Inheriting an IRA?
Put your favorite reading comfies on. We’ve got lots to cover.
For starters, as part of the 2019 Secure Act, most adults who inherit an IRA from a parent or other decedent (deceased person) must take or transfer all of the money in 10 years.
A decade doesn’t seem urgent, but the tax implications shape withdrawal strategies and affect how frequently, and over what time period, makes the most sense to collect an inherited IRA.
And if you don’t do it correctly, you may open yourself up to taxes as high as 50% on improperly withdrawn funds (absolutely brutal).
This guide is designed to be a central information hub of sorts. We’ve got links and information about what we think are the best resources and places to help you make a good decision, along with the context many sources forget to add.
Note: This information will give you an overview of inherited IRAs but may not apply to your unique situation, may be outdated since the IRS changes rules often, and should not be considered financial advice. The tax implications of these decisions can be massive, so paying for a tax professional to create a plan for you is almost always the right call.
Key Facts About Inheriting an IRA
- Unless you are the spouse or choose to “disclaim” the inherited IRA, you’ll have to create a brand new type of IRA account, known as an “inherited IRA” account to receive your inheritance.
- If there are multiple beneficiaries for a single account, it’s usually best if each beneficiary creates their own inherited IRA.
- IRAs, unless payable to a specific estate, are considered a non-probate asset and pass directly to the beneficiaries listed.
- Traditional IRA withdrawals are considered income and subject to income tax in the year you receive the distribution.
- The tax structures and rules of the original IRA type transfer over to your inherited IRA.
- Anyone can be a beneficiary, including a person, trust, estate, or organization.
- Regardless of what a will or trust says, IRAs accounts are transferred based on the designated beneficiary.
How to Inherit an IRA Checklist
- First off… if you are inheriting more than say, $300k, I’d go hire a tax professional to help. Even if you pay them $5k+, the taxes they will likely save you and clarity they provide will make it worth it, seriously. This stuff is complicated and changes rapidly. There’s a reason people make a good living being financial advisors.
- If you’re not working with a professional or are just curious about the process, your next step is to figure out if you are an eligible designated beneficiary, a designated beneficiary, or a non-designated beneficiary (see rules below).
- Determine what type of IRA the original is and read up on the tax rules for that particular kind.
- Review this breakdown and choose what withdrawal strategy makes the most sense for you. Ask yourself about whether you want to receive more money faster and pay more taxes upfront, or reduce taxes across a longer-term strategy.
- If needed, create a new “inherited IRA account” with the original bank or with the bank of your choice.
- Transfer the funds or your portion of the funds into your new inherited IRA account (if needed).
- Understand your relationship with the original owner and how that affects the 10-year withdrawal rule & required minimum distributions (RMDs).
- Make a plan to reduce your taxes, and balance that consideration against your immediate needs (again, the faster you withdraw, the harsher the taxes tend to be).
- Begin taking RMDs if required/desired and paying appropriate taxes each year.
- Keep other taxes in mind every step of the way and create a plan that has details through when you formally dissolve the account. This is typically when the 10-year rule expires.
Useful Resources and Links
Here’s a list of links we think are super useful for understanding all of this.
- Retirement Accounts Overview from the IRS (IRS overview of retirement accounts)
- Latest Inherited IRA Regulations from the IRS (recent 2022 changes to inherited IRA regulations)
- IRS Rules on Distributions (general list of distribution rules straight from the source)
- IRS Life Expectancy Table (specific table on how the IRS calculates life expectancy)
- IRS Required Minimum Distribution Age (IRS FAQs)
- Charles Schwab Inheriting an IRA breakdown (awesome quick facts PDF)
- Specific Inherited IRA Withdrawal Rules (as far down in the weeds as you can go)
- Highly-reviewed Tax Professionals (general NerdWallet recommendations)
Inherited IRA vs. Inherited IRA account
We’ll be talking a lot about inherited IRAs and inherited IRA accounts.
Inherited IRAs are a broad term meaning IRAs that were owned by someone who has now passed (a decedent), and they are being given to heirs and beneficiaries.
Inherited IRA accounts are a special type of retirement account you open after inheriting someone else’s tax-advantaged retirement account.
This is a brand new inherited IRA account created by beneficiaries and heirs, and they transfer the funds from the original (owned by the decedent) IRA account into this new account after the person has passed.
Inherited IRAs are also called beneficiary IRAs to better distinguish them from the original owner’s IRA.
There are no rules on who and who can’t inherit an IRA, although how you approach withdrawals change depending on a variety of factors, including your relationship with the original owner (e.g. surviving spouses get special treatment).
How to Inherit an IRA — how this all works
Why does this feel like a complicated web?
(Uncle Sam Ain’t Laying Down)
As nice as it would be to continue growing an inherited IRA in perpetuity (8%+market gains for generations!), there are a myriad of rules designed by the government to crack down on long-term ballooning of generational assets that avoid being taxed.
A major part of the government’s strategy to get their cut of generational wealth is putting rules in place around what they call “required minimum distributions” or RMDs. These are just amounts you must withdraw from an IRA account and (usually) pay taxes on after meeting certain ages and other requirements. This is true of both normal and inherited IRAs.
The government’s hope is to generally wind down the number of assets in an IRA before or soon after someone passes away, but like most laws and regulations, the details of when, how, and who can do what with inherited IRAs are dense and change often.
And the government does not mess around. If you do not take any distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required.*
2019’s SECURE Act is the latest example of the government’s efforts to balance getting paid with its other priorities, such as ensuring families retain wealth.
For those reasons, the details of your life circumstances and the IRA shape how you can receive your inheritance.
Generally speaking, your relationship with the deceased, the age of the deceased, your age, and the type of account (roth vs. traditional, etc.) ALL affect the specific tax and required minimum distribution requirements you must adhere to.
Step 1 — Figure out what type of beneficiary you are
So the first thing you need to do is figure out what type of beneficiaries are on the account, and which one you are.
You can find who has been named a beneficiary in the account information provided by the bank. If you are unsure or can’t find it, ask the bank representative.
If they can’t confirm who the beneficiary is because they say that information is private, you may have to talk to the acting executor, personal representative, or executrix to have them ask the bank, since they have the authority to act on the behalf of an estate after beginning probate.
If you’re the acting executor or similar equivalent, and you’re unsure about how to get your letters and begin probate, go read: What is Probate? Beginner’s Guide + Timeline.
- Eligible designated beneficiaries
- Designated beneficiaries
- Non-designated beneficiaries (includes cases where no one was named)
You need to figure out which one you are, because that affects how you can control the funds.
Eligible Designated Beneficiaries
You are considered an eligible designated beneficiary if you are listed as a beneficiary on the IRA, and you are also one of these:
- The spouse
- The minor child of the person who passed (usually 21 years or younger)
- Someone less than 10 years younger than the deceased (e.g. brother or sister)
- Someone considered disabled or chronically ill as defined by the IRS
Eligible designated beneficiaries are the highest form of beneficiary and receive some special treatment from the IRS.
For example, surviving spouses who are the sole beneficiaries can delay IRA withdrawal until after they turn 72, even if that will be longer than 10 years. And minors must withdraw required minimum distributions but aren’t subject to the 10-year rule (meaning they must deplete the funds within 10 years) UNTIL they reach the “age of majority”, which is usually 18 but is now being defined as 21 by the IRS.
IF you are an eligible beneficiary, you have 4 options for inheriting an IRA:
- Roll the assets into your own IRA (for spouses)
- Open an inherited account and take distributions over time
- Take all of the amount at once, pay taxes, and do what you want with it
- Refuse the inheritance and give it to someone else
You are the beneficiary of the account but don’t qualify as an eligible designated beneficiary.
IF you are an designated beneficiary, you have 3 options for inheriting an IRA:
- Open an inherited IRA account and deplete the account via distributions within 10 years.
- Take all of the amount at once, pay taxes, and do what you want with it.
- Refuse the inheritance and give it to someone else.
You aren’t listed as the beneficiary on the account but will receive the assets via the will, the estate, or a trust.
This happens most often when someone passes unexpectedly and never named a beneficiary. This means the account will not be considered a transfer-on-death account and will have to go through probate.
IF there are no designate beneficiaries, and is therefore (at first) given to the estate, you have 3 options:
- IF the deceased is under RMD age (usually 72), the executor can open an inherited IRA account and distribute assets according to the will or intestacy laws within 5 years.
- IF the deceased was RMD age or older, they can open an inherited IRA account and distribute assets according to the will or intestacy laws based on the original life expectancy of the deceased.
- Take all of the amount at once, pay taxes, and immediately distribute to beneficiaries and/or heirs during probate.
Step 2 — Determine how quickly you need the money
There is a tradeoff when inheriting IRAs, and generally speaking, the faster you inherit something, the more taxes you will pay.
Treating an IRA as a quick injection of cash to finance other goals, such as paying for college or buying a house, requires a different approach than not needing the money and choosing to let it grow as much as possible before finally taking distributions.
This isn’t binary, either. You could take a larger distribution the first year, initiate some investments or pay off debts, and then take out the minimum every year after.
There is no wrong or right way to answer this question, but you should spend some time thinking through it. This is also part of the benefit of hiring a tax professional. Rules are one thing. Strategy is another.
Step 3 — Make a plan with taxes in mind
Once you know you know what type of beneficiary you are, have rough goals for what you want to do with the money, and are broadly aware of the implications of each type of distribution strategy, dig into the one you think makes the most sense for your situation, and get detailed about the tax requirements.
Then you should create a plan for how to collect your distributions and when, have a good idea of the tax burden, and start taking action.
Do the work. Make a plan. And then simply execute.
Does it matter what type of IRA you inherit?
Most definitely. SEP IRAs, Simple IRAs, Roth IRAs, and Traditional IRAs can all be transferred and changed into an inherited IRA account, so don’t worry about whether the type affects your ability to inherit.
The tax structures and rules of the original IRA type transfer over to your inherited IRA.
In other words, your inherited IRA is subject to the tax constraints of the original IRA.
So if your parents / deceased loved one had a Roth IRA, you may not owe taxes when you withdraw.
But with a traditional IRA, you pay basic income tax on your withdrawals.
Let’s dig into that a bit more.
Inheriting Traditional IRAs
When inheriting traditional IRAs, you will likely need to take annual distributions, also called Required Minimum Distributions (RMDs), regardless of your age or may have to deplete the inherited funds within a certain number of years. But, these rules only apply if you have an inherited IRA account, not if you’ve transferred the inheritance into your own IRA account (which again, is a spouse-only privilege).*
Generally speaking, you will have to pay taxes on all distributions from a traditional IRA and treat them as income tax.
And again, if you don’t take out your required distributions, the IRS charges a brutal 50% excise tax penalty on what should have been withdrawn. So pay close attention.
Inheriting Roth IRAs
The great thing about Roth IRAs is that they are way more tax-friendly than traditional IRAs.
You can often withdraw at whatever frequency you want, as long as the fund is depleted by the end of the deadline based on the 10-year rule or life expectancy method.
Whether or not you will be required to make RMDs depends on the type of beneficiary you are.
You also won’t be taxed on Roth IRA withdrawals, only earnings, assuming the 5-year rule is met. This is simply a rule saying that 5 years of contributions must be made before you can begin withdrawing. In the industry they call this being “vested”.
So as long as the Roth IRA was 5 years or older before you acquired it, you should be fine.
How to Get Access to an IRA You Inherited
If you’re the executor, begin by checking who is the beneficiary on the account.
If no one is named, that means it will have to be considered a probate asset and be distributed among beneficiaries according to a will or intestacy laws.
If there is a beneficiary listed / you know it’s you, then here’s what you usually need to open an inherited IRA or to claim existing funds that you plan on transferring to your own IRA.
- Your Social Security number
- Your driver's license number
- Your employer’s name and address (if applicable)
- Statement information for funds you may want to transfer
- Notarized Affidavit of Domicile. This is a verification of the deceased’s home address and is usually signed by the executor
- Copy of the death certificate. Get this from the spouse or executor
- Possibly the letters testamentary if there is no beneficiary listed and you are the executor acting on behalf of an estate. You receive this during probate after you are appointed the executor of an estate. If you aren’t the executor and still ask for this, you will need to work with the acting executor.
And anything else the bank asks. Just contact the bank of the IRA and let them lead you.
How an Inherited IRA is Taxed
The biggest things to know about inherited IRA taxes are:
- IRAs receive no capital gains treatment
- Any distributions from a traditional IRA are taxed as ordinary income
- Roth IRA distributions are usually not taxed assuming the 5-year rule has been met
With that in mind, depending on the nature of your inherited IRA and financial goals, it may be smarter to take timed distributions over a longer period of time to reduce your tax bill each year and avoid getting hit by higher progressive tax rates
For example, here is the 2022 progressive tax bracket numbers via the Tax Foundation:
Say you made $85k each year, and you were thinking about taking $40k from your inherited traditional IRA account. Only around 10% of that withdrawal ($4,075) would be taxed at your current highest bracket, being the 22%. The remaining $35k or so would be taxed at 24% — costing you another $700 or so in taxes.
But if you were toward the bottom of the 22% tax bracket, say around $50k/year, the majority of that withdrawal would stay within that 22%, keeping your taxes more manageable.
What to Do with The Money from an Inherited IRA
Well, this is has no right answer, but you can start by asking yourself these questions:
- Do I have any high-interest debt I’d like to pay off?
- Do I want to buy a house? What about an investment home?
- Do I want to pay for any sort of celebration of life or other way to honor the deceased?
- Should I put this into a specific fund to use later, e.g. for college tuition? How would that fund differ from keeping it in the IRA as long as possible?
- How are macroeconomic factors affecting this decision? I.e. is inflation really high?
- Would I rather preserve this money for my children or future generations?
The bottom line is to ask yourself: where would this money serve me and my family best, and what is the smartest way to transfer it there, in terms of taxes and timing.
Other Tips for Inheriting IRAs
Keep in mind, inherited IRAs are just one part of the process that occurs after death. If you are the executor, executrix, or personal representative for the deceased’s estate, you have a lot more assets and responsibilities to get through.
- Making a complete inventory of assets
- Separating probate and non-probate assets
- Filing notice to creditors
- Filing probate forms
- Writing off executor expenses
And completing the many other duties you’re responsible for during this final act of kindness for someone you love.
A word of caution
The IRS is a good resource to start, and hiring tax professionals is usually the way to go, but even they can not be up to date, act in their own interest, and ultimately fail you.
You must hire someone you find intelligent, well-established, and ideally has a fiduciary duty and no conflicts of interest.
And if you are burned by a financial advisor, well the IRS doesn’t care much. They still will want what they’re owed.
So do your research, ask for referrals from friends, and make sure you feel comfortable. You’re hiring them for an important job.
Have more inherited assets than the IRA?
Chances are you’ve inherited assets other than just IRA accounts, and most asset types come with different nuances and considerations. We've written inheritance guides like this on a few major asset classes, and you can read those by going to the Inheritance Advice section of the Atticus® Executor's Resource Library.