The 5-year rule for beneficiaries generally requires that inherited IRA assets be fully withdrawn by December 31 of the fifth year following the owner's death. This rule often applies when the owner dies before their required beginning date (RBD) for RMDs, or to non-designated beneficiaries like estates or certain trusts.
Yes, you must keep the money in your Roth IRA for five years, but you can continue to invest that money into those alternative or traditional investments. You just must keep all the assets in the account for five years before you start taking money out to avoid the IRS penalties and taxes.
You generally have 10 years to withdraw the entire balance of an inherited IRA if the original owner died after 2019, with most non-spouse beneficiaries subject to the "10-year rule," meaning the account must be fully emptied by December 31st of the 10th year after the owner's death, though some (like spouses, disabled heirs, or those within 10 years younger) have exceptions allowing lifetime payouts. If the original owner was already taking Required Minimum Distributions (RMDs) when they died, you must take annual RMDs for years 1-9, then empty the rest by the end of year 10, but spouses and Eligible Designated Beneficiaries (EDBs) can use older rules.
New IRS rules for inherited IRAs, solidified by 2024 regulations following the 2019 SECURE Act, primarily enforce the "10-Year Rule" for most non-spouse beneficiaries, requiring the entire account to be emptied by the end of the 10th year after the original owner's death. Key changes starting in 2025 mandate annual Required Minimum Distributions (RMDs) during those 10 years if the original owner had already started taking RMDs, eliminating the previous flexibility to wait until year 10, with exceptions for "Eligible Designated Beneficiaries" (spouses, disabled/chronically ill, minor children until age 21, and those not more than 10 years younger).
The Internal Revenue Service (IRS) requires a waiting period of 5 years before withdrawing balances converted from a traditional IRA to a Roth IRA, or you may pay a 10% early withdrawal penalty on the conversion amount in addition to the income taxes you pay in the tax year of your conversion.
The best thing to do with an inherited IRA depends on your situation, but generally involves either rolling it into a new Inherited IRA (to stretch distributions over 10 years or your lifetime if a spouse) for continued tax-deferred growth or taking a lump-sum distribution if you need cash immediately, understanding that traditional IRA funds become taxable income. Spouses have more options, including treating it as their own, while most non-spouses must empty the account within 10 years, potentially taking annual Required Minimum Distributions (RMDs) if the original owner was 73+. Always consult a financial advisor to navigate the complex rules and tax implications.
Beneficiaries generally do not pay income tax on the principal amount of inherited cash or bank accounts, but they do pay taxes on any interest earned after the date of death, and on certain pre-tax retirement funds (like traditional IRAs). State laws vary, with some states having specific inheritance or estate taxes, while federal estate tax usually falls on the estate itself, not the beneficiary.
Inherited Roth IRAs
Withdrawals of contributions from an inherited Roth are tax free. Most withdrawals of earnings from an inherited Roth IRA account are also tax-free. However, withdrawals of earnings may be subject to income tax if the Roth account is less than 5-years old at the time of the withdrawal.
You generally should not transfer an IRA into a trust during your lifetime because it triggers immediate taxes and penalties, but you can name the trust as the beneficiary for controlled distribution after death; however, a poorly structured trust can cause faster taxation (e.g., 5-year rule instead of 10-year rule) and increased complexity for heirs, negating some benefits of the trust, so careful planning with an estate lawyer is crucial.
Exceptions to the inherited IRA 10-year rule allow certain "Eligible Designated Beneficiaries" (EDBs) like spouses, minor children, disabled or chronically ill individuals, and those not more than 10 years younger than the owner to avoid emptying the account in 10 years, instead stretching distributions over their lifetime (like the old rules) if the original owner died after their Required Beginning Date (RBD), or by the 10-year deadline if the owner died before their RBD. Non-spouse beneficiaries not fitting these categories must generally empty the IRA by the end of the 10th year following the owner's death.
For simplicity's sake, let's assume a hypothetical investor has one IRA with an account balance of $100,000 as of December 31 of the prior year. To calculate the RMD the year they turn 73, they would use a life expectancy factor of 26.5. So the RMD would be $100,000 ÷ 26.5, or $3,773.58.
An inherited IRA, also known as a beneficiary IRA, is an individual retirement account that is opened when someone inherits retirement fund assets after the death of the original owner. Virtually anyone can inherit an IRA.
Key takeaways
Withdrawals taken before age 59½ are generally subject to taxes and a penalty. After age 59½, you can withdraw funds from both traditional and Roth IRAs without a penalty, though taxes apply to some withdrawals.
A "rollover rule loophole" often refers to using the 60-day rollover rule to access IRA funds temporarily as a short-term, tax-free loan or employing strategies like the Backdoor Roth IRA to bypass income limits, though the IRS scrutinizes these; another "loophole" involves the strict once-per-year IRA-to-IRA rollover limit, which some misinterpret, but rules exist for exceptions like the 72(t) SEPPs for early access, requiring expert tax advice for compliance.
The best thing to do with an inherited IRA depends on your situation, but generally involves either rolling it into a new Inherited IRA (to stretch distributions over 10 years or your lifetime if a spouse) for continued tax-deferred growth or taking a lump-sum distribution if you need cash immediately, understanding that traditional IRA funds become taxable income. Spouses have more options, including treating it as their own, while most non-spouses must empty the account within 10 years, potentially taking annual Required Minimum Distributions (RMDs) if the original owner was 73+. Always consult a financial advisor to navigate the complex rules and tax implications.
You can typically inherit a very large amount from your parents without paying federal tax, as the federal estate tax exemption is around $15 million per person for 2026, meaning only estates larger than that pay tax, not you directly. While you generally don't pay income tax on inheritances (except for pre-tax retirement funds like IRAs/401(k)s, which are taxed as income when withdrawn), some states have their own estate or inheritance taxes with much lower thresholds, affecting a smaller portion of wealth.
Give more money away
Lifetime gifting is a straightforward way to begin reducing your IHT bill. By gifting money during lifetime, that would have been part of an inheritance anyway, you reduce the size of your estate so that there is smaller amount subject to IHT on your death.
You can typically inherit a large amount without federal taxes because the tax applies to the deceased's estate, not the recipient, and the exemption is very high: $13.99 million in 2025 and $15 million in 2026 per person, meaning most inheritances fall below this threshold. The key is that the estate's total value must exceed these limits for any tax to be owed by the estate. Inheritances themselves (cash, property) are generally not income, but earnings on them (like interest/dividends) or pre-tax retirement funds (like IRAs) are taxable.
Best of all, with most inheritances, you won't owe any taxes. You won't even have to report them to the IRS. There is one important exception, however: If you inherit an individual retirement account (IRA), any taxes on IRA distributions that would have been owed by the deceased will now be owed by you.
Ways to reduce Inheritance Tax