Losing someone you care about is hard enough without having to untangle a web of financial decisions at the same time. If you’ve been named the beneficiary of an individual retirement account (IRA), you might feel a mix of gratitude, responsibility, and uncertainty. What exactly are you allowed to do with this account? How soon do you have to take money out? And what does it mean for your taxes?
An inherited IRA can be a valuable gift, but the rules around it are not always straightforward. Taking time to understand your options can help you honor your loved one’s legacy while also protecting your own financial future.
In this post, we’ll walk through what an inherited IRA is, the different types of beneficiaries under current law, and the main ways you can handle the account once it’s in your name.
What Is an Inherited IRA?
An inherited IRA (sometimes called a beneficiary IRA) is a retirement account that you receive because you were named as a beneficiary on someone else’s IRA. Instead of opening it yourself and funding it with your own contributions, you’re taking over an account that was built by another person.
You can inherit either a traditional IRA or a Roth IRA. The tax treatment generally follows the character of the original account:
- Traditional IRA: Distributions are usually taxable as ordinary income.
- Roth IRA: Qualified withdrawals are generally tax-free, provided certain conditions are met.
Inherited IRAs are different from IRAs you open for yourself in a few key ways:
- You typically cannot add new contributions to an inherited IRA.
- You often must withdraw the funds within a set time frame.
- You may be required to take annual required minimum distributions (RMDs), depending on your situation and the type of beneficiary you are.
Because the rules differ based on who you are in relation to the original account owner, it’s important to understand how the law classifies beneficiaries.
How the SECURE Act Changed Inherited IRA Rules
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in 2019 and later updated, reshaped how many beneficiaries must withdraw money from inherited retirement accounts. Instead of allowing many heirs to “stretch” distributions over their entire lifetimes, the law created specific categories of beneficiaries, each with its own withdrawal rules.
Broadly, beneficiaries fall into three groups:
- Eligible designated beneficiaries
- Designated beneficiaries
- Non-individual (or “non-person”) beneficiaries
Let’s look at what each one means.
Eligible Designated Beneficiaries (EDBs)
Eligible designated beneficiaries have the greatest flexibility when it comes to inherited IRA distributions. This group includes:
- A surviving spouse of the IRA owner
- A minor child of the IRA owner (generally under age 21)
- A beneficiary who is disabled or chronically ill, as defined by IRS rules
- A beneficiary who is not more than 10 years younger than the account owner
Surviving spouses have the most choices of all beneficiaries. Depending on their needs and age, a spouse can:
- Treat the inherited IRA as their own by moving the assets into an IRA in their name, allowing them to continue making contributions (if otherwise eligible) and deferring withdrawals until their own retirement timeline.
- Keep the funds in an inherited IRA and take distributions based on life expectancy.
- Follow the 10-year rule and fully distribute the account by the end of the tenth year after the original owner’s death.
- Take a lump sum distribution, which may be taxable but is not subject to the early withdrawal penalty if the rules are followed.
If the original IRA owner had already started taking RMDs, the surviving spouse generally must ensure RMDs continue, though the calculation can be based on the spouse’s life expectancy.
Non-spousal EDBs (such as an adult sibling who is less than 10 years younger than the decedent, or a qualifying disabled or chronically ill individual) cannot roll the inherited funds into their own existing IRA. However, they can open an inherited IRA and may have several options:
- Take distributions over their lifetime using life expectancy tables.
- Follow the 10-year rule and withdraw all funds by the end of the tenth year after death.
- Take a lump sum, recognizing the potential tax impact.
The exact choices available can depend on when the account owner died and whether RMDs had already started.
Designated Beneficiaries
Designated beneficiaries are named individuals who do not qualify as EDBs. This typically includes:
- Adult children who are no longer minors
- Other named non-spousal beneficiaries who are more than 10 years younger than the deceased
In most cases, these beneficiaries must follow the 10-year rule. That means the entire balance of the inherited IRA must be distributed by December 31 of the tenth year following the year of the original owner’s death.
Within that 10-year window, some beneficiaries have flexibility in how they schedule withdrawals (for example, evenly over time or in larger amounts in certain years), but they can’t leave the money in the account indefinitely.
Non-Individual Beneficiaries
Sometimes the beneficiary of an IRA is not a person at all, but an entity such as:
- An estate
- A trust
- A charity
These non-individual beneficiaries have a different set of rules:
- If the original account owner had already started taking RMDs, the IRA may continue to pay distributions based on the deceased owner’s remaining life expectancy.
- If RMDs had not begun at the time of death, the “5-year rule” often applies, requiring that the entire account be distributed by the end of the fifth year after the owner’s death.
Trusts can be especially complex, as the trust language and IRS rules must be read together to determine how quickly funds must be paid out.
Your Main Options With an Inherited IRA
Once you know what type of beneficiary you are, you can start thinking through your choices. While not every option is available to every beneficiary, these are the broad paths you’ll usually see:
- Take a Lump-Sum Distribution
Any beneficiary can choose to withdraw the entire balance in one go. This may be appealing if:
- The balance is small and the tax hit is manageable.
- You have urgent financial needs, like paying off high-interest debt or covering major expenses.
However, there are trade-offs:
- If the account is a traditional IRA, the full distribution is generally taxable as ordinary income in the year you receive it. A large payout can push you into a higher tax bracket.
- Once the money is out, it no longer benefits from tax-deferred (or potentially tax-free) growth.
Because of the tax implications, a lump sum is often more of a last resort than a default choice.
- Open and Use an Inherited IRA
Most individual beneficiaries will open an inherited IRA in their name to receive the assets. Doing this allows you to manage distributions in a more strategic way. Generally, you will either:
- Follow the 10-year rule and make sure the account is fully distributed by the end of the tenth year after death, or
- Take required minimum distributions over your life expectancy if you qualify and the rules permit.
For example, if the original IRA owner died in 2025, and you are subject to the 10-year rule, you must empty the account by December 31, 2035. You might choose to spread withdrawals across several years to help manage your tax bracket.
If life expectancy distributions are allowed for your situation, you’ll use IRS tables to calculate the amount to withdraw each year. This can help stretch the tax impact over a longer period while leaving more assets invested.
- Move the Funds Into Your Own IRA (Spouses Only)
If you are the surviving spouse, you have an additional option that other beneficiaries do not: you can roll the inherited assets into an IRA in your own name and treat them as if they were always yours.
This may make sense if:
- You are younger than the required minimum distribution age and want to delay withdrawals as long as possible.
- You want to consolidate retirement accounts for simpler management.
However, this choice can affect when penalties and RMDs apply, so it’s worth running the numbers or consulting with a retirement professional before making this move.
- Disclaim (Refuse) the Inheritance
It may sound surprising, but sometimes the right move is to say “no” to an inherited IRA. This is called disclaiming the inheritance.
You might consider this if:
- Accepting the IRA would significantly increase your taxable income in high-earning years.
- You would prefer the assets to pass to another beneficiary in line, such as your own child or another family member with greater financial need.
Disclaiming must be done correctly and within specific time limits, and once you disclaim, you can’t change your mind. Because the rules are strict, professional guidance is especially important if you’re considering this option.
Putting a Strategy in Place
An inherited IRA is more than just a windfall; it’s a piece of someone else’s long-term planning that’s now part of your own financial story. The choices you make about timing, tax planning, and investment strategy can have lasting consequences.
Before you act, consider:
- What type of beneficiary you are under current law
- How quickly you’re required to distribute the account
- Your current and expected future income levels
- Other assets, debts, and goals in your financial life
Meeting with a knowledgeable tax or financial advisor can make a big difference. They can help you structure withdrawals in a way that fits both the legal requirements and your personal priorities, whether that’s minimizing taxes, preserving long-term growth, or meeting immediate needs.
Handled thoughtfully, an inherited IRA can support your financial security while honoring the person who chose you as their beneficiary.
