Inheriting a retirement account often comes at a difficult time. While you’re managing loss and estate matters, you’re also faced with complex distribution rules and tax decisions that require attention. Understanding the requirements and benefits of an inherited IRA can help you make informed choices.
An inherited IRA, also called a beneficiary IRA, is created when a retirement account transfers to a named beneficiary after the account owner dies. This can include traditional IRAs, Roth IRAs, and employer-sponsored retirement plans.
Once the account is inherited, no new contributions can be made. The assets may remain invested, and withdrawals are not subject to early withdrawal penalties. The rules for when and how much you must withdraw are determined by three factors:
Under the SECURE Act, certain beneficiaries retain additional favorable treatment: surviving spouses enjoy the most flexibility, minor children of the decedent (until age 21), disabled or chronically ill individuals meeting specific IRS criteria, and individuals not more than 10 years younger than the deceased.
These eligible beneficiaries may structure distributions based on their own life expectancy, creating a “stretch” opportunity that extends tax-deferral benefits.
Minor children transition to the 10-year rule upon reaching age 21.
If you fall outside eligible categories—adult children, siblings, friends, or most trusts—you face reduced timelines. The account must be fully distributed by December 31st of the tenth year following the owner’s death.
However, there’s a critical nuance many miss: if the original owner had reached their required minimum distribution age at the time of their death, you must take annual distributions during the 10-year holding period. If they had not yet started RMDs, you control withdrawal timing within the decade, but the account must be emptied by December 31st of the tenth year following the date of death.
Spouses have options that other beneficiaries do not. In many cases, a spouse may move inherited assets into their own IRA, which means personal Required Minimum Distribution rules apply. Whether this is beneficial depends on age, cash flow needs, and long-term planning goals. Strategic decisions early on can influence the timing of future distributions and tax exposure.
In certain situations, inherited retirement accounts are subject to a five-year distribution rule rather than the ten-year rule. This typically occurs when the original owner died before beginning required minimum distributions and no individual beneficiary was designated.
When the five-year rule applies, the entire inherited account must be fully distributed by December 31st of the fifth year following the year of death. There are no required annual withdrawals, but leaving the account untouched until the final year may not be advisable in every tax situation.
The five-year rule most often applies when an estate is named as beneficiary, a non-qualifying trust is listed, or beneficiary designations were missing or outdated. While less common, these scenarios can accelerate taxable income and should be addressed promptly.
Inherited Roth IRAs offer unique advantages but follow the same distribution timelines as traditional inherited IRAs. The key difference is taxation: qualified distributions from inherited Roth IRAs are completely tax free, making them particularly valuable for beneficiaries.
For distributions to be tax free, the original owner must have held the Roth IRA for at least five years before their death. If this requirement is met, all withdrawals (contributions and earnings) are tax free to the beneficiary. If the five-year holding period has not been satisfied, earnings may be subject to income tax, though contributions remain tax free.
Inherited Roth IRAs follow the same beneficiary categories as traditional IRAs. Eligible designated beneficiaries may stretch distributions over their life expectancy, while non eligible beneficiaries must empty the account within 10 years.
Because the original owner was never required to take RMDs from a Roth IRA during their lifetime, beneficiaries subject to the 10-year rule are not required to take annual distributions during that period. They may allow the account to grow tax free for the entire 10 years and withdraw everything in year ten or take distributions at any point up to year ten. This flexibility can provide significant tax planning opportunities, particularly for beneficiaries in high income years who may prefer to delay distributions until their tax situation is more favorable.
As you navigate inheriting retirement accounts, consider this timely question: when did you last review your own retirement account beneficiaries?
Beneficiary designations supersede your will and transfer assets directly outside probate. Yet they often remain unchanged despite marriages, divorces, births, deaths, and evolving intentions. Review your forms now to ensure primary and contingent beneficiaries reflect your current wishes, designations coordinate with your estate documents, and your heirs will receive clear direction on your intentions.
This review may protect the legacy you are building while you are managing the one you have received.
At GHP Investment Advisors, inherited retirement accounts are viewed as part of a larger picture. For many clients, the question is not simply when to take distributions, but how those distributions should be sequenced, invested, and integrated into an already complex financial life.
Our role is to bring clarity to those decisions. That includes:
This guide provides a framework for understanding inherited IRA rules and distribution requirements. Use it as a reference as you coordinate with your financial and tax advisors. The IRS provides official guidance on inherited IRA rules, including timelines, beneficiary categories, and distribution requirements.
Questions about inherited IRAs? Contact GHP Investment Advisors to schedule a consultation
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