Once upon a time, inheriting an IRA was relatively simple. You had to pay attention to and make required minimum distributions (RMDs) for inherited traditional IRAs, just as you would with a traditional IRA you opened yourself, but you could stretch those RMDs over your own life expectancy or that of your deceased loved one, whichever was longer.
Since the SECURE Act went into effect on January 1, 2020, however, the world of inherited IRAs has become confusing at best, especially for non-spousal beneficiaries.
Let’s review who counts as an eligible beneficiary, and how different kinds of beneficiaries can handle their inheritance.
Who counts as eligible for an inherited IRA?
The SECURE Act created two classes of eligible inherited IRA beneficiaries, and outlines multiple ways these beneficiaries can handle the inherited assets.
The first and most common class of eligible inherited beneficiaries is a spouse.
Other eligible beneficiaries are restricted to the following categories:
- Minor children of the deceased account holder, until they reach the age of majority in their state
- Beneficiaries who suffer from a chronic illness
- Beneficiaries who are disabled
- Beneficiaries who were no more than 10 years younger than the deceased account holder at the time of their death
- Some see-through trusts that benefit those beneficiaries listed above
While others who don’t fit these categories can inherit IRAs, they have fewer options for how they manage those funds.
Spousal beneficiary options
If you inherit an IRA from your spouse, you have a wide range of choices for how you handle it.
Treat it as your own
Spousal beneficiaries can treat the inherited IRA as identical to their own, if the surviving spouse is the sole primary beneficiary of the IRA. This option allows you to name your own beneficiaries, and allows the money in the IRA to continue to grow tax-deferred until the you are required to take RMDs. You can also take distributions once you are 59 ½ or older without incurring a penalty.
There’s one exception: If the IRA was inherited after the original account owner had reached the age when they were required to take RMDs, then the RMD for the year of their death must be taken, whether by the original account holder or you, the inheritor.
Open an inherited IRA in your own name
As a surviving spouse, you can open an inherited IRA in your own name. You can delay taking RMDs from this account until the year the original account holder would have reached age 73, or December 31 of the year of the account holder’s death—whichever is later.
If there are multiple beneficiaries, then each must establish their own account. Otherwise, all the RMDs for all beneficiaries will be based on the age of the oldest beneficiary.
10-year method
If you inherit an IRA before the account owner’s required beginning date for RMDs, you can draw down the balance of the account over 10 years. Starting in 2025, there will be a requirement to take some sort of RMD each year.
Take a lump sum distribution
You, the surviving spouse, can take a lump sum distribution from the IRA, drawing it down completely. You will be subject to any taxes that are applicable, but there will be no early withdrawal penalties.
Surviving spouse rule from SECURE 2.0
Under the SECURE 2.0 regulations, surviving spouses can be treated as if they were the deceased spouse for the purpose of taking RMDs. That means that you can delay taking RMDs from your deceased spouse’s account until your spouse would have been required to, as long as the money is not merged with your own IRA.
This primarily benefits people who are older than their deceased spouse. It also allows the surviving spouse to use the more favorable Uniform Lifetime Table to calculate the RMD instead of the Single Life Table, which is normally used to calculate RMDs for a deceased spouse.
Options for non-spousal beneficiaries
Non-spousal eligible beneficiaries have several options for how they handle an inherited IRA.
Life expectancy method
You as a beneficiary can transfer the assets into an inherited IRA in your own name.
If the account holder died before they were required to start taking RMDs, then you must commence taking RMDs from the account by December 31 of the following year.
If the assets are inherited after the account holder was required to take RMDs, then an RMD must be taken in the year of their death, unless the account holder had already taken that year’s RMD.
A few additional caveats: If there are multiple beneficiaries, each one must establish their own account. Beneficiaries may name their own account beneficiaries, and RMDs are mandatory and will be taxed.
10-year method
All assets in the inherited IRA must be distributed by December 31 of the tenth year after the account holder’s death. There is no 10% early withdrawal penalty. Rules on RMDs for these inherited IRAs are evolving, so be sure to check with your financial advisor for any RMD requirements beginning in 2025.
Lumps sum distribution
All assets in the IRA are distributed to you and other beneficiaries. There are no penalties on the distribution, but taxes may be due.
Non-eligible designated beneficiaries
People who don’t fit one of the eligible designated beneficiaries categories can still inherit IRAs. They just have fewer options for how they can handle those funds.
Non-eligible designated beneficiaries must withdraw the assets in their inherited IRA by the end of the tenth year after the account holder died. There are RMD requirements during the 10-year rule, which will likely generate tax obligations.
Options for non-individual beneficiaries
Not all beneficiaries are individuals. An account holder can designate an estate, a charity or certain types of trusts as beneficiaries of their IRA.
If the IRA account holder was required to take RMDs at the time of their death, then RMDs must be taken based on the single life expectancy of the original account owner.
If the original account owner was not yet required to take RMDs, all funds must be distributed by the end of the fifth year after the original account holder's death, but there are no RMD requirements.
A note about pandemic-era inherited IRAs
Between 2020 and 2024, the IRS waived RMDs for those beneficiaries distributing an inherited IRA over 10 years. That grace period is now over.
The IRS is mandating RMDs for these beneficiary account holders in 2025, and has indicated that the full amount of RMDs that would have been required for years 2020–2024 will need to be included in the RMDs taken by the end of year 10.1
This could result in a substantial increase in required distributions, with an equally substantial tax hit for some inherited IRA account holders. Taking additional distributions in the years prior to year 10 may help to even out the tax hit, and it may be a good idea to consult with your financial or tax advisor if you’re in this situation.
Inherited Roth IRAs
Roth IRAs have different requirements for beneficiaries. Inherited Roth IRAs where the account owner had satisfied the five-year rule for contributions to the account or conversions to the account can be taken tax-free by the account beneficiaries. If contributions or conversions have happened within the previous five years, then earnings pertaining to these contributions or conversion may be taxable.
This means that if one or more of your beneficiaries is not a spouse or an otherwise eligible designated beneficiary, passing on a Roth IRA may be more beneficial to them. In some cases, this might entail converting some or all of your traditional IRA to a Roth.
Conclusion
In many cases, a significant portion of an individual’s wealth might be held in an IRA account. Careful planning on the part of both the account holder before their death and their beneficiaries can go a long way towards maximizing the benefits.
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