When someone you care about passes away and you inherit their IRA, the rules for taking money out aren’t as straightforward as you might expect. Recent changes to federal retirement account rules have added complexity, especially for non-spouse beneficiaries. Understanding these basics can help you navigate timing, tax implications, and distribution requirements with greater confidence.
What Is an Inherited IRA?
An inherited IRA refers to an IRA that you receive as a beneficiary after the original owner’s death. These accounts are governed by specific IRS rules that dictate when and how you must take distributions. How those rules apply depends on factors like your relationship to the original owner and whether the original owner had already begun required minimum distributions (RMDs) at the time of their death.
How the Rules Have Changed
In 2019, Congress passed the SECURE Act, which altered the way most inherited IRAs must be distributed. Before this change, many beneficiaries could use a “stretch IRA” approach, taking distributions over their lifetime. For most non-spouse beneficiaries, this option is now limited.
Subsequent IRS guidance and final regulations clarified how these rules apply, including how the 10-year rule interacts with annual RMD requirements.
Spouses vs. Non-Spouse Beneficiaries
Spouse beneficiaries generally have the most flexibility. Options include:
Assuming the inherited IRA as your own (which can delay distributions until your RMDs are required)
Keeping it as an inherited IRA and taking distributions based on your life expectancy
A combination of the above two
The choice you make can have implications for taxes and distribution timing.
Non-spouse beneficiaries face different rules and usually cannot roll the IRA into their own account. For those inheriting from someone who died in 2020 or later, the SECURE Act’s provisions typically apply.
The 10-Year Rule
For most non-spouse beneficiaries, the 10-year rule now governs inherited IRAs. This rule requires that the entire account balance be withdrawn by December 31 of the 10th year after the original owner’s death. There are no annual distribution requirements during the 10-year period for beneficiaries of owners who died before starting RMDs. If the original owner had already begun RMDs, annual withdrawals are typically required during the first nine years, with full depletion by year 10.
In recent years, the IRS issued final regulations clarifying how these rules apply, particularly for beneficiaries of IRA owners who had already begun taking RMDs. Because earlier guidance was unclear, the IRS provided temporary penalty relief for certain missed inherited IRA RMDs. Going forward, beneficiaries should expect these requirements to be enforced, making it important to confirm whether annual distributions apply in their specific situation.
Exceptions: Eligible Designated Beneficiaries
Some beneficiaries are exempt from the strict 10-year rule and may take distributions over their lifetime. These include:
Surviving spouses
Minor children of the IRA owner (until they reach the age of majority, typically 21)
Individuals who are disabled or chronically ill
Beneficiaries not more than 10 years younger than the deceased IRA owner
These individuals may benefit from more tailored distribution options, sometimes resembling the older “stretch” method.
Tax Considerations
Withdrawals from inherited traditional IRAs are generally taxable as ordinary income in the year you take them. Roth IRAs, on the other hand, allow for tax-free withdrawals if certain conditions are met, though the distribution timing rules still apply. Inherited IRAs don’t carry the same penalty for early distribution that original IRAs do, but taxes on withdrawals still matter and should be part of your planning conversation.
Getting the Most Out of Your Timeline
Even with the 10-year rule, you still have choices about when to take distributions within the allowed window. Spreading withdrawals over several years may help manage your tax bracket, while taking larger withdrawals earlier may make sense in some situations. Because these choices can significantly affect your tax outcome, many beneficiaries benefit from a comprehensive review of timing and tax strategy.
Common Pitfalls
Assuming you can wait until year 10 to take everything without regard to annual requirements (if applicable)
Forgetting to check whether the original owner had started RMDs, which affects distribution timing
Overlooking the distinction between traditional and Roth IRA tax treatment
These details have implications for your financial picture, including federal income tax and potential interactions with Medicare premiums or other financial planning elements.
Conclusion
Inherited IRAs are subject to specific distribution rules that changed significantly with recent federal legislation and IRS guidance. For spouses, flexibility remains. For most non-spouse beneficiaries, the 10-year rule and potential annual RMDs guide how you must access the funds. Knowing these basics and where your situation fits is a valuable first step in making informed choices about an inherited IRA.
If you’ve recently inherited an IRA or are planning ahead as a potential beneficiary, consider reviewing your situation with a financial professional who understands how these rules interact with your broader financial picture. At Hassell Wealth Management, we help clients make decisions about inherited IRAs as part of their ongoing financial planning.
Schedule a complimentary 30-minute discovery call with one of our Wealth Advisors.