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Inherited Individual Retirement Accounts (IRAs) are opened when someone inherits an IRA or employer sponsored account after the original account holder’s death. Though you can inherit an account from anyone, be it a spouse or not, the rules for these accounts differ depending on your relationship with the deceased. In addition, regulations on these accounts have become more complicated after the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and the SECURE 2.0 Act of 2022 were enacted. [1],[2]

How are these accounts distributed?

The assets from a deceased person’s IRA, whether a Traditional, Rollover, SEP, and/or SIMPLE IRA, will be transferred to the beneficiary to distribute the funds. 1

The beneficiary’s distribution options from the inherited account depend on whether they are Eligible Designated Beneficiary, Designated Beneficiary, or Non-Designated Beneficiary

These designations are based on the following: [2],[3]

The date of the original owner's death.

Your age and relationship to the original owner.

Directives within the original account agreement. [3],[4]

Eligible Designated Beneficiary

is someone listed as the beneficiary on the original account and is the deceased’s legal spouse, a minor child of the deceased, a chronically ill or disabled beneficiary, or an inheritor less than ten years younger than the original owner of the account. 2,3

Designated Beneficiary

is someone listed as the beneficiary on the original account but has none of the other relationships, age, or health concerns of an Eligible Designated Beneficiary.2,3

Non-Designated Beneficiary

is someone listed in a will or a trust. But they are not listed as beneficiaries on the original account. These heirs will have to consult the executor of the will or the trustee of the trust to determine how to distribute funds from these accounts. 2

Eligible Designated Beneficiary 

An Eligible Designated Beneficiary that is, a spouse and the sole beneficiary of the account, has the largest options with what they do with the account. 2,3,4,[4],[5],[6]

The solitary beneficiary spouse can:

Treat the account as their own.

Transfer or rollover the funds to their own account:

    • IRA
    • Qualified employer plan,
    • Qualified employee annuity plan (section 403(a) plan),
    • Tax-sheltered annuity plan (section 403(b) plan),
    • The deferred compensation plan of a state or local government (section 457 plan)

These converted funds would now have the rules of the beneficiary spouse’s account, and waiver of the withdrawal penalty for those under 59½ would revert to the rules of the IRA that the money is in now.

These funds can grow tax-deferred along with the rest of the spouse’s IRA.

This transfer must be done within 60 days.

This option might not be the right one if there is a financial need that the surviving spouse has in the present because the money can’t be touched without penalty until 59 ½, with some exceptions. An example of why someone might not choose this option would be a surviving spouse needs financial help with the care of minor children.

Treat themselves as regular Eligible Designated Beneficiaries, or Designated Beneficiaries follow the rules in place for these beneficiaries.

Designated Beneficiary

Eligible Designated Beneficiary and Designated Beneficiary can:

Open an Inherited IRA and take distributions over time. 2,3,8

  • The Ten-Year Rule– The entire IRA balance must be withdrawn by December 31st of the tenth year after the original owner’s death.
  • No additional contributions can be made to this account after the transfer of funds from the original account(s).
  • Required Minimum Distributions (RMDs) amounts for the Inherited IRA will be based on your age.9
  • If the original account owner was under the RMD age at death, the distributions need to start from the account by December 31st of the year following the year they passed. 5
  • If the original account owner was over the RMD age at the time of death, the distributions need to start from the account by December 31st of the following year they passed. Unless the deceased was meant to take an RDM for the year and hadn’t before their death, you will need to take the amount they were supposed to or incur the 50% penalty they would have had if they lived the full year without taking the RDM. 5
  • If the inheritor is a minor child, the RMDs required are delayed until the child reaches 18 years old. The Ten-Year Rule starts at the inheritor’s 18th year, leaving them ten years to withdraw the money.10

Take a lump-sum distribution. 2,3,4

    • You would pay the taxes on the amount distributed from the fund. However, this distribution does not have the additional withdrawal penalty for those under 59½ that IRAs typically have.
    • This lump-sum distribution may move the inheritor into a higher tax bracket incurring additional taxes for that year.
    • The tax-deferred earning potential is lost with a slower distribution strategy.

Disclaim the account. 2, 3, 11

  • You would refuse the inheritance.
  • You would not need to worry about the Ten-year rule or any
  • People disclaim inherited IRAs for many reasons: they want a contingent beneficiary to have the money, they don’t want the added tax burden, they are shielding the money from bankruptcy, the money could affect their access to financial aid, etc.

Non-Designated Beneficiaries

Non-Designated Beneficiaries inheritors have slightly different rules than Eligible Designated Beneficiaries or Designated Beneficiaries.

Non-Designated Beneficiary can:

Open an Inherited IRA, but if the deceased were under their RMD age, those funds would need to be distributed in 5 years, not 10. If the deceased is past the RMD age, the distributions will continue based on the deceased's RMD schedule.

Take a lump-sum distribution with the appropriate taxes.

Disclaim the account.

Other Key Aspects of Inherited IRAs:


  • If the original owner’s death was on or after 01/01/2020, the beneficiary rules in the SECURE Act would affect the inheritor’s distribution options as an Eligible Designated Beneficiary or Designated Beneficiary. Any death before this date would be able to follow the stretch rules that were allowed before. 6
  • Beneficiaries of IRAs inherited in 2020, 2021, 2022, or 2023 should plan on receiving distributions from that IRA or qualified plan in 2024. The proposed regulations distributions are still in the works and have not yet been finalized. However, the IRS has waived penalties on missed distributions for 2023. It’s been announced that final guidance regarding the regulations will not be issued until 2024. *12, 13
  • Though Inherited IRAs have vastly different distribution rules than other investment accounts, they are still investment accounts. And with all investment accounts, you expose some or all your invested money to loss for the chance to earn a higher profit. Investment gains hinge on an ongoing and long-term investment strategy that uses your risk tolerance and diversification to mitigate some risks. Even with these in place, you are exposing your money to loss.[14]
  • Investment options within these accounts are almost anything- individual stocks, mutual funds, ETFs, annuities, UITs, etc. There are investment vehicles that are not allowed in IRAs, including Life Insurance, types of Derivatives Positions, antiques/collectibles, personal real estate, and most coins. [15]
  • Fees vary from institution to institution. It is crucial to understand how much you are paying in fees.
  • Investment control is either by your chosen institution or advisor or can be self-directed. With this type of account, you must know your risk tolerance and diversification strategy. These are especially important if you are self-directed and need to make changes to your investments as you make changes to your life and risk tolerance.[16]


If you want to explore additional retirement investment accounts that could work for your goals, Scarlet Oak Financial Services can be reached at 800.871.1219, or you can contact us here.  To sign up for our weekly newsletter with the latest economic news, click here



















This material has been prepared for informational purposes. *To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances.