What to Know About Inheriting an IRA

For affected non-spouse beneficiaries, the 10-year withdrawal rule has two big downsides compared with a stretch IRA:

• Since there’s less time to zero out the account, withdrawals must be larger. That can result in bigger tax bills, especially if income from the withdrawal pushes you into a higher tax bracket.
• You get fewer years for the money to grow tax-free in the account (as it does in a traditional IRA).

RMD game plan for inherited IRAs

Financial advisers recommend that beneficiaries subject to the 10-year rule plan a withdrawal strategy with tax consequences in mind. Here are some strategies to consider.

Spread withdrawals out. The 10-year rule that requires annual RMDs isn’t necessarily a bad thing, especially if the IRA you inherit has a sizable balance. Steady withdrawals over several years will help you avoid a late, large distribution that could push you into a higher tax bracket.

“You want to smooth out your tax bill over the withdrawal period,” says Ed Slott, a certified public accountant and nationally recognized authority on IRA distributions. Even if you aren’t required to make withdrawals in the first nine years after inheriting, he says, “you don’t want to wait and have a 100 percent RMD in year 10.”

In some cases, it might make sense to take out more than the required amount. Say you inherited an IRA from someone who died in 2021, and you took advantage of the IRS penalty waivers to skip RMDs through 2024. That may have been good for growing the account, but the 10-year schedule still applies, so you now have just six years to empty it.

In this scenario, “instead of taking out just the minimum, I would take more out,” Slott says. That will mitigate your tax hit in 2031.

The calculus is different if you inherit a Roth IRA, because withdrawals from Roth accounts are tax-free. In this case, it makes financial sense to let your Roth grow as long as possible and take a lump-sum distribution in year 10.

“If you inherit a Roth, let it roll,” says Brad Bernstein, managing director of UBS Private Wealth Management. “A Roth IRA is probably the best account to inherit.”

Take other income into account. Withdrawals from traditional IRAs are taxable income. If you have variable earnings from other sources, such as consulting or gig work, and use the IRA to supplement that income as needed, it’s prudent to take bigger distributions in the years when the work earnings are lower. That reduces your odds of bumping up to a higher tax bracket.

Options for spouses

“Spouses have the most options,” says Ganglani. Someone who inherits an IRA from a deceased spouse is still covered by the old rules: They can spread out their withdrawals over their lifetime, which allows more of their IRA balance to remain invested and benefit from tax-free growth.

The starting date for mandatory withdrawals from inherited IRAs can vary, depending on the original account owner’s age at the time of death.

• If the deceased had reached the RMD starting age of 73, the surviving spouse must satisfy their late partner’s withdrawal requirement for the year of death, then start taking their own mandatory distributions the following year.
• If the deceased was not yet 73, the survivor must start taking distributions by Dec. 31 of the year following their spouse’s death or by Dec. 31 of the year their spouse would have turned 73, whichever is later.

A spouse can avoid complications by rolling the inherited IRA into an account of their own, as long as it’s the same type of IRA — traditional to traditional or Roth to Roth. (Rollovers are not allowed for non-spouse beneficiaries.)

With a rollover, it doesn’t matter how old your late spouse was; the age that counts, for RMD purposes, is your own, and you won’t have to start taking them until April 1 of the year after the year you turn 73. You can also make contributions to the IRA — not permissible if the money stays in the original account — and continue building tax-free savings.

“That’s probably the best option for spouses,” Slott says.

Leaving the money in the inherited account might make sense if the spouse who inherits is younger than age 59½ and thinks they may need the money sooner than age 73, Ganglani says. That’s because the penalty the IRS typically imposes on IRA distributions before age 59½ — 10 percent of the amount taken out — is not levied if the withdrawal is made by a surviving spouse tapping an inherited account. And you can always go ahead with the rollover later.

The 10-year rule doesn’t apply to what the IRS calls eligible designated beneficiaries, or EDSs, who qualify for special treatment under the SECURE Act. This category includes beneficiaries who are minor children of the deceased IRA owner, have a disability or are chronically ill, or are less than 10 years younger than the original account holder.

How to invest an inherited IRA

Financial professionals recommend treating the inherited account balance as part of your overall asset mix. That means making sure that your overall holdings of stocks, bonds, cash and other assets are in line with your financial goals and risk tolerance. 

Suppose you inherited an IRA from an older relative who shifted the assets to 100 percent cash to eliminate risk. You’re still looking to maximize returns, so you might make portfolio moves to diversify the account into investments with greater growth potential — say, a 60/40 mix of stocks and bonds — to align it with your broader financial plan.

If you are strapped for cash, you can use annual distributions from the IRA to help fund everyday expenses. But if you don’t need that money, it might make sense to reinvest it elsewhere , Bernstein says.

The key takeaways were created with the assistance of generative AI. An AARP editor reviewed and refined the content for accuracy and clarity.