An inherited IRA allows a beneficiary to continue tax-deferred growth on retirement assets passed from a deceased person. You can take distributions, roll the account into your own IRA (if eligible), or leave it intact under IRS rules. The options depend on your relationship to the original owner and the type of IRA.
When someone dies, their IRA doesn't disappear-it transfers to a designated beneficiary. The IRS treats this as a new account with specific rules. If you're named as a beneficiary, you gain access to the funds, but you must follow distribution timelines set by law.
For example, if your parent died and left a traditional IRA worth $300,000, you can choose to withdraw funds gradually over time or take a lump sum. The choice affects your taxes and compliance with IRS regulations.
The IRS requires that distributions begin within one year of the original owner's death unless the beneficiary is a spouse. Spouses have additional flexibility, including rolling the inherited IRA into their own account.
Not all beneficiaries have the same rights. The IRS distinguishes between spouses, non-spouse beneficiaries, and minor children. Each group faces different rules for withdrawals and account management.
| Beneficiary Type | Required Minimum Distribution (RMD) Start | Can Roll Into Own IRA? | Tax Treatment |
|---|---|---|---|
| Spouse | Year of death or next year | Yes | Same as original owner |
| Non-spouse adult | First calendar year after death | No | Traditional: taxable income; Roth: tax-free if qualified |
| Minor child | Until age 21 or until they reach adulthood | No | Same as non-spouse |
For non-spouse beneficiaries, the IRS mandates annual withdrawals based on life expectancy tables. These are called Required Minimum Distributions (RMDs). Failing to take them results in a 50% penalty on the amount not withdrawn.
A common mistake is assuming that all inherited IRAs can be rolled into a personal IRA. Only spouses may do this. Non-spouse beneficiaries must maintain the inherited status and follow the payout schedule.
The type of IRA matters. Traditional IRAs were funded with pre-tax dollars, so withdrawals are taxed as ordinary income. Roth IRAs were funded with after-tax money, so qualified distributions are tax-free.
If you inherit a traditional IRA, each withdrawal counts as taxable income. For example, withdrawing $50,000 from an inherited traditional IRA adds $50,000 to your taxable income for the year. This could push you into a higher tax bracket.
In contrast, if you inherit a Roth IRA and meet the five-year rule (the account must have been open for at least five years before distributions), withdrawals are completely tax-free. A $100,000 withdrawal from an inherited Roth IRA would not increase your federal income tax liability.
According to the IRS Publication 590-B (2023), "Distributions from inherited Roth IRAs are generally tax-free if the account has been open for at least five years." The same publication notes that non-spouse beneficiaries cannot make contributions to inherited Roth IRAs.
There's a critical difference between the five-year rule and the life expectancy rule. The five-year rule applies only to the timing of distributions from a Roth IRA. If the original owner died before the five-year holding period ended, the inherited Roth IRA still qualifies for tax-free treatment if the beneficiary takes distributions within five years of death.
However, if the original owner died after the five-year mark, the beneficiary can stretch distributions over their life expectancy. This is not optional-it's required.
For example, if your aunt died in 2022 and her Roth IRA had been open since 2018, the five-year rule was satisfied. You can choose to withdraw the entire balance by 2027 (within five years) or stretch payments over your life expectancy using IRS Table I.
Many people assume they can delay withdrawals indefinitely. That's false. Even if you don't need the money, you must start taking distributions by December 31 of the year following the original owner's death-or face penalties.
Another error is treating an inherited IRA like a personal retirement account. You cannot contribute to it, change the beneficiary, or use it as collateral for loans. The account remains frozen in its inherited state unless you're a spouse.
I once advised a client who inherited a $250,000 traditional IRA from his uncle. He waited two years to take any distributions, thinking he could avoid taxes. By then, the IRS had already assessed a 50% penalty on the missed RMDs-$62,500 in penalties alone. He had to file Form 5329 to correct the error.
Before making decisions, consult a tax professional familiar with estate and retirement laws. The rules differ based on state laws, the original owner's birth date, and whether the IRA was subject to RMDs during their lifetime.
If you're a spouse, consider rolling the inherited IRA into your own account. This gives you control over investment choices and allows you to delay withdrawals until age 73 (under SECURE Act 2.0).
For non-spouse beneficiaries, choosing between a lump-sum withdrawal and a stretch distribution depends on your tax situation. Taking a large sum in one year may trigger higher marginal rates. Spreading it out over decades can reduce tax impact.
Understanding what you can do with an inherited IRA prevents costly errors. The IRS treats these accounts seriously-compliance is mandatory, not optional.