Inheriting a retirement account can feel like an unexpected financial gift — until you discover the IRS has very specific opinions about what you can do with it. Millions of Americans inherit Individual Retirement Accounts each year, and a surprising number of them make costly mistakes simply because they didn’t know the rules. Whether you’ve just lost a parent or spouse, or you’re planning ahead, understanding how inherited IRAs work could save you tens of thousands of dollars.
The Rules Changed Dramatically in 2020
Before 2020, beneficiaries who inherited an IRA could stretch withdrawals over their entire lifetime — a strategy known as the “stretch IRA.” That changed when the SECURE Act took effect, overhauling the rules for most non-spouse beneficiaries.
Under current law, most people who inherit an IRA from someone who died after December 31, 2019, must empty the account within 10 years. The account must be fully distributed by the end of the 10th year following the original owner’s death. If the owner died before they were required to start taking distributions, you can withdraw on whatever schedule you like within that window. But if the owner had already reached their required beginning date, final IRS regulations issued in 2024 also require you to take annual required minimum distributions in years one through nine, a requirement the IRS began enforcing in 2025. Fail to do that, and you could face a penalty of 25% on the amount you were supposed to withdraw.
There are important exceptions. Spouses who inherit an IRA have the most flexibility — they can roll the funds into their own IRA and treat it as if it were always theirs, delaying distributions based on their own age. Other “eligible designated beneficiaries” also escape the 10-year rule, including minor children of the deceased (until they turn 21, when the 10-year clock starts), disabled or chronically ill individuals, and anyone no more than 10 years younger than the original account owner.
The Tax Trap Most Beneficiaries Walk Into
Here’s where things get expensive. Traditional IRAs are funded with pre-tax dollars, meaning every dollar you withdraw is taxed as ordinary income in the year you take it. That might seem manageable — until you consider what happens when you pull out a large lump sum.
Say you inherit a $300,000 traditional IRA and decide to withdraw everything in year one. That $300,000 gets added to your regular income for the year. If you’re already earning $80,000 at your job, you could suddenly find yourself with $380,000 in taxable income, pushing a significant chunk into the 32% or even 35% federal tax bracket. Spreading withdrawals strategically over the 10-year window — especially timing larger withdrawals in lower-income years — can dramatically reduce your total tax bill.
Roth IRAs work differently. Because contributions were made with after-tax dollars, qualified distributions from an inherited Roth IRA are generally tax-free. The 10-year rule still applies for most non-spouse beneficiaries, but at least you won’t owe income tax on the withdrawals themselves.
What You Should Do First — and Fast
Time matters with inherited IRAs. First, you’ll need to open a properly titled inherited IRA account — you cannot simply roll the money into your own existing IRA (unless you’re a spouse). The account title must reflect both your name and the deceased’s name, such as “John Smith IRA, deceased, for benefit of Jane Smith.”
Missing key deadlines can trigger immediate and unexpected tax consequences, so consulting a financial advisor or tax professional soon after inheriting is strongly recommended. Some custodians require you to establish the inherited account within a specific timeframe after the account owner’s death.
A few other things to keep in mind:
- Review beneficiary designations on the account, since IRA assets pass outside of a will and directly to named beneficiaries
- Check whether the original owner had begun required minimum distributions (RMDs), since that determines whether you must take annual withdrawals during the 10-year window
- Consider your own financial timeline — if you anticipate lower income in certain years during the 10-year window, those may be ideal times to take larger distributions
The rules around inherited IRAs are genuinely complex, and the IRS revised its guidance multiple times after the SECURE Act passed before finalizing the regulations in 2024. A second piece of legislation, the SECURE 2.0 Act of 2022, added further adjustments. Given how rapidly the rules have evolved, what applied to an account inherited in 2018 may look very different from one inherited today.
Ultimately, an inherited IRA can be a meaningful financial asset — but only if you treat it carefully. A little planning now can mean keeping far more of that money in your pocket and out of the government’s.