Have you recently inherited an IRA and aren’t sure what to do next? Receiving an inherited IRA can be a financial blessing, but it also comes with specific rules, time-sensitive decisions, and potential tax traps. The IRS updated its enforcement of inherited IRA distribution rules in 2025, making it even more important to understand your responsibilities as a beneficiary.
This comprehensive guide walks you through the key steps, options, and strategies to make smart, compliant decisions about your inherited IRA—whether you’re a spouse, non-spouse, or part of a trust or estate.What is an Inherited IRA?
An inherited IRA is a retirement account opened by someone who inherits an IRA after the original account holder’s death. Beneficiaries can include individuals, estates, or trusts. Your relationship to the deceased—whether you are a spouse, non-spouse, or part of an estate—affects your withdrawal options and tax obligations.How does an Inherited IRA work?
Any type of IRA account that is inherited can be transferred to an Inherited IRA.You can inherit:
These accounts retain their original tax treatment. For example, distributions from inherited Traditional IRAs are still taxable, while qualified Roth IRA withdrawals remain tax-free. Your options for taking money out of the account depend primarily on two factors:- Your relationship to the original IRA owner.
- Whether the original owner had already started required minimum distributions (RMDs).
The first step you need to take if you inherit an IRA is to figure out what type of IRA account you inherited and what type of beneficiary you are. These two things are key to determine which inheritance IRA strategy may be best for you.
(Don’t forget to download the ‘What Issues Should I Consider If I Experience A Sudden Wealth Event?‘ guide if you haven’t already.)
What Type of Beneficiary Are You?
The IRS classifies beneficiaries into two main groups:
- Spouse Beneficiaries
- Non-Spouse Beneficiaries (including individuals, trusts, and estates)
There is also a subset of Eligible Designated Beneficiaries (EDBs) who are granted special flexibility.
Spousal Beneficiaries: Your Options in 2025
As a surviving spouse, you have more choices than any other type of beneficiary. Here are your primary options:
1. Treat the IRA as Your Own
You can roll the inherited IRA into your own Traditional or Roth IRA. This strategy is often the most advantageous for spouses because:
RMDs follow your own timeline. If you’re under 73, no RMDs are required yet.
Early withdrawal penalties apply if you take money out before age 59½ (unless exceptions apply).
Tax treatment remains consistent with the type of IRA.
2. Open an Inherited IRA as a Spouse
You can also choose to keep the account as an inherited IRA. In this case, you have two distribution methods:
Life Expectancy Method: Take annual RMDs based on your own life expectancy.
10-Year Rule: Withdraw the entire account by December 31 of the 10th year following the original owner’s death.
3. Take a Lump-Sum Distribution
This option allows you to withdraw all the funds at once. While simple, it may not be tax efficient:
Traditional IRAs: Entire balance is taxable as income.
Roth IRAs: Withdrawals are tax-free if the account was open for at least five years.
Caution: A large withdrawal could push you into a higher tax bracket.
Special Note for Spouses Over Age 73
If you’re 73 or older and inherit a Traditional IRA, you must begin RMDs right away unless you roll it into your own IRA. Roth IRAs remain exempt from RMDs for spouses.
Non-Spouse Beneficiaries: IRS Rules for 2025
Non-spouse beneficiaries face stricter rules under the SECURE Act and subsequent updates. As of 2025, here’s how the 10-year rule works:
If the original account owner had started RMDs, you must take annual RMDs for years 1 through 9, and the entire account must be emptied by December 31 of year 10.
If the owner had not yet started RMDs, you can wait to withdraw but must still fully deplete the account by the end of year 10. Annual RMDs are not required in this case.
Penalties for Missing RMDs
- The IRS now imposes a 25% excise tax on missed RMDs.
- If corrected promptly, the penalty may be reduced to 10%.
Eligible Designated Beneficiaries (EDBs)
Some non-spouse beneficiaries are exempt from the 10-year rule and may use the Life Expectancy Method:
- Surviving spouses
- Minor children of the account owner (until they reach age of majority)
- Individuals with a disability
- Chronically ill individuals
- Individuals less than 10 years younger than the deceased
Once a minor child reaches adulthood, the 10-year rule kicks in.
The 5 Year Rule for Inherited IRAs
The 5-year rule applies in specific situations:
- No Named Beneficiary: If the account owner didn’t name a beneficiary, the estate must withdraw the full balance within five years.
- Roth IRAs: Earnings from an inherited Roth IRA can be withdrawn tax-free if the account was open for at least five years before the original owner’s death. Contributions can be withdrawn tax-free at any time.
Are Inherited IRAs Taxable?
Yes, but it depends on the type of IRA:
- Traditional, SEP, and SIMPLE IRAs: Withdrawals are taxed as ordinary income.
- Roth IRAs: Withdrawals are tax-free if the account has been open for at least five years. Contributions can be withdrawn at any time tax-free.
Strategies to Minimize Taxes on an Inherited IRA
To reduce your tax burden, consider these strategies:
- Spread Withdrawals Over 10 Years: Distribute the withdrawals evenly to avoid a large tax bill in any single year.
- Withdraw During Low-Income Years: If you’re retiring soon or have reduced earnings, time withdrawals to align with years when you’re in a lower tax bracket.
Common Mistakes to Avoid
- Missing RMD deadlines: Even one year of non-compliance can cost thousands.
- Waiting until year 10 to withdraw: This may violate RMD rules and trigger penalties.
- Rolling an inherited IRA into your own (if you’re not a spouse): This is not allowed.
FAQs About Inherited IRAs
Can I Roll an Inherited IRA Into My Own IRA?
Only spouses can roll an inherited IRA into their own. Non-spouse beneficiaries must keep the account as an inherited IRA and follow the applicable withdrawal rules.
Can an Inherited IRA Be Split Between Siblings?
Yes. The inherited IRA can be split into separate accounts for each beneficiary. This must be done by December 31 of the year following the original owner’s death.
Is There a Difference Between an Inherited IRA and a Beneficiary IRA?
No. The terms are used interchangeably and refer to the same type of account established after the death of the original owner.
What Should You Do If You Inherit an IRA?
Inheriting an IRA can be emotionally and financially complex. Here’s what to do:
Identify the type of IRA you’ve inherited.
Determine your beneficiary category: spouse, non-spouse, or EDB.
Review IRS rules specific to your situation.
Create a withdrawal strategy that aligns with your goals and tax situation.
Avoid penalties by meeting deadlines and understanding your RMD obligations.
Interested in comprehensive financial planning with District Capital?
Are you unsure of how to manage your inherited IRA? It’s often best to consult with a fiduciary financial advisor to make sure that you know all of your options and which one will best suit you. Book a complimentary discovery call today to see how we can help you!
Alvin Carlos, CFP®, CFA is a fee-only financial planner, in Washington, D.C. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is the founder of District Capital, a financial planning firm designed to help professionals in their 30s and 40s maximize their money and retire by 55, through holistic financial planning and research-driven investing. Schedule a free discovery call today.
