Can You Cash Out an Inherited IRA?

Can You Cash Out an Inherited IRA?

Yes, you can cash out an inherited IRA, but how and when you withdraw the funds determines the taxes and penalties you face. The rules differ significantly depending on whether you are a spouse or a non-spouse beneficiary, and whether the original account owner died before or after required beginning dates.

Spouse Beneficiary Options

If you inherit an IRA from a spouse, you generally have the most flexibility. You can treat the inherited IRA as your own by rolling it over into your existing IRA, which delays required minimum distributions until you reach age 73. Alternatively, you can take a lump-sum distribution immediately, though this triggers ordinary income tax on the full amount in the year you withdraw it.

Non-Spouse Beneficiary Rules

Non-spouse beneficiaries — such as adult children, siblings, or friends — cannot roll the inherited IRA into their own account. Under the SECURE Act enacted in 2019, most non-spouse beneficiaries must empty the inherited IRA within 10 years of the account owner's death. You can take withdrawals in a lump sum, in installments, or leave the money in the account and draw it down over the 10-year period. Any withdrawal is taxed as ordinary income.

The Five-Year Rule and Exceptions

For account owners who died before 2020, the old five-year rule often applied, allowing beneficiaries to spread withdrawals over five years. Certain eligible designated beneficiaries — including minor children (until they reach the age of majority), disabled individuals, and those not more than 10 years younger than the deceased — may still qualify for lifetime distributions rather than the 10-year rule.

Tax Implications of a Lump-Sum Withdrawal

Taking a lump-sum distribution from an inherited traditional IRA pushes the entire withdrawal into your taxable income for the year, which can push you into a higher bracket. An inherited Roth IRA offers tax-free withdrawals, provided the account was opened at least five years before the original owner's death.

Penalty Considerations

The 10% early withdrawal penalty does not apply to inherited IRAs, regardless of your age, as long as you follow the distribution rules. However, failing to withdraw the required amounts under the 10-year rule can result in a 50% excise tax on the amount not distributed.

Practical Steps Before Cashing Out

• Confirm whether the account is a traditional or Roth IRA
• Check the account owner's date of death against the required beginning date
• Consult a tax professional to model the tax impact of a lump sum versus spreading withdrawals