Inherited IRA

What Is an Inherited IRA?

An inherited IRA is a separate IRA account that is opened when someone inherits an IRA upon the death of a spouse, family member, or non-family member. Also called beneficiary IRAs, the rules for inherited IRAs depend on the type of beneficiary you are (spouse, child, etc.) and the year you inherit the original IRA. Prior to January 1, 2020, all beneficiaries could stretch annual distributions from inherited IRAs throughout their own lifetimes. But the passage of the SECURE Act eliminated that lifetime stretch ability for non-spouse beneficiaries who inherit an IRA on January 1, 2020, and after.

You Can Self-Direct an Inherited IRA

Self-directed IRAs allow you to invest your inherited funds into real estate, private equity, gold, crypto, and much more.

Rules for Spouses

Inherited IRA rules for spouses did not change with the passage of the SECURE Act.

  • Spouses can take a lump sum distribution of the entire account.
    • You will have to pay taxes on the distribution, but the early-withdrawal penalty is waived.
  • You can treat the IRA as your own and:
    • Transfer the cash/assets into your existing IRA or a new IRA in your name.
    • Leave funds in the plan for as long as IRS rules allow.
    • Withdraw funds anytime, but if you are not 59 ½ years or older, you’ll pay a 10 percent early-withdrawal penalty.
    • If the original IRA owner was taking RMDs but had not taken one the year they died, you must take the RMD for that year. This distribution is penalty free.
  • As a spouse, you can open an inherited IRA in your own name, and you must:
    • Start taking distributions that are based on your life expectancy no later than December 31 of the year following the original plan owner’s death.
    • Take an RMD in the year of the original plan owner’s death if one was not already taken (if the plan owner was of retirement age and eligible for RMDs).
  • If you inherit a Roth IRA, please note:
    • For Roth IRAs, you must wait until the original account is five years old to take tax-free distributions. However, you can withdraw contributions at any time.

Rules for Eligible Beneficiaries

The rules for eligible beneficiaries are the same regardless of when the IRA was inherited except when minor children are the beneficiaries.

  • Open inherited IRA plan and transfer funds from the deceased’s account.
  • You cannot make contributions to this plan.
  • You must take annual RMDs, which are stretched over your life expectancy. You will not incur an early-withdrawal penalty for lifetime stretch distributions.

See the following considerations for Roth IRAs:

  • You can take tax-free distributions of initial contributions to the account at any time.
  • If the account has been established for 5 or more years, distributions of Roth IRA earnings are tax-free.
  • If distributions of earnings are taken within the first 5 years after the original account was opened, these distributions will be subject to income tax.

Eligible Beneficiary Definitions

  • Minor children who inherited the IRA in 2020 and later must take RMDs from the inherited plan until they turn 18 or 21 (depending on state laws), at which time their 10-year clock starts to deplete all inherited funds from the account. If they inherited the account prior to 2020, they can stretch their IRA distributions throughout their lifetime.
  • Besides spouses and minor children, eligible beneficiaries are:
    • Beneficiaries who are disabled and/or chronically ill at the time of the plan owner’s death, as defined by IRC 72(m)(7), can take advantage of the lifetime stretch rule.
    • Beneficiaries who are not more than 10 years younger than the deceased (such as a sibling or a life partner) can stretch distributions over their lifetimes.

Rules for Non-Spouse Beneficiaries

Non-spousal beneficiaries include children, grandchildren, etc., who are not considered eligible beneficiaries as defined by the IRS.

Please see the eligible beneficiary section if you are not a spouse but are a beneficiary who is disabled, chronically ill, or a minor child. The information below is for all other non-spouse beneficiaries.

2020 or later icon
2020 and Later
Before 2020 icon
Before 2020

For IRAs Inherited in 2020 and Later

You have two options:

  • Take a lump sum distribution, or
  • Open a new inherited IRA, move the funds into that plan, and comply as follows:
    • You have 10 years to deplete the inherited IRA. This 10-year clock starts the year after the original plan owner’s death.
    • You can’t contribute to this plan, but income grows until the funds are depleted.
    • You are not required to take annual RMDs. You can withdraw some funds one year and none the next. But the account must be empty and closed by the end of the 10th year of the original account owner's death.
    • If the original IRA owner was taking RMDs, you must take an RMD in the first year if they did not take one before their death.

Inherited Roth IRAs have special consideration:

  • If you take a lump-sum distribution before the original account is 5 years old, you will pay tax on the earnings.
  • If you establish a new inherited IRA, the original account must reach at least 5 years of age before you can take tax-free distributions on the earnings from the new account.
  • Distributions of initial contributions to the account can be taken tax-free at any time.

For IRAs Inherited Before 2020

  • You cannot make contributions to this plan, but returns on the investments in the plan grow until the account is depleted.
  • Beneficiaries must take annual RMDs that are stretched over your life expectancy. There is no early-withdrawal penalty for lifetime, stretch distributions.
  • You must also take the original account owner’s RMD in the year of their death if they were required to but had already not taken one.

Special consideration with Roth IRAs:

  • Tax-free distributions of initial contributions to the account can be taken at any time.
  • Distributions of Roth IRA earnings are tax-free and penalty-free only if the account has been established for 5 or more years.

Note: These rules apply to all non-spouse beneficiaries and minor children.

Please note: The rules for trusts and estates differ from the rules for individual beneficiaries. Please consult your tax and/or estate planning professional for help navigating an inherited IRA for a trust or estate.