Understanding Inherited IRAs [2025]

The date of the original owner's death.

Your age and relationship to the original owner.

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

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.

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• The Ten-Year Rule– The entire IRA balance must be withdrawn by December 31^st of the tenth year after the original owner’s death.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
• Non-spouse beneficiaries who inherit an IRA from an account holder who had already begun taking RMDs must start taking annual RMDs beginning in 2025.
• 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 RMD 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 RMD. 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 18^th 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.

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. Non-spouse beneficiaries who inherit an IRA from an account holder who had already begun taking RMDs must start taking annual RMDs beginning in 2025.

Take a lump-sum distribution with the appropriate taxes.

Disclaim the account.