Inherited IRA: How It Works & Distribution Rules for Beneficiaries

Withdrawal rules and taxes depend on your relationship and whether the account is a Roth IRA or a traditional IRA.

Dayana Yochim, Andrea CoombesNovember 25, 2020

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Here are the rules on inherited IRAs that can help you make the most of the money you inherit and avoid a tax-time surprise.

What is an inherited IRA?

An inherited IRA, often called a beneficiary IRA, is an account opened for someone who inherits an individual retirement account or retirement plan account when the original owner dies. Any person, estate or trust can inherit an IRA, but spouses have more flexibility on using an inherited IRA.

Inherited IRA rules for spouses

If you're the sole beneficiary of your spouse’s IRA, you can take over the account (also known as a spousal transfer or “assuming” the IRA), and the IRS will treat it as though it has been yours all along.

  • You do this by designating yourself as the owner of the existing account, rolling the assets from the deceased’s account into an existing IRA (either a Roth or traditional account, as long as it has the same tax treatment).

  • You can also set up a new account for this purpose.

Inherited IRA rules for non-spouse beneficiaries

A bit more administrative legwork is required if you’re a non-spouse inheriting an IRA (solely or when it’s left to multiple people) or a spouse who is not the sole beneficiary.

  • The IRS doesn’t allow you to roll the money from an inherited IRA into one of your existing accounts. Instead, you’ll have to transfer your portion of the assets into a new IRA set up and formally named as an inherited IRA; for example, (Name of Deceased Owner) for the benefit of (Your Name).

  • No additional contributions are allowed in the new, inherited IRA account.

» Need to open a new account? See our picks for top IRA account providers

What are the distribution rules for an inherited IRA?

Due to the Secure Act, which was signed into law in December 2019, most (but not all) IRA beneficiaries must deplete an inherited IRA within 10 years of the account owner's death. This applies to inherited IRAs if the owner died after Dec. 31, 2019.

There's no limit on when or how often you withdraw money from the account, as long as the account is empty by the end of the 10 years. That is, you can choose to withdraw all of the money at once, you can leave it sitting there for a decade and then take it all out, or you can withdraw distributions over time. (Just note that with a traditional IRA, each withdrawal will be counted as income and subject to taxes in the year you make the withdrawal.)

There are some exceptions to the 10-year rule:

  • You inherited the IRA from your spouse. You can treat this account like it’s your own. If it’s a Roth IRA, you don’t have to take any withdrawals in your lifetime. If it’s a traditional IRA, required distributions start when you reach age 72. (See more on traditional IRA distribution rules.)

  • You’re a minor child. You must start distributions, but they’ll be figured based on your life expectancy. That rule applies only until you reach the “age of majority,” which in most states is 18. At that point, you have 10 years to withdraw the entire account.

  • You’re chronically ill or disabled. You can stretch the IRA distributions out over your lifetime.

  • You’re not more than 10 years younger than the account owner. Withdrawals can be stretched over your lifetime.

What is the 5-year rule for an inherited IRA?

Roth IRA beneficiaries can withdraw contributions tax-free at any time. Note here that we’re talking about Roth IRA contributions. Earnings from an inherited Roth can also be withdrawn tax-free, as long as the account had been open for at least five years at the time the account holder died.

The so-called five-year rule is critical: If the Roth IRA was less than 5 years old at the original owner’s death, you’ll owe taxes on the earnings you withdraw. (Here are more details on the 5-year rule for Roth IRA withdrawals.)

» Read our tips for what to do if you inherit a Roth IRA

Taxes on withdrawing money an inherited IRA

As tempting as it might be to cash out an inherited IRA (called a lump-sum distribution), tread carefully. Going the “Vegas or bust” option could leave you owing a hefty sum when it’s time to file your taxes. Withdrawals from a traditional IRA generally are taxable as income, at your income tax rate.

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