What Are the Rules for an Inherited IRA

Required Minimum Distributions

An inherited IRA is subject to required minimum distributions (RMDs) that begin in the year following the original owner's death. The RMD amount is calculated using the beneficiary's life expectancy under the IRS Single Life Expectancy Table, and it must be taken annually or face a steep penalty. Non-spouse beneficiaries cannot delay RMDs by treating the account as their own.

Spouse vs. Non-Spouse Beneficiaries

Spouses have more flexibility than other beneficiaries. A spouse can roll the inherited IRA into their own existing IRA, delay RMDs until they reach age 73, and make contributions to the account. Alternatively, a spouse can treat the IRA as inherited and begin taking RMDs immediately. Non-spouse beneficiaries, such as children or friends, cannot roll the account into their own IRA and must take distributions based on their own life expectancy or follow the 10-year rule.

The 10-Year Rule

Under the SECURE Act, most designated beneficiaries must empty an inherited IRA within 10 years of the original owner's death. This rule applies to adult children, siblings, and estate beneficiaries. Distributions can be taken in a lump sum or over the 10-year period, but the entire account must be fully distributed by December 31 of the tenth year. Roth inherited IRAs follow the same 10-year distribution rule, though qualified distributions remain tax-free.

Exceptions to the 10-Year Rule

Certain beneficiaries are exempt from the 10-year rule and can stretch distributions over their own life expectancy. Eligible exceptions include minor children (until they reach the age of majority), disabled individuals, chronically ill individuals, and beneficiaries not more than 10 years younger than the original owner. Eligible designated beneficiaries can take RMDs annually, which may reduce the tax burden over a longer period.

Tax Implications

Distributions from a traditional inherited IRA are taxed as ordinary income to the beneficiary. Roth inherited IRA distributions are generally tax-free if the account has been open for at least five years. The 50% excise tax applies to any shortfall between the required distribution and the amount actually withdrawn. Beneficiaries should plan carefully to minimize taxes and penalties when taking distributions.