For retirement accounts inherited after December 31, 2019, the SECURE Act generally requires non-spouse beneficiaries to fully withdraw all assets within 10 years, eliminating the "stretch IRA" for most. Finalized IRS rules starting in 2025 mandate that if the original owner died after their Required Minimum Distribution (RMD) age, beneficiaries must take annual, taxable withdrawals over that 10-year period.
If you inherit a Roth IRA, you won't owe taxes on distributions, though you will still be required to empty the account within 10 years. 3. The tax rules are more lenient for spouse beneficiaries. Spouses can roll over the inherited IRA into their personal IRA or put the money into a new, inherited IRA account.
There is an inherited IRA change for 2025 that could trigger an IRS penalty of up to 25% before year-end. Starting in 2025, certain non-spouse heirs, including adult children, must start taking required minimum distributions while emptying their inherited IRA over 10 years.
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.
You generally have 10 years to withdraw all funds from an inherited IRA if the original owner died in 2020 or later, under the 10-year rule established by the SECURE Act. If the owner died before 2020, the rules are different, and for non-designated beneficiaries (like estates or charities), it's a 5-year rule if distributions hadn't started, or the owner's life expectancy if they had.
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.
The downside is that there's a 10% penalty on withdrawals before age 59½, and there might be accelerated RMDs if the surviving spouse was older than the deceased spouse.
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.
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.
Roth IRAs stand out as the best type of account to inherit due to their tax-free growth and distributions.
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.
As the beneficiary, you may distribute the account assets in a lump sum without facing a 10% early withdrawal penalty. (If you inherit a Roth IRA, the account must have been open for at least five years to avoid paying a penalty.) There are a couple of downsides to distributing all the assets however.
Rolling Over Funds Into Your Personal 401k or IRA
Surviving spouses often choose to roll over the funds from the inherited 401(k) into their personal 401(k) or IRA, as this method offers unique tax advantages.
Inheritances aren't considered income for federal tax purposes, but subsequent earnings on the inherited assets, including interest income and dividends, are taxable (unless it comes from a tax-free source).
Charity exemption
Like the spousal exemption, assets passing to charity on death are exempt from inheritance tax. As such, if an entire estate passes to charity, there will be no inheritance tax due.
If you assume the IRA, remember that you'll be penalized for taking distributions before you turn age 59.5. You will be able to defer distributions from the IRA until you turn 73, however. If you inherit the IRA, there will be no penalties for taking distributions.
You transfer the assets into an Inherited IRA held in your name. Money is available: At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed.
The benefits of inheritance include:
Retirement Accounts are Subject to Income Tax at Death
Retirement accounts are among a special class of assets known as income in respect of a decedent, or IRD. This means all retirement accounts (except for Roth IRAs) will be subject to federal income tax and state income tax at the death of the account owner.