Making the most of an IRA inheritance doesn't have to be overwhelming.

When it comes to wealth transfer, death and taxes are inextricably linked. Beneficiaries need to follow specific IRS IRA inheritance guidelines for a seamless transition of a loved one's retirement funds.

Women tend to navigate the complexities of IRA inheritance more often due to longevity statistics and the prevalence of IRAs among retirement savings.

Two main factors influence the process when you inherit an IRA: your relationship to the deceased and the type of IRA inherited.

Your Relationship with the Account Holder

Spouses who are the sole beneficiaries of an IRA have a straightforward path. They can either roll the funds into their current IRA (provided they are of the same type) or create a new account.

The IRS treats the inherited account as if it has always belonged to them. This means contributions can continue, and withdrawals follow the rules applicable to the beneficiary.

For non-spouses—children, relatives, or friends—things get a bit more complicated. Transfers to existing IRAs are not permitted. Each beneficiary must establish a new IRA to receive the inherited funds. Additionally, no further contributions can be added to these accounts.

Type of IRA Inherited

The IRA type—whether it's a Roth or traditional IRA—determines tax implications and withdrawal strategies.

Withdrawals from an inherited traditional IRA are typically taxed as income at the beneficiary's tax rate. Conversely, withdrawals from a Roth IRA of the original owner's contributions are tax-free. Earnings from a Roth IRA can also be accessed tax-free, but it's important to remember the account must have been established for at least five years before the owner's passing to avoid taxes on those earnings.

New IRA Inheritance Rules Allow 10 Years for Withdrawals

Previously, beneficiaries faced complicated calculations regarding how long they could let the inherited IRA grow and when to start taking distributions. The SECURE Act, enacted in 2020, simplified this. If the original owner passed away after December 31, 2019, beneficiaries must withdraw all funds from the inherited account within ten years of the owner's death. (For those whose loved ones died before this date, refer to the IRS regulations.)

There are exceptions to this 10-year requirement. Here's a quick rundown:

  • Spouses: You can treat the account as your own, so standard required minimum distribution rules apply.
  • Minors: You have additional time to take distributions until reaching the age of majority (typically 18), at which point the 10-year rule applies.
  • Disabled or Chronically Ill: IRS regulations allow you to withdraw funds over your lifetime.
  • Close Age to the Original Owner: If you're not more than ten years younger than the deceased, you can also stretch distributions over your lifetime.

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