Inherited IRA rules: 7 things all beneficiaries must know
Inheriting an IRA can be complex. The rules differ based on your relationship to the deceased, your age and even their age at death. One misstep can trigger hefty penalties or tax bills you can't undo.
Surviving spouses can treat the IRA as their own or remain as the beneficiary, which opens up more options for delaying distributions and maximizing growth.
Most inheritors (especially non-spouses) must empty the account within 10 years, potentially triggering big tax hits if not planned for properly.
An inherited IRA is an individual retirement account opened when you inherit a tax-advantaged retirement plan (including an IRA or a retirement-sponsored plan such as a 401(k)) following the death of the owner. Any type of IRA may be turned into an inherited IRA, including traditional and Roth IRAs, SEP IRAs and SIMPLE IRAs.
It may be one of the most complex issues to handle well when wrapping up an estate. If you've recently inherited an individual retirement account, you could find yourself at the tricky three-way intersection of estate planning, financial planning and tax planning. One wrong decision can lead to expensive consequences, and good luck trying to persuade the IRS to give you a do-over.
Looking for an advisor?: Find a financial advisor near you or online
When it comes to inheriting an IRA, an heir will typically have to move assets from the original owner's account to a newly opened IRA in the heir's name. For this reason, an inherited IRA may also be called a beneficiary IRA.
Importantly, the income tax treatment of the IRA remains the same from the original account to the inherited IRA. So, accounts made with pre-tax dollars (as in a traditional IRA) or after-tax dollars (as in a Roth IRA) are still treated the same way in an inherited IRA.
Anyone can inherit an IRA, but the rules on how you must treat it differ depending on whether you're the spouse or someone else.
Spouses get the most flexibility when inheriting an IRA. You can treat the account as your own or keep it as an inherited IRA, depending on what best fits your financial and tax situation.
If the original account owner died before taking required minimum distributions (RMDs):
Roll the IRA into your own IRA.
Treated as your own IRA.
RMDs not required until you reach age 73.
Remain a beneficiary of the inherited IRA.
Can delay RMDs until the deceased would have turned 73.
Take a lump-sum distribution.
Fully taxable if a traditional IRA.
If the original account owner died on or after starting RMDs:
You must take the deceased owner's RMD for the year of death if it wasn't already taken.
You can then become the owner.
You then begin RMDs at age 73 and they're calculated using your own life expectancy.
Or you can remain a beneficiary of the inherited IRA.
You must begin taking RMDs in the year after the year of your spouse's death.
Non-spouse have fewer choices and the SECURE Act shook up long-standing practices, creating even more confusion. You can't treat the account as your own, and the 10-year rule usually applies.
If the original account owner died before taking RMDs:
Eligible designated beneficiaries (you're chronically ill or disabled, a minor child, or not more than 10 years younger than the original owner) can choose to stretch RMDs over their life expectancy instead of the deceased's expectancy.
Designated beneficiaries (everyone else) must follow the 10-year rule.
Entire balance must be withdrawn by Dec. 31 of the 10th year after death.
If the original account owner died on or after taking RMDs:
You must take the deceased owner's RMD for the year of death if it wasn't already taken.
After that:
Designated beneficiaries
10-year rule applies
Eligible designated beneficiaries
You must continue taking RMDs.
Distributions are based on your life expectancy or the owner's life expectancy, whichever is longer.
Non-individuals — like estates, charities or some trusts — have the least flexibility. If the beneficiary isn't a 'qualified see-through trust,' IRS rules accelerate distribution.
If the original account owner died before taking RMDs:
Five-year rule applies.
Entire account must be distributed within five years.
If the original account owner died on or after taking RMDs:
Five-year rule applies.
If someone inherits an IRA from their deceased spouse, the survivor has a few choices of what to do with it:
Treat the IRA as if it were your own, naming yourself as the owner. You can also roll it over into another account, such as another IRA or a qualified employer plan, including 403(b) plans.
Treat yourself as the beneficiary of the plan.
If you're a surviving spouse, you can roll over the inherited IRA into your own account, but no one else will receive this privilege.
You have other options for taking the money as well, and each course of action may create additional choices that you must make. In addition, your options depend on whether the deceased spouse was under or at least age 73.
For example, if you, as a surviving spouse, are the sole beneficiary and treat the IRA as your own, you may have to take RMDs, depending on your age, or you may have to fully withdraw the money in 10 years. But in the right circumstances, you may have the option of not withdrawing money.
If you were not interested in taking money out at this time, you could let that money continue to grow in the IRA until you reach the age when you must take RMDs, says Frank St. Onge, an enrolled agent at Total Financial Planning, LLC in the Detroit area.
In addition, spouses 'are able to roll the IRA into an account for themselves. That resets everything. Now they are able to name their own beneficiary that will succeed them and be able to deal with the IRA as if it is their own,' says Carol Tully, CPA and attorney at Wolf & Co. in Boston.
The IRS provides further rules around your options, including what you can do with a Roth IRA, where the rules differ substantially from traditional IRAs.
If you've inherited an IRA, you'll need to take action to avoid running afoul of IRS rules.
Your available options as an inheritor depend on whether you're:
An eligible designated beneficiary: Meaning you're chronically ill or disabled, a minor child or not more than 10 years younger than the original owner.
A designated beneficiary: If you're not a spouse or someone in one of the categories above, you're known as a designated beneficiary.
If you're in the first group, you have two options:
You can transfer assets into an inherited IRA in your name and choose to take RMDs over your life expectancy or that of the deceased account holder's.
You can transfer assets into an inherited IRA in your name and choose to take distributions over 10 years. You must liquidate the account by Dec. 31 of the year that is 10 years after the original owner's death.
Your ability to access these options depends on whether the original owner of the IRA was under or at least age 73.
The first option allows most of your funds to grow for potentially decades while you take minimal amounts out each year.
In the second option, the beneficiary is forced to take all the money over 10 years. For substantial accounts, that can add up to a monstrous income tax bill — unless the IRA is a Roth, in which case, taxes were paid before money went into the account.
If you're in the second group — designated beneficiaries group — you can select only the 10-year rule as outlined above. You'll have up until Dec. 31 of the year that is 10 years after the original account owner's death to fully withdraw the account.
When you're considering how to take withdrawals, you'll need to follow the legal requirements while balancing the tax impact of withdrawals and the advantages of letting the money continue to grow over time.
The IRS website has more information on the topic of RMDs.
Learn more: When to get a financial advisor
Another hurdle for beneficiaries of traditional IRAs is figuring out if the benefactor had taken his or her RMD in the year of death.
If the original account owner hasn't done this, it's the responsibility of the beneficiary to make sure the minimum has been met, says Natalie Choate, a retired estate planning lawyer and author of the book 'Life and Death Planning for Retirement Benefits.'
'Let's say your father dies Jan. 24, leaving you his IRA. He probably hadn't gotten around to taking out his distribution yet. The beneficiary has to take it out if the original owner didn't. If you don't know about that or forget to do it, you're liable for a penalty of 50 percent' of the amount not distributed, Choate says.
Not surprisingly, that can cause a problem if someone dies late in the year. The last day of the calendar year is the deadline for taking that year's RMD.
'If your father dies on Christmas Day and still hasn't taken out the distribution, you may not even find out that you own the account until it's already too late to take out that year's distribution,' she says.
If the deceased was not yet required to take distributions, then there is no year-of-death required distribution.
An inherited IRA may be taxable, depending on the type. If you inherit a Roth IRA, you're free of taxes. But with a traditional IRA, any amount you withdraw is subject to ordinary income taxes.
For estates subject to the estate tax, inheritors of an IRA will get an income-tax deduction for the estate taxes paid on the account. The taxable income earned (but not received by the deceased) is called 'income in respect of a decedent.'
'When you take a distribution from an IRA, it's taxable income,' says Choate. 'But because that person's estate had to pay a federal estate tax, you get an income-tax deduction for the estate taxes that were paid on the IRA. You might have $1 million of income with a $350,000 deduction to offset against that.'
'It's not necessary that you were the person who paid the taxes; just that someone did,' she says.
For 2025, estates worth more than $13.99 million are subject to the estate tax, up from $13.61 million in 2024.
An ambiguous, incomplete or missing designated beneficiary form can sink an estate plan.
Many people assume they filled out the form correctly at one point.
'You ask who their beneficiary is, and they think they know. But the form hasn't been completed, or it's not on record with the custodian. That creates a lot of problems,' says Tully.
If there is no designated beneficiary form and the account goes to the estate and RMDs have not begun, the beneficiary will be forced to withdraw the money from the account over a five-year period.
The simplicity of the form can be misleading. Just a few pieces of information can direct large sums of money.
'One form like that can control millions of dollars, whereas a trust could be 50 pages,' says M.D. Anderson, founder of InheritedIRAHell.com and president of Arizona-based Financial Strategies, which specializes in inherited IRA issues. 'People procrastinate, they don't update forms and cause all kinds of legal entanglement.'
It is possible to list a trust as a primary beneficiary of an IRA. It is also possible that this will go horribly wrong. Done incorrectly, a trust can unwittingly limit the options of beneficiaries.
Tully says that if the provisions of the trust are not carefully drafted, some custodians won't be able to see through the trust to determine the qualified beneficiaries, in which case the IRA's accelerated distribution rules would come into play.
The trust needs to be drafted by a lawyer 'who's experienced with the rules for leaving IRAs to trusts,' says Choate.
Without highly specialized advice, the snarls can be difficult to untangle.
One of the less obvious benefits of the Roth IRA is how it eliminates some tax issues in estate planning. Given the complexity of inherited IRAs, it's valuable when anything simplifies the process.
In general, the Roth IRA allows you to pass assets tax-free to heirs, meaning that later they won't be taxed on the principal. However, the Roth IRA doesn't eliminate all tax issues.
For example, if a spouse inherits a Roth IRA and decides to treat it as their own, any withdrawn earnings from the account will be taxable until the spouse reaches age 59 ½ and the five-year holding period has been met.
Or if you take a lump-sum distribution of the Roth IRA, you'll also enjoy a tax-free withdrawal as long as the five-year holding period on the account was met. If this rule was not met, any withdrawn earnings are taxable.
Of course, there are other ways to treat the Roth IRA that have different implications, and you'll want to explore which one works best for your situation. But the fact that the Roth IRA reduces the tax impact on heirs may make it easier to use that account.
Inherited IRAs are complicated to say the least, and one wrong move can lead to long-lasting financial repercussions. But you have several resources, including some free ones, that can get you going in the right direction so that you can avoid costly mistakes.
Start with the IRS website: It has detailed rules on inherited IRA distributions, RMDs and timelines. It's a solid reference, but don't expect personalized advice.
Talk to your IRA custodian: Your custodian knows the specifics of your plan and can explain your options. But be warned: Some custodians are more versed than others in the complex rules surrounding inherited IRAs. If your custodian messes up, fixing it may require a private letter ruling — which means a $6,000 to $10,000 IRS fee and a six-month wait.
Hire a professional: Look for an estate attorney or financial advisor who specializes in inherited IRAs. Choose a fee-only fiduciary — they're legally required to act in your best interest.
If you're getting conflicting advice or something seems wrong, don't sign anything. It could lead to something irreversible. Get a second opinion from someone with expertise specific to inherited IRAs. It really can be that complicated.
Learn more: Find a financial advisor near you or online
An inherited IRA can be a windfall, especially if you're able to take advantage of decades of tax-advantaged compound growth. But as you're navigating the process, you'll need to avoid the pitfalls, which unfortunately seem all too easy to fall into. While relatively easy questions can likely be answered online, it could be well worth the cost to hire an advisor to help you avoid tax penalties and make sure it's the best option for you.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Yahoo
24 minutes ago
- Yahoo
Kroger closing around 60 stores: Report
(NewsNation) — Kroger is planning to close around 60 of its stores within the next 18 months, per NewsNation local affiliate WDTN. According to the company's first-quarter report, it is expecting a 'modest financial benefit' as it plans to close those stores. The report said, 'In the first quarter, Kroger recognized an impairment charge of $100 million related to the planned closing of approximately 60 stores over the next 18 months. As a result of these store closures, Kroger expects a modest financial benefit.' Kraft Heinz removing all artificial dyes from its US products The company claimed that the savings it receives from the closures will benefit the customer experience. 'Kroger is committed to reinvesting these savings back into the customer experience, and, as a result, this will not impact full-year guidance,' company officials said. Employees affected by these closures will reportedly have the opportunity to be placed in a different position at a different Kroger location. Kroger didn't announce which of its 2,731 stores would be closed. During a call with Wall Street analysts, interim CEO Ron Sargent reportedly said that the stores being closed were spread across the country. He also said that Kroger is still pushing for more than 30 'major storing projects,' which would include several new Marketplace Krogers that would be larger. The 10 most liveable cities in the world in 2025 According to the Cincinnati Enquirer, the company also stated that it still plans to spend anywhere from $3.6 billion to $3.8 billion in 2025 on capital expenditures. This money would be used to build new Kroger stores and expand and renovate existing ones. The first-quarter fiscal results showed that the company's profit decreased by 8.6%, but total sales declined by only 1%. This news comes a few months after Kroger had two rounds of layoffs, according to the Cincinnati Enquirer. Kroger is also still looking for a new CEO after the last CEO, Rodney McMullen, reportedly resigned abruptly. McMullen quit the company March 3 after an internal ethics investigation. Sargent, the former CEO of Staples and a current Kroger board member, is temporarily working as the CEO. Baby boomers: 1 in 3 say they'll never sell their home, according to survey Sargent said during the Friday conference call that Kroger has hired a search firm to help them find a new CEO. Kroger is based in Cincinnati, Ohio, and has over 400,000 employees across the nation. Copyright 2025 Nexstar Media, Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
Yahoo
29 minutes ago
- Yahoo
It Seems That Many Young Adults Don't Know That Credit Cards Aren't 'Free Money.' Isn't Knowing To Pay It Off Monthly Just Common Sense?
A Reddit post from r/NoStupidQuestions revealed something eye-opening: many young adults don't realize they have to pay off their credit card balances in full each month to avoid interest. The original poster asked, 'Why do so many people not know that credit cards aren't free money?' and the comments quickly filled with stories, confessions, and hard-earned lessons. Don't Miss: Maker of the $60,000 foldable home has 3 factory buildings, 600+ houses built, and big plans to solve housing — Peter Thiel turned $1,700 into $5 billion—now accredited investors are eyeing this software company with similar breakout potential. Learn how you can Hundreds of commenters shared that they had never been taught how credit cards work, and that financial literacy wasn't part of their education at home or in school. As one person said, 'My mom worked all the time and I was a latchkey kid. She never had time to teach me anything. I know to pay it in full now but I was never taught how to handle money. If I knew then even half of what I know now I would be in a much better place.' Another said they thought credit cards worked like a car loan: pay the minimum each month and eventually it's paid off. They don't understand that interest piles on unless you pay in full. Some admitted they once believed credit cards were basically free money. One wrote, 'No one taught me or prepared me for it. I was racking up a bill and paying off the minimum amount and had no idea what interest was and was stuck in it for a long time.' Trending: Maximize saving for your retirement and cut down on taxes: . Many pointed out that young adults are often offered credit cards the moment they turn 18, without understanding the consequences. 'When I was in college, banks would set up a desk in the student center, usually staffed by attractive young women, and sign students up for credit cards,' one commenter shared. 'They had a low minimum payment for as long as you were in school. Imagine handing a 19-year-old a piece of plastic and saying 'Spend as much as you want and only pay $15/month.'' Others shared that financial lessons, if taught, came too early. 'At my school it was taught in 9th grade... four years before any of us even turned 18,' one person wrote. Plenty of financially savvy users said they use credit cards for cashback or points but stressed the importance of paying off the full balance every month. 'I get about $1,000 a year between my Amex and Amazon Prime cards,' one said. 'But you MUST pay off your balance each month to make it work.' Another added, 'Think of it as basically a debit card that doesn't deduct money immediately, but you instead pay for it in one big chunk each month.'Impulse spending came up frequently, not just as a result of poor education but also as a separate challenge. 'If I see something I want in a store and I know I can just whip out a card and take it home there and then, it's hard to resist,' one Redditor confessed. Others pointed out that sometimes it's not about irresponsibility, but necessity. 'You're in a big city and being good with your money but your partner loses her job and for a couple of months money gets ridiculously tight,' one person wrote. While some commenters mocked the idea of anyone thinking credit cards were free money, most responses were empathetic: 'Things that are obvious and common sense to an adult often aren't actually innate behaviors, they're learned.' For many, it wasn't a lack of intelligence, but a combination of being young, under financial stress, and never having someone explain how compound interest and minimum payments really work. Read Next:Inspired by Uber and Airbnb – Deloitte's fastest-growing software company is transforming 7 billion smartphones into income-generating assets – Up Next: Transform your trading with Benzinga Edge's one-of-a-kind market trade ideas and tools. Click now to access unique insights that can set you ahead in today's competitive market. Get the latest stock analysis from Benzinga? APPLE (AAPL): Free Stock Analysis Report TESLA (TSLA): Free Stock Analysis Report This article It Seems That Many Young Adults Don't Know That Credit Cards Aren't 'Free Money.' Isn't Knowing To Pay It Off Monthly Just Common Sense? originally appeared on © 2025 Benzinga does not provide investment advice. All rights reserved. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
29 minutes ago
- Yahoo
Caris Life Sciences indicated to open at $30, IPO priced at $21 per share
Caris Life Sciences (CAI) priced 23.53M shares at $21.00. The deal priced above the $19.00-$20.00 range. BofA, JPMorgan and Goldman Sachs acted as joint book running managers for the offering. Caris describes itself as a 'patient-centric, next-generation AI TechBio company and precision medicine pioneer that is actively developing and commercializing innovative solutions to transform healthcare.' Caris has created the large-scale, multimodal clinico-genomic database and computing capability needed to 'analyze and further unravel the molecular complexity of disease' through comprehensive molecular profiling and the application of advanced AI and machine learning algorithms at scale, the company states. Easily unpack a company's performance with TipRanks' new KPI Data for smart investment decisions Receive undervalued, market resilient stocks right to your inbox with TipRanks' Smart Value Newsletter Published first on TheFly – the ultimate source for real-time, market-moving breaking financial news. Try Now>> See Insiders' Hot Stocks on TipRanks >> Disclaimer & DisclosureReport an Issue Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
