Every year, millions of Americans receive an inheritance—from their parents, a spouse or other loved ones. An inheritance can include many different assets, from investment accounts to real estate to individual retirement accounts (IRAs).
If you’ve inherited an IRA, there are some rules that you’ll have to follow to avoid added taxes or penalties.
Below, we define inherited IRAs, take a look at the different ways you might choose to receive your inheritance and review factors that may influence your options.
What is an inherited IRA?
An inherited IRA is simply an account opened by a person who has inherited an IRA (or other type of retirement account) after the original account holder has died. They are also called beneficiary IRAs.
If you inherit an IRA, it’s important to note that you will not be able to contribute to an inherited IRA account (though you may be eligible to make contributions to your own IRA). But the money held in an inherited IRA can continue to grow and enjoy tax benefits for a period of time.
Rules for IRA inheritance
Your options for an IRA that you have inherited will depend on a number of factors, including these:
- When the IRA owner died (in 2019 or earlier or in 2020 or later)
- Whether or not you were a spouse of the deceased IRA owner
- Whether the deceased died before or after the required beginning date to take required minimum distributions from the IRA
- Whether the account is a traditional or Roth IRA
1. When the IRA owner died
Prior to 2020, if you were a non-spouse inheriting an IRA, you could stretch distributions from that account over the course of your life—just like a spouse. The 2019 SECURE Act removed this option for most non-spouse beneficiaries if the original IRA owner died in 2020 or later. Now, in most cases, you are required to fully distribute the IRA within 10 years of the original owner’s death.
2. Whether or not you were the spouse of the deceased IRA owner
If you are inheriting the IRA from your spouse, you have more options than in many other cases. You can:
- Do a spousal rollover, in which the resulting IRA is treated as your IRA rather than an inherited IRA, meaning you may be able to make additional contributions to this IRA.
- Open an Inherited IRA.
- Receive a lump-sum distribution.
One requirement you’ll need to be aware of if you are inheriting an IRA is the account’s rules around required minimum distributions, or RMDs. RMDs provide parameters around the amount of money that must be distributed from an IRA once a person reaches a certain age (the government would like to eventually collect taxes on this money).
As a spouse, you can choose to have RMDs calculated based on your life expectancy, or you can elect to deplete the account by the end of the tenth year following the original account owner’s death. These options are also available to certain eligible non-spouse beneficiaries such as individuals who are chronically ill or disabled.
If you are a non-spouse beneficiary, on the other hand, you’ll have more limited options. You can either receive a lump-sum distribution (and pay taxes all at once) or open an inherited IRA—but you cannot roll the inherited IRA into your own IRA. You’ll also typically be required to deplete the account by the end of the tenth year following the original account holder’s death. This can allow you to spread the amount you’ll owe in taxes over a longer period of time, which may reduce the amount you’ll owe in tax overall.
3. Whether the IRA owner died before or after the required beginning date
This past January, lawmakers passed the SECURE Act 2.0, which raised the Required Beginning Date (RBD) on retirement accounts. The RBD defines the time at which an account owner must begin to take RMDs. In 2023, the RBD is now 72 or 73 depending on what year you were born. This age will eventually increase to 75.
If you are a non-spouse beneficiary and the IRA owner died before this RBD, you will not have to take yearly distributions (although you still could). But you must still deplete the account by the tenth year. If the deceased owner died after the RBD and you are a non-spouse beneficiary, you must take yearly distributions over the next 10 years, fully depleting the inherited IRA in 10 years.
4. Whether you have inherited a traditional or Roth IRA
When it comes to taking distributions from inherited traditional IRAs and Roth IRAs, the rules can vary. Roth IRAs do not have RMDs during the owner’s life; therefore, the Roth IRA owner cannot die before the RBD. As a result, there is no requirement for annual distributions during the 10-year period beginning with the inherited Roth IRA owner’s death. The entire account must still be distributed within 10 years of the Roth IRA owner’s death. You generally won’t have to pay taxes on money that’s distributed from an inherited Roth IRA. Given that, it may make sense to leave funds in an inherited Roth IRA as long as possible to continue to receive tax-free growth.
Understanding your options when you inherit an IRA
Determining what you have to do, what you can do and what you should do with an IRA that you have inherited from a loved one is confusing. Your decision also has the potential to impact your tax situation, making it even more important to understand all of your options.
The good news is that you don't have to make decisions on your own. A financial advisor and a tax professional can help you determine which option is best for your situation. A financial advisor can also help you understand how your inheritance fits into your overall financial plan.
This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.