So, You Have Inherited a Traditional IRA — Now What?
The time of inheriting a traditional IRA may be occupied by a range of mixed emotions, from grief for a lost loved one to the joy of receiving a windfall of money that you may not have expected. When you inherit an IRA, then you are a “beneficiary” for purposes of federal tax rules. A beneficiary can be a person or an entity, such as a trust, and that beneficiary must choose how to receive the benefits of the IRA after the original owner passes away. Beneficiaries of a traditional IRA must include any taxable distributions they receive in their gross income. Therefore, consulting with a tax advisor can help you understand your options for choosing the distribution method that best suits your financial situation and minimizes your tax liability.
The IRA distribution rules dictate when you must withdraw the assets and over what period of time. The SECURE 2.0 Act, passed by Congress in December 2022, shortened the time period that beneficiaries can stretch out the distributions of an inherited IRA. It also postponed the date that distributions have to begin for certain types of beneficiaries.
The Required Beginning Date (RBD) is the date the decedent owner would have been required to take minimum distributions from their IRA based on their age. A beneficiary’s required date for taking an initial distribution from an inherited IRA depends on the beneficiary’s status. Additionally, a beneficiary’s status and whether the decedent’s death was before or after their RBD determine the beneficiary’s maximum allowable distribution period. Taking the maximum allowable number of years can significantly reduce the impact on the recipient’s tax liability and allow the value of the IRA to grow tax-deferred by staying invested.
Distribution Options for Spousal Beneficiaries
There are a distribution options if you inherit an IRA from your spouse. One option involves taking ownership of the IRA. As a spousal beneficiary, you can treat the inherited IRA as your own IRA and roll it into your existing IRA, or you can create an IRA account in your name with the inherited funds. Once a spousal beneficiary takes ownership, the rules that apply to any other IRA owned by the inheriting spouse apply to the inherited account for the calendar year of change and in all subsequent years. The required minimum distribution (RMD) for the inherited account begins when the spousal beneficiary reaches their RBD, and it is based on their life expectancy.
Alternatively, the spousal beneficiary can simply take distributions directly from the inherited IRA without taking ownership of it. Then the rules for non-spousal beneficiaries (addressed in the next section) would apply to the inherited IRA.
Notably, the tax rules also allow those under the age of 59½ to be exempt from the usual 10% early withdrawal penalty. This can be particularly advantageous for younger spouses who may need to access these funds sooner.
Distribution Options for Non-spousal Beneficiaries
If an individual inherits an IRA from someone other than the spouse, there are varying withdrawal rules depending upon their type of beneficiary. The IRS has established two main categories of beneficiaries: eligible designated beneficiaries (EDB) and designated beneficiaries (DB).
A non-spousal EDB is:
- A spousal beneficiary
- A disabled or chronically ill individual
- A minor child of the IRA owner
- Any individual no more than 10 years younger than the IRA owner
An EDB is not subject to the 10-year maximum distribution period. However, once a minor child reaches the age of majority, then the IRA account must be distributed within 10 years. An EDB can take distributions over the longer of their own life expectancy or the original IRA account owner’s life expectancy.
A DB is an individual who does not fall under the category of an EDB. If the original account holder died after 2019, the 10-year rule applies to a DB. Under this rule, the entire benefit must be distributed on or before December 31 of the year in which the 10th anniversary of the owner’s death occurs.
EXAMPLE 1: Surviving Spouse
Susan (age 58) lost her husband (age 67) to cancer on January 24, 2024. She has been designated as the sole beneficiary. Since her husband was not taking an RMD when he passed, she can choose from different options to best suit her needs.
Option 1: Susan can take ownership of the account by either electing to be the owner of her deceased husband’s account or by rolling a distribution from his IRA to her own IRA account within 60 days of his death. Once she establishes ownership over the account, the general IRA rules apply to her starting with the first calendar year of her ownership. If Susan does not need any of the funds, she does not have to take a distribution until she reaches her own RBD, and she can enjoy continued tax-deferred growth of the IRA value.
If Susan’s husband was taking an RMD before his death, and if she takes ownership of the account within the same calendar year of his passing, the RMD would be based on her deceased husband’s life expectancy for 2024, the year of death. Thereafter, her RMD would be based on her life expectancy, if she was also past her RMD age. In this case, the entire account would have to be distributed by the 10th year post death. Since Susan is the surviving spouse and is less than 10 years younger than her husband, she is considered an EDB and the 10-year rule does not apply to her. She may distribute the IRA over her life expectancy.
Option 2: Susan can choose to be treated as a non-spousal beneficiary and keep the account as an inherited account. Even though she is not yet 59½, she can take distributions from the IRA without incurring the 10% early withdrawal penalty. Unfortunately, she cannot make contributions to the IRA, but she can make trustee-to-trustee transfers. Since she is an EDB, she can take distributions over her life expectancy and the 10-year rule does not apply to her.
EXAMPLE 2: Child
Mike (age 48) passed away on February 15, 2024, leaving his sons Jack (age 16) and Luke (age 27) as the beneficiaries of his IRA. Because Jack is a minor child at the time of Mike’s death, Jack is considered an EDB. Accordingly, he can take distributions without incurring a 10% early withdrawal penalty, and he is not subject to the 10-year rule until he meets the age of majority. Once Jack meets the age of majority, he must empty his portion of the account within 10 years. Since Luke is over the age of 26 and more than 10 years apart from Mike, he is considered a DB. Unlike Jack, Luke is subject to the 10-year rule and must empty the entire account by the 10th year following Mike’s death. Since Mike died before taking an RMD, Luke has one year until he must take the first distribution. If Mike had died on or after his RBD, then Luke would have until the end of the calendar year to take the first distribution.
The chart below summarizes the RMD rules for each beneficiary type with respect to an inherited traditional IRA.
Inherited Traditional IRA RMD Rules (Post-SECURE 2.0 Act)
| Beneficiary | Death Before RBD | Death On or After RBD |
| Spouse Is Sole Beneficiary | – May treat as own IRA
– Or use 10-year rule – Or take life expectancy RMDs beginning in year after death |
– May treat as own IRA
– Or continue decedent’s RMD schedule using spouse’s life expectancy (recalculated annually) |
| Non-Spouse Individual | – 10-year rule applies
– No annual RMDs required unless IRS issues contrary guidance |
– 10-year rule applies
– Annual RMDs required during years 1-9, based on beneficiary’s life expectancy |
| Qualified Trust | – 10-year rule applies if trust qualifies as see-through | – 10-year rule applies with annual RMDs during years 1-9 if trust qualifies as see-through |
| No Designated Beneficiary | – Five-year rule applies (distribute by 12/31 of fifth year) | – RMDs over decedent’s remaining life expectancy using IRS Single Life Table |
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