What Heirs Need to Know About Inheriting an IRA

May 14, 2025

In the next twenty years, about $84 trillion in wealth will likely pass from older generations to their heirs. A large part of that will come from retirement accounts, especially IRAs.

These accounts currently hold over $11 trillion in assets. Many families may inherit IRAs. It is important for non-spouse beneficiaries to understand how these accounts work and what new rules may apply.

Inherited IRA Rules Are Changing

The rules for inherited IRAs have changed in recent years. This is especially true after the SECURE Act passed in 2019. Further IRS guidance was proposed in 2022 and finalized in 2024.

These rules apply to non-spouse beneficiaries. This includes children, grandchildren, siblings, and friends who inherit IRA assets from someone who died in 2020 or later. Starting in 2025, new distribution rules will begin. It is important to understand your duties as a beneficiary.

Understanding Inherited IRAs

An inherited IRA is a special account created by someone who inherits an IRA from a deceased individual. These can be either traditional or Roth IRAs, depending on the type of account the original owner held. While inherited IRAs allow for tax-deferred growth, beneficiaries cannot make new contributions to them.

The rules around required minimum distributions (RMDs) are also different. Unlike original IRA owners, who start RMDs at age 73, many beneficiaries must withdraw funds sooner. In some cases, they must empty the account within 10 years.

Who Is Considered a Non-Spouse Beneficiary?

Non-spouse beneficiaries include anyone other than a surviving spouse: children, grandchildren, siblings, or even close friends. However, some non-spouse beneficiaries qualify as “eligible designated beneficiaries” and may have more flexible options for withdrawals. These include:

●      Minor children of the original account owner

●      Individuals with disabilities or chronic illness

●      Beneficiaries within 10 years of the original owner’s age

●      Certain trusts (in limited cases)

The 10-Year Rule: A Common Requirement

If you inherit an IRA from someone who passed away in 2020 or later, you may be required to follow the 10-year rule:

●      If the original account owner died before starting RMDs, you must empty the inherited IRA by December 31 of the 10th year following their death. You can choose how and when to take distributions during that time.

●      If the original owner started RMDs, you must take minimum distributions in years 1 to 9. Then, you need to fully deplete the account by the end of year 10.

Eligible designated beneficiaries can take annual RMDs based on their own life expectancy. They can also choose to follow the 10-year rule.

What If the Owner Died in 2019 or Earlier?

If the original IRA owner passed away before 2020, you may follow the pre-SECURE Act rules:

●      If they died before taking RMDs, you can either use the 5-year rule or take withdrawals based on your life expectancy.

●      If they died after starting RMDs, you must keep taking them. Use either your life expectancy or the original owner's. Choose the one that gives you smaller annual distributions.

Key Considerations and Pitfalls to Avoid

●      Tax consequences: Most distributions from inherited traditional IRAs are taxed as ordinary income. Roth IRAs, while not taxed on qualified withdrawals, are still subject to distribution rules.

●      No rollovers allowed: Non-spouse beneficiaries cannot do a 60-day rollover. Instead, use a trustee-to-trustee transfer to move inherited IRA funds.

●      Disclaiming an inheritance: If you don’t wish to accept an inherited IRA, you must formally disclaim it within nine months and before accessing the funds. This action is irrevocable and should be discussed with a professional.

●      Protection from creditors: Inherited IRAs may not be shielded from creditors in bankruptcy. Laws vary by state, and workplace retirement plans like 401(k)s often offer stronger protection under ERISA rules.

●      Keep beneficiary designations current: IRA beneficiary forms override wills, so it's essential for account holders to update them regularly, especially after life events like marriage or divorce.

Bottom Line

Inheriting an IRA can be a meaningful gift, but it comes with complex decisions and potential tax consequences. The rules can vary significantly based on your relationship to the original owner and the year they passed away. Because of this complexity, it’s wise to speak with a financial advisor, tax specialist, or estate planning attorney to ensure you handle everything properly—and make the most of the opportunity.

Sources:

https://www.fidelity.com/learning-center/personal-finance/retirement/non-spouse-IRA

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.