Inheriting an IRA can be a mixed experience. On one hand, it may represent a meaningful financial legacy from a family member or loved one. On the other, it comes with a set of complex rules that determine when and how you must withdraw the funds, and the rules have shifted significantly in recent years.
Navigating these requirements thoughtfully can make a material difference in taxes, long-term growth potential, and the flexibility you preserve around your broader financial plan. Here are the key components beneficiaries should understand, along with the practical options available.
1. First, Determine What Type of IRA You Inherited
Your obligations depend heavily on the type of account:
Traditional IRA: Withdrawals are taxable as ordinary income. Decisions revolve around timing your distributions to minimize tax drag.
Roth IRA: Withdrawals are generally tax-free. However, inherited Roth IRAs are still subject to distribution rules, even though the original owner was never subject to required minimum distributions (RMDs).
2. Identify Whether You Are an Eligible or Non-Eligible Designated Beneficiary
Under the SECURE Act and SECURE Act 2.0, which primarily apply to individuals that passed away in 2020 or later, IRA beneficiaries fall into two broad categories:
Eligible Designated Beneficiaries (EDBs) - Includes:
Surviving spouses
Minor children of the deceased (until they reach the age of majority)
Individuals who are disabled or chronically ill
Beneficiaries not more than 10 years younger than the account owner
EDBs have more flexible withdrawal options and the ability to “stretch” distributions over their own life expectancy.
Non-Eligible Designated Beneficiaries (NEDBs) – Includes virtually everyone else:
Adult children
Grandchildren
Siblings
and other beneficiaries
NEDBs face a more rigid distribution requirement: the 10-year rule, which mandates that the entire IRA account must be emptied by the end of the 10th year after the original owner’s death.
3. Understand the 10-Year Rule - The Most Common Scenario Today
For most beneficiaries, the rule is straightforward in principle but more challenging in practice. The account must be fully distributed within 10 years from when the original account owner passed away. The nuance is whether annual RMDs apply during those 10 years.
The general framework:
If the original owner died before they were required to begin taking annual distributions, you do not need to take annual RMDs (although you are still eligible to), but you must empty the IRA by December 31st of the 10th year following the original account holder's death.
If the original owner died after they were required to begin taking annual distributions, then you must take annual RMDs during the first nine years of the 10-year period, and the remaining balance of the account must still be fully withdrawn by the 10th year.
To calculate these annual RMDs, you divide the prior year's year-end balance of the account by the life expectancy factor for your age (using the appropriate IRS table). Charles Schwab provides a complimentary Inherited IRA distribution calculator, which can be accessed here.
Finally, it is important to identify if the original IRA owner died before taking their RMD in the year of death. If they did not take their RMD that year, the beneficiary must take the RMD by the end of that year, which is referred to as Income in Respect of a Decedent (IRD). The IRD could face double taxation, being taxable as ordinary income to the beneficiary and subject to estate taxes if the original owner’s estate exceeds their lifetime tax exemption. However, there is an IRS provision for an income tax deduction that can be claimed for the estate tax paid on the IRD, helping to avoid double taxation.
The differing interpretations of these rules have been a point of IRS guidance updates and delays, so beneficiaries should remain attentive to rule adjustments in the coming years. Simply ignoring the rule is a mistake, as it can lead to penalties and a large tax bill in the final year if you have not taken all the money out.
4. If You Are a Surviving Spouse: More Options, More Strategy
Spouses receive the broadest flexibility, which opens meaningful planning opportunities:
Option A: Roll the Inherited IRA into your own IRA (Traditional or Roth)
This is the most common solution for spouses, particularly younger ones that do not need access to the money right away. If you are an eligible surviving spouse, you can delay RMDs until you reach your own RMD age, and you will be treated as the original owner. This maximizes long-term tax-deferred or tax-free growth. Your RMD age depends on your birth year, due to changes from the SECURE 2.0 Act:
Option B: Remain as a Beneficiary of an Inherited IRA
This is often used when the surviving spouse is under 59.5 years old but needs access to some or all of the Inherited IRA assets immediately. By going with this option, you will not be subject to any early withdrawal penalty prior to age 59.5 as you would otherwise be if you rolled the Inherited IRA into your own non-inherited IRA.
Once you reach age 59.5 or no longer need to use money from the Inherited IRA, you might consider transferring the inherited assets into your own IRA.
If you go with option B, you must begin taking RMDs in the year after the year of death, or you can delay beginning RMDs until your spouse would have reached RMD age (refer to table above) in the event your spouse did not attain RMD age before the year of death.
Option C: Convert Inherited Traditional IRA assets to a Roth IRA (indirectly)
Spouses can roll the Inherited IRA assets into their own Traditional IRA and then complete a Roth conversion. This option is particularly attractive when the surviving spouse expects to be in a higher tax bracket in the future or wants to leave their beneficiaries a tax-free legacy.
Choosing the right path is highly situational and should be coordinated with broader retirement-income and tax-planning strategies.
5. RMD Strategy Matters, Even When You Do Not “Have To Take Them”
For non-eligible beneficiaries subject to the 10-year rule, the main question is when to take distributions. There is no one-size-fits-all formula, but several considerations guide the decision:
Cash flow needs: Some beneficiaries need immediate income; others prefer to defer.
Current and future tax brackets: If you expect your income to rise in the future, taking earlier distributions can minimize your lifetime tax exposure.
Market conditions: In years of strong performance, taking gains early can reduce the risk of “forced” withdrawals during a downturn late in the 10-year window.
Portfolio allocation: Coordinating Inherited IRA withdrawals with rebalancing or other accounts can help manage risk and taxes holistically.
Waiting until year 10 may seem convenient, but it can create a lump-sum taxable event that nudges the beneficiary into a higher tax bracket. For many, a more measured approach, such as equal annual withdrawals, keeps taxes more predictable.
6. Roth IRAs Still Require a Strategy
Even though distributions from Inherited Roth IRAs are typically tax-free, the 10-year rule still applies for most beneficiaries. The benefit, however, can be substantial. Allowing the Roth to grow tax-free for the entire decade before distributing it can meaningfully increase the ultimate value received.
For example, take an Inherited Roth IRA with an initial balance of $250,000. Assuming 7% linear growth, someone who waits 10 years before taking a lump sum distribution would end up with over $93,000 of more wealth than someone who took distributions in each of the 10 years.
7. Coordinate the Inherited IRA with Your Broader Plan
The right investment strategy cannot be determined in isolation. Inherited IRAs are just one component of a financial picture that might also include:
Employer retirement plans
Taxable brokerage accounts
Roth IRAs
Real estate or business interests
Charitable intentions
Future income expectations
Medicare planning
A thoughtful integration of the inherited IRA can improve cash-flow resilience today and reduce long-term tax exposure. This is an area where professional advice consistently adds value, as the rules are complex and occasionally shifting.
8. Be Mindful of Missed RMDs and Penalties
If RMDs apply and are missed, the IRS imposes penalties. Fortunately, the IRS often grants relief when beneficiaries take corrective action promptly and file the appropriate forms. Still, avoiding errors upfront saves time, taxes, and administrative burden.
Conclusion
An inherited IRA carries both opportunity and responsibility. The decisions beneficiaries make, sometimes within the first year, can influence taxes and long-term outcomes for a decade or more. Whether your priority is maximizing growth, smoothing taxable income, preserving optionality, or simplifying your financial life, a clear strategy is essential.
Disclosure
RISE Investment Management, LLC ("RISE" or "RISE Investments") is an investment adviser registered under the Investment Advisers Act of 1940. Registration of an investment adviser does not imply any level of skill or training. This publication is solely for informational purposes and past performance is not indicative of future results. Any description of products, services, and performance results of RISE contained in this publication are not an offering or a solicitation of any kind. No advice may be rendered by RISE Investments unless a client service agreement is in place. Advisory services are only offered to clients or prospective clients where RISE Investments and its representatives are properly licensed or exempt from licensure. All of the information in this publication is believed to be accurate and correct as the date set forth. RISE does not have or accept responsibility or an obligation to update such information. This article is for education purposes and should not be treated as tax or legal advice. This article is not a substitute for legal or tax advice from your professional legal or tax advisor.