Inherited IRAs: Taxes, RMD rules, and other considerations

An inherited IRA is the account opened by a beneficiary to receive the funds of an IRA after the original owner passes away. This article covers the rules and tax implications that govern these inherited accounts. 

What is an inherited IRA?

With individual retirement accounts (IRAs) being a widespread form of retirement investing, it’s common for them to be passed down as part of the original owner’s estate. To complete the transfer of an IRA from an owner who has passed away, their beneficiary must open a new IRA account in their own name to receive the funds. This new account is called an inherited IRA. Although most inheritances are tax free, inherited IRAs come with tax obligations for the beneficiary.

Inherited IRA rules

Inherited IRAs behave like non-inherited IRAs in that they allow for tax-deferred growth; however, inherited IRAs are governed by several additional rules.

Some general rules concerning inherited IRAs include:

• An inherited IRA can be either a traditional IRA or a Roth IRA depending on the original owner’s account. For example, if you’re the beneficiary of a traditional IRA, then you would open a traditional IRA to receive the funds. If you inherit a Roth IRA, then you would open a Roth IRA.
• Typically, you cannot add funds to an inherited IRA.
• The beneficiary is not required to pay a 10% penalty tax for withdrawing money before the age of 59½.
• Other rules govern what you can do with an inherited IRA and how long you can hold it before you start taking distributions—based on your relationship to the original owner and their age at the time they passed away (more on these rules to come).

The rules governing inherited IRAs are complex, and since everyone’s current situation and future goals are different, the information in this article, or any article for that matter, should not be taken as individual investment advice. Instead, use this information as a guide as you discuss your investment goals and needs with an experienced financial professional. 

RMD rules for inherited IRAs

Original IRA owners must begin taking required minimum distributions (RMDs) between the ages of 72 to 75 depending on the year in which they were born. For inherited IRAs, distributions usually start much earlier, with different rules for spousal and non-spousal beneficiaries.

RMD rules for spousal beneficiaries

Spousal beneficiaries have the following options when an IRA is passed on to them:

• Lump sum: You can take a lump-sum distribution, which will close out the IRA. With this option, the entire amount is subject to income tax in the year of the distribution. It’s worth noting that a lump sum distribution could move you into a higher tax bracket.
• Rollover: Opting for a spousal rollover means you can treat the IRA as your own. You can roll the funds into an existing IRA, contribute more money to it if desired, and stretch the distributions out over your lifetime.
• Open an inherited IRA: With an inherited IRA, you may have the added flexibility to delay the start of your RMDs on the account.

RMD rules for non-spousal beneficiaries

Like spousal beneficiaries, non-spousal beneficiaries can opt for a lump sum distribution, which will close out the IRA. In the past, non-spousal beneficiaries were also able stretch distributions over their lifetime just as the original owner would have—until the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. This law introduced the 10-year rule, which is designed to limit the amount of time an inherited IRA can remain open and continue to enjoy tax-deferred status.

The inherited IRA 10-year rule

The 10-year rule requires the non-spousal beneficiary to liquidate or withdraw all the funds from an inherited IRA within 10 years of the original owner’s passing. However, in the following cases, the 10-year rule does not apply:

• The original owner passed away before January 1, 2020.
• The beneficiary is chronically ill or has a qualifying disability.
• The IRA was left to an estate or charity.
• The beneficiary is no more than 10 years younger than the original owner.
• A minor child of the IRA owner who inherits an IRA must take annual RMDs based on their own life expectancy (when they reach the age of 21, however, the 10-year rule will apply).

Understanding the rules that govern RMDs is crucial. Failure to take RMDs in a particular year could result in penalty taxes of up to 25% for the beneficiary.

Calculating inherited IRA RMDs

Calculating RMDs on inherited IRAs can be an involved process that includes special life expectancy tables. Online calculators can also be a helpful resource. They are available from several financial institutions, such as Charles Schwab and Vanguard.

Taxes on inherited IRAs

Inheritances are generally not taxed by the federal government. However, distributions on inherited IRAs are taxable because the accounts are funded with pretax dollars and allowed to grow tax free. The funds are taxed at the beneficiary’s regular tax rate in the year the distribution was taken.

Taxes on inherited Roth IRAs

Distributions from inherited Roth IRAs are generally not taxed unless the account was held by the original owner for less than five years (5-year rule). While RMDs are not required for the original owner, the person inheriting the Roth IRA is required to take RMDs, unless the account is fully withdrawn within 10 years of the original owner’s passing. These rules also apply to backdoor Roth IRAs.

What to do with an inherited IRA?

The rules governing inherited IRAs are complex, and receiving one comes with tax implications. A financial professional can help you understand the options and make the choice that’s best for you. General options include:

• Disclaiming the account: Some individuals opt not to accept an inherited IRA because of the tax implications that come with the added income. The disclaimer must be done within a specified time after the original owner’s death and before taking possession of the IRA.
• Lump-sum distribution: This option is open to spousal and non-spousal beneficiaries alike. The additional income can put you into a higher tax bracket, and by taking a lump-sum distribution you will not receive the earnings that may accumulate based on the account’s tax-deferred status.
• Rollover: As mentioned earlier in this article, a spousal beneficiary can roll the late owner’s IRA into their existing IRA and treat it as their own. The rules governing your IRA will then apply, rather than any rules that governed the original owner’s account.
• Open an account in your name: You can simply open an inherited IRA, which is an account opened in your name to receive the funds from the original owner’s account. This account will then be subject to RMD rules that are determined by your relationship to the original owner, the year they passed away, and their age at the time.

In most cases, RMDs¹ must be taken at some point, and they must be fully distributed (closing the account), either within five or 10 years of the original owner’s death. If there is no designated beneficiary on the original account (or the owner’s estate is the named beneficiary), additional rules apply. For example, if the original owner passed away before reaching the RMD age, the owner’s estate is not required to take RMDs, but the account must be closed within five years of the original owner’s death to avoid penalties on the funds that remain in the account. If the original owner was of RMD age at death, then they will most likely have to take RMDs over their remaining life expectancy.

Can you convert an inherited IRA to a Roth IRA?

An inherited IRA will take the form of the original owner’s IRA. If you inherit a traditional IRA, you cannot convert it into a Roth IRA or vice versa.

Cashing out an inherited IRA

It’s important to note that the withdrawals can potentially push you into a higher tax bracket. Since IRAs are tax-advantaged accounts, it may be a good idea to keep the money in the account as long as the law allows the money to continue its tax-free growth.

Inherited IRA FAQs

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¹Retirement topics – Beneficiary. IRS.gov, August 26, 2025.