of beneficiary you are, what your options are for receiving the inherited IRA, and when you need to start and finish taking distributions. Otherwise, you could face a penalty — or not be taking advantage of certain options you may have. IRS Publication 590-B spells out the rules. You might also want to consult with a trusted tax professional.

Neglecting to take RMDs. The rules regarding RMDs are different depending on the type of beneficiary you are, when the account holder passed away, and if that person had started taking RMDs. Make sure to follow the rules specific to your situation. Consider consulting a financial professional if you’re not sure.

Recent Changes and Updates to Inherited IRA Rules

As noted, the SECURE Act of 2019 introduced some changes that affect how inherited IRAs are handled. Designated non-spouse beneficiaries who inherited an IRA from an account holder who died in 2020 or later must empty the entire account within 10 years after the original owner’s death.

Furthermore, the SECURE 2.0 Act added some additional changes to the 10-year rule. If the original account holder had begun RMDs, beneficiaries must continue to take RMDs yearly, based on their own life expectancy, while emptying the account within 10 years. However, if the account holder had not started taking RMDs, beneficiaries don’t need to make annual withdrawals, but they still must take all of the money out of the account within 10 years.

Eligible designated beneficiaries, a category of beneficiary created by the SECURE Act of 2019, are generally not subject to these changes.

The Takeaway

Once you inherit an IRA, it’s wise to familiarize yourself with the inherited IRA rules and requirements that apply to your situation. No matter what your circumstances, inheriting an IRA account has the potential to put you in a better financial position for your own retirement.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

FAQ

Are RMDs required for inherited IRAs?

In many cases, RMDs are required for inherited IRAs. The specific rules depend on the type of beneficiary a person is, whether the account holder died before or after 2020, and if they started taking RMDs before their death.

Spouse beneficiaries can generally take RMDs based on their own life expectancy and stretch the withdrawals over their lifetime. Designated non-spouse beneficiaries of an account owned by someone who passed away in 2020 or later may or may not need to take annual RMDs, depending on whether the original account holder had started taking them. But either way, they have to completely empty the account with 10 years.

What are the disadvantages of an inherited IRA?

The disadvantages of an inherited IRA include: knowing how to navigate and follow the complex rules regarding distributions and RMDs, and understanding the tax implications and potential penalties for your specific situation.

How do you calculate your required minimum distribution?

To help calculate your required minimum distribution, you can consult IRS Publication 590-B. There you can find information and tables to help you determine what your specific RMD would be.

How should multiple beneficiaries handle an inherited IRA?

If an inherited IRA has multiple beneficiaries, one way to handle it is to split it into different accounts — one for each beneficiary. Then the individual beneficiaries can each decide what to do with the funds.

One thing to keep in mind, though, is that if the account holder died in 2020 or thereafter, all assets must be withdrawn from the accounts of non-spouse designated beneficiaries within 10 years.

What are the options for a spouse inheriting an IRA?

A spouse inheriting an IRA has several options, including taking a lump-sum distribution, rolling the funds over to their own IRA account, opening an inherited IRA, and disclaiming or rejecting the inherited IRA, in which case the next beneficiary would get it.

Spouse beneficiaries will likely want to consider the possible tax implications of each option and how RMDs will need to be handled if they roll the funds over into their own account or open an inherited IRA. It may be wise for them to consult a financial professional.

Can a trust be a beneficiary of an IRA?

Yes, a trust can be a beneficiary of an IRA. In this case, the trust inherits the IRA and the IRA is maintained as an asset of the trust and managed by a trustee. A trustee is required to follow the wishes of the deceased, which might be an option for an account holder with young children or dependents with special needs.

However, there are disadvantages to having a trust as the beneficiary of an IRA. For example, if the original account holder had not begun taking RMDs before their death or the account is a Roth IRA, trust beneficiaries must typically fully distribute all assets within five years of the account owner’s death.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

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