Inherited IRA

An Inherited IRA is the account that results when you become the beneficiary of someone else's IRA — or, in some cases, an inherited workplace-plan balance rolled into an IRA — after that person dies. You don't open or fund it yourself; it's retitled in your name as beneficiary, and the money keeps its tax character, Traditional or Roth, from the original account. How quickly you must withdraw the money depends on who you are relative to the deceased and, for non-spouse beneficiaries, whether the original owner had already reached their required beginning date for required minimum distributions.

The SECURE Act (2019) ended the old "stretch IRA" strategy for most non-spouse beneficiaries, replacing it with a 10-year rule: the account must be fully emptied by December 31 of the tenth year after the original owner's death. Final IRS regulations, issued in 2024, added an important wrinkle — if the original owner died on or after their required beginning date, most 10-year-rule beneficiaries must also take annual required minimum distributions in years one through nine, on top of emptying the account by year ten. If the owner died before their required beginning date, the beneficiary can withdraw however they like within the 10 years, including waiting until year ten to take everything at once. This annual- RMD wrinkle only comes up with an inherited Traditional IRA: Roth IRA owners are treated as never reaching a required beginning date during their own lifetime, since Roth IRAs carry no lifetime RMDs, so a 10-year-rule beneficiary of an inherited Roth IRA is never required to take annual withdrawals in years one through nine, no matter how old the original owner was.

A smaller group — called eligible designated beneficiaries — is exempt from the 10-year rule and can instead stretch withdrawals over their own life expectancy, similar to the older rules. This group includes a surviving spouse, a minor child of the original owner (until they reach majority, at which point the 10-year clock starts), someone disabled or chronically ill, and any beneficiary who isn't more than 10 years younger than the original owner. A surviving spouse has the most flexibility of all: they can treat the IRA as their own, renaming it and following their own age-based RMD schedule, or remain a beneficiary and use the eligible-designated-beneficiary rules instead.

A hypothetical example: Tom, age 45, inherits his uncle's $200,000 Traditional IRA. His uncle was 80 and had already been taking required minimum distributions, so Tom — as a non-spouse beneficiary who isn't an eligible designated beneficiary — must take annual RMDs in years one through nine, calculated using his own life expectancy, and withdraw whatever remains by December 31 of year ten. Each withdrawal is taxed as ordinary income in the year he takes it; there's no way to convert an inherited Traditional IRA to Roth. If Tom's uncle had died before his required beginning date instead, Tom could skip withdrawals in years one through nine entirely and simply empty the account by the end of year ten, giving him more control over which tax years absorb the income.

Pros

• Lets you receive tax-advantaged retirement savings from a family member without immediately owing tax on the full balance.
• Eligible designated beneficiaries can stretch withdrawals over decades, spreading out the tax impact.
• An inherited Roth IRA still comes out tax-free, even though it's now subject to the 10-year (or life-expectancy) withdrawal rules.

Cons

• Missing a required annual withdrawal can trigger an IRS excise tax on the amount that should have been taken.
• The 10-year rule can push a beneficiary into higher tax brackets in the years they withdraw, especially if they wait and take a large lump sum near the deadline.
• The rules differ meaningfully depending on who died, when they died, and who inherited — it's easy to get wrong without checking your specific situation.