Inheriting an IRA can feel like a gift and a burden at the same time. On one hand, it may provide financial support for your future. On the other, it comes with rules that can be complex—and mistakes can lead to costly tax consequences. If you’ve recently inherited a traditional IRA, it’s important to understand how distributions work so you can make smart, tax-efficient decisions.
Step One: Determine Who You Are as a Beneficiary
The rules differ based on your relationship to the original account owner. Generally, beneficiaries fall into two main categories:
Spouse Beneficiaries
Non-Spouse Beneficiaries (children, other relatives, or non-family members)
Your status determines the flexibility you have when withdrawing funds.
If You’re a Spouse Beneficiary
Spouses have the most options and may:
Treat the account as your own.
- You can roll the inherited IRA into your own traditional IRA. Distributions then follow the rules for your retirement.
Remain a beneficiary.
- You can keep the account as an “inherited IRA” and start taking distributions based on your own life expectancy.
Choosing between these options often depends on your age and whether you need the funds soon.
If You’re a Non-Spouse Beneficiary
The rules here have changed significantly due to the SECURE Act of 2019:
The 10-Year Rule
Most non-spouse beneficiaries must withdraw the entire account within 10 years of the original owner’s death. You don’t have to take money every year, but the account must be fully emptied by year 10.Eligible Designated Beneficiaries (certain exceptions):
Some beneficiaries—such as minor children (until they reach majority), disabled individuals, chronically ill individuals, or beneficiaries less than 10 years younger than the deceased—may still take required minimum distributions (RMDs) over their life expectancy rather than following the 10-year rule.
Taxes on Distributions
Since this is a traditional IRA, distributions are taxed as ordinary income. Unlike a Roth IRA, there’s no tax-free withdrawal option (unless part of the account was funded with nondeductible contributions). It’s wise to plan distributions with your overall tax picture in mind—sometimes spreading withdrawals across several years can minimize your tax bracket exposure.
Key Deadlines to Watch
First distribution timing:
- If the original account owner hadn’t yet reached their required beginning date (age 73 under current law), then you generally follow the 10-year rule. If they had, you may also have annual RMD requirements within that 10-year window.
Year 10 deadline:
- The account must be fully emptied by December 31 of the 10th year after the owner’s death (unless you’re an eligible beneficiary with a life-expectancy payout option).
- The account must be fully emptied by December 31 of the 10th year after the owner’s death (unless you’re an eligible beneficiary with a life-expectancy payout option).
The Bottom Line
Inheriting a traditional IRA isn’t as simple as leaving the money untouched. The IRS has clear rules about how and when funds must be withdrawn. Whether you’re a spouse or a non-spouse, the choices you make can significantly impact your tax bill and financial future.
Steffens Financial Corp. does not provide legal or tax advice. Please consult a legal or tax professional regarding your individual situation.
Ready to Schedule a Meeting?
Click here or the photo below to schedule an in-person, virtual, or phone call meeting.
We look forward to working with you!
