When a loved one passes away and leaves behind a traditional IRA, it is natural to feel unsure about what comes next. Beneficiaries often have immediate questions: What happens to the account now? When are withdrawals required? Can the funds be moved into another IRA? The rules can be detailed and confusing, especially during an already difficult time.
What Is an Inherited IRA?
An inherited IRA is a traditional IRA that passes to a beneficiary after the original account holder’s death. The account remains intact, but the rules governing withdrawals change. Instead of following the rules that applied to the original owner, the beneficiary must follow IRS rules that determine when and how distributions must be taken.
Spouse vs. Non-Spouse Beneficiaries: Key Differences
Spouse beneficiaries have the most flexibility. Depending on their circumstances, a surviving spouse may choose to:
Treat the account as an inherited IRA.
Under this option, required minimum distributions (RMDs) are determined under applicable IRS rules and may vary based on the spouse’s age and elections made. In some situations, this approach may allow continued tax-deferred growth.
Roll the IRA into their own IRA.
This allows the spouse to treat the account as their own. RMDs can then be delayed until the spouse reaches the required age under federal law, which can be beneficial for long-term retirement planning.
Non-spouse beneficiaries, such as adult children, siblings, relatives, or friends, are subject to different rules:
- An inherited IRA cannot be rolled into the beneficiary’s own IRA.
- The account must remain titled as an inherited IRA.
- Most non-spouse beneficiaries must withdraw the entire account balance within 10 years of the original owner’s death.
- This “10-year rule” applies to most beneficiaries other than surviving spouses, minor children of the deceased, disabled or chronically ill individuals, and certain other limited exceptions.
- Depending on the beneficiary’s classification and current IRS guidance, annual distributions may also be required during the 10-year period, not just a full withdrawal by the end of year ten.
Failing to take required distributions can result in substantial penalties.
Why Understanding These Rules Matters
Missing a required distribution can trigger an IRS penalty of up to 25 percent of the amount that should have been withdrawn, with potential reductions if corrected in a timely manner. Because inherited IRA distributions are generally taxed as ordinary income, the timing and size of withdrawals can also have a significant impact on overall tax liability.
Handled properly, an inherited IRA can be an important financial resource, whether used to support retirement planning, education costs, or other long-term goals.
Final Thoughts
Inheriting an IRA comes with both opportunity and responsibility. Understanding whether you are a spouse or non-spouse beneficiary, and which rules apply to you, is critical to making informed decisions.
If you have inherited an IRA and are uncertain about your next steps, speaking with a financial advisor, tax professional, or the institution that manages the account can help you move forward with clarity and confidence.
If you would like to understand how an inherited IRA fits into your broader estate or financial planning strategy, our team is here to help.