# Inherited IRA Rules: Understand Tax Implications for Spouses & Non-Spouses

## What Is an Inherited IRA?

An inherited IRA is an individual retirement account that a beneficiary must open after they inherit it. Beneficiaries can include spouses, relatives, or entities like trusts and estates. The rules for handling an inherited IRA can be complex, with different tax rules for spouses and non-spouses. The SECURE Act added a 10-year rule for non-spousal beneficiaries, requiring the account to be fully withdrawn within 10 years. There are options for beneficiaries to take withdrawals and to manage required minimum distributions (RMDs).

### Key Takeaways

*   An inherited IRA, also known as a beneficiary IRA, is an account opened when you inherit an IRA after the original owner dies.  
    
*   Spouses can roll over inherited IRAs into their accounts, deferring required minimum distributions (RMDs) until age 73.  
    
*   Non-spouse beneficiaries must withdraw all funds from inherited IRAs within 10 years, due to the SECURE Act.  
    
*   Withdrawals from inherited IRAs vary in tax treatment, depending on whether the IRA was traditional or Roth.

## Understanding the Functionality of Inherited IRAs

An inherited IRA is also known as a "beneficiary IRA." Many of the [top brokers for IRAs](https://www.investopedia.com/the-best-ira-brokers-8764115) provide support in resolving matters related to the inheritance of IRA assets, taxation issues, and continuation of retirement account status. 

Tax laws for inherited IRAs are complex and became more so with the 2019 [SECURE Act](https://www.congress.gov/bill/116th-congress/house-bill/1994/text), which made key changes, especially for non-spouse heirs.

A beneficiary may open an inherited IRA using the proceeds from any type of IRA, including traditional, Roth, rollover, SEP, and SIMPLE IRAs. Generally, assets held in the deceased individual’s IRA must be [transferred into a new inherited IRA](https://www.investopedia.com/ask/answers/05/stoprmd.asp) in the beneficiary’s name.

This transfer must be made even if a lump-sum distribution is planned. You cannot make additional contributions to an inherited IRA.

The Internal Revenue Service provides guidelines for inherited IRA beneficiaries. IRS forms [1099-R and 5498](https://www.irs.gov/pub/irs-pdf/i1099r.pdf) are required for reporting inherited IRAs and their distributions for tax purposes.

Inherited IRAs are treated the same, whether they are traditional IRAs or [Roth IRAs](https://www.investopedia.com/the-best-roth-ira-brokers-8764132). The tax treatment of withdrawals does vary—consistent with the type of IRA (funded with pre-tax dollars, like the traditional type, or post-tax dollars, like with the Roth).

## Spousal Rules for Managing Inherited IRAs

Spouses have more flexibility in how to handle an inherited IRA. They can roll over all or part of the inherited IRA into their own individual retirement account. The advantage of this rollover is the ability to defer [required minimum distributions (RMDs)](https://www.investopedia.com/terms/r/requiredminimumdistribution.asp) of the funds until they reach the age of 73.

> **Important**
>
> RMDs previously began at 70½, but the age was raised to 72 following the December 2019 passage of the Setting Every Community Up For Retirement Enhancement (SECURE) Act. This limit has since been increased again to 73 as part of SECURE 2.0 Act.

They have 60 days from receiving a distribution to roll it over into their own IRAs as long as the distribution is not a required minimum distribution.

Spousal heirs can also set up a separate inherited [IRA account](https://www.investopedia.com/terms/i/ira.asp), as described above. How they deal with this IRA depends on the age of the deceased account holder.

If the original owner started RMDs before passing, the spouse must continue them or create a new schedule based on their life expectancy. If the owner had not yet committed to an RMD schedule or reached their [required beginning date (RBD)](https://www.investopedia.com/terms/r/requiredbeginningdate.asp)—the age at which they had to begin RMDs—the beneficiary of the IRA has a five-year window to withdraw the funds, which would then be subject to income taxes.

## Non-Spousal Guidelines for Inherited IRAs 

[Non-spouse beneficiaries](https://www.investopedia.com/inheriting-roth-ira-from-parent-5220471) may not treat an inherited IRA as their own. That is, they may not make additional contributions to the account nor can they transfer inherited funds into their existing IRA account. Non-spouses may not leave assets in the original IRA. They must set up a new inherited IRA account unless they want to distribute the assets immediately via a lump-sum payment.

It is in the realm of distributions that the SECURE Act most significantly affects non-spouse inheritors of IRAs. Previously, these beneficiaries could handle RMDs as spousal heirs could. Specifically, they could recalculate them based on their own life expectancy—which often significantly decreased the annual amount that had to be withdrawn and the tax due on them (in the case of traditional IRAs).

### Note

If you inherit a Roth IRA, you are required to take distributions (unlike the original account owners). But the funds remain tax-free and also free of any early-withdrawal penalty, even if you're under 59½.

Now, the SECURE Act dictates that, for accounts inherited after Dec. 31, 2019, non-spouse beneficiaries typically must cash out the account within 10 years of the original owner's death. Some heirs are exempted:

*   those whose age is within a decade of the deceased's
*   disabled or chronically ill individuals
*   or minor children; however, these minors must be immediate descendants (no grandchildren), and, once they reach majority age, the 10-year rule applies.

For beneficiaries in these categories and those who already have inherited IRAs, the old distribution rules and schedules apply. There's no particular timetable for the withdrawals. You can take the money out in small withdrawals or all at once.

## Options for Beneficiaries: Claiming Your Inherited IRA Benefits

IRA beneficiaries have several options for claiming their inheritance, but choices depend on their relationship to the decedent. All beneficiaries have the option to receive a lump sum distribution of the funds or disclaim the inheritance.

Depending on the account type, natural beneficiaries might leave the proceeds in the plan. Spouses have the most options, followed by natural non-spousal beneficiaries. Non-natural beneficiaries have the fewest options.

### Spousal beneficiary

As a spouse inheriting IRA funds, you have the most options for protecting and receiving your inherited funds. You may elect to:

*   Take a lump-sum distribution. Unlike a life insurance policy where death proceeds are non-taxable, IRA distributions are taxable to the beneficiary.
*   Roll over inherited funds into your personal, like-kind IRA. For instance, if you inherit proceeds from your late spouse's traditional IRA, you may roll over those proceeds to your own traditional IRA.
*   **RMD**: Required minimum distributions are based on your age and are calculated using the IRS Uniform Lifetime Table life expectancy factors. The Uniform Lifetime Table factors are based on two lives and are roughly double the factors in the IRS Single Life Expectancy Table; as a result, payments are spread out over a longer period.
*   Transfer the inherited proceeds into an Inherited IRA.
*   **RMD**: Unlike a Traditional IRA, the timing of the required minimum distribution is based on the decedent's age at the date of death and is calculated using the IRS Single Life Expectancy Table life expectancy factors.
*   Disclaim the proceeds. By not claiming the inheritance, the remaining primary beneficiaries inherit the funds. In the event, other primary beneficiaries are not named with the disclaiming beneficiary, the contingent beneficiaries are eligible to receive the funds. If no beneficiary is named, proceeds are payable to the estate of the decedent or according to contract specifications.

### Non-spousal beneficiary

Non-spouse beneficiaries can be individuals or entities. Entities like charities, businesses, trusts, or estates can take a lump sum or transfer funds to an Inherited IRA.

For natural non-spousal beneficiaries, funds can be:

*   Taken as a lump-sum distribution, which is taxable to the beneficiary
*   Disclaim the proceeds, transferring full rights to remaining beneficiaries or the decedent's estate.
*   Transfer the inherited funds into their own Inherited IRA
*   RMD: If the original owner passed away before December 31, 2019, the required minimum distribution (RMD) will be based on the beneficiary's age using the single life expectancy factor.
*   RMD: If the original owner passed away on or after January 1, 2020, the proceeds will be paid out within 10 years from the original owner's date of death. For certain beneficiaries, such as minor children, a disabled or chronically-ill person, or a beneficiary no more than 10 years younger than the deceased, the pre-January 1, 2020 rules apply.

## Frequently Asked Questions (FAQs)

## Do Beneficiaries Pay Taxes on Inherited IRAs?

The recipient of an inherited IRA may or may not pay taxes depending on their situation. In general, if you inherit a Roth IRA, you're free of taxes. However, if you inherit a traditional IRA, any amount withdrawn is often subject to taxes. On the other hand, estates subject to the estate tax may also be allowed an income-tax deduction for the estate taxes paid on the IRA.

## What Happens When You Inherit an IRA From a Parent?

If a child is not yet of age, a custodian may manage the money in the IRA until the child reaches the state's recognized age of adulthood. Then, at that time, the child would have complete access to the funds. They may choose to withdraw funds from the IRA but depending on the type of account, they may be subject to taxes on withdrawal.

## How Do I Avoid Paying Taxes on an Inherited IRA?

Some of the strongest tax-avoidance strategies for an inherited IRA are executed before the original owner passes away. In many cases, it's best for the individual to convert a traditional IRA to a Roth IRA (to potentially minimize the tax burden, especially after their passing). In addition, individuals inheriting IRAs can choose to not take non-qualifying distributions that would otherwise be taxable.

## The Bottom Line

Inherited IRAs can be traditional or Roth, with Roth IRAs offering beneficiaries better tax benefits. The SECURE Act set different rules for spouses and non-spouses who inherit IRAs: non-spousal beneficiaries must withdraw all of the funds from an inherited IRA within 10 years, while spouses have more options, like rolling it over into their own account to delay RMDs. The rules can be complex, so it's important to speak to a financial professional if you inherit one.  

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Retirement Topics - Beneficiary](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary)."
>     
> 2.  United States Congress. "[H.R. 2617](https://www.congress.gov/bill/117th-congress/house-bill/2617)."
>     
> 3.  Internal Revenue Service. "[Retirement Topics - Beneficiary](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary)."
>     
> 4.  Internal Revenue Service. “[Life Insurance & Disability Insurance Proceeds](https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds).”
>     
> 5.  IRS. "[Publication 590-B](https://www.irs.gov/publications/p590b),"