Inheriting a retirement account can feel like a quiet gift wrapped in confusing rules. A single wrong move, like cashing it all out at once, can hand a large slice to the IRS. Here is how inherited IRA rules actually work, in plain language.
When someone dies with money in a traditional IRA, Roth IRA, 401(k), or similar retirement plan, that account does not pass through a will. It goes directly to whoever is named on the beneficiary designation form. What happens next depends almost entirely on who you are to the person who died and what kind of account you inherited.
The big shift: the SECURE Act 10-year rule
For deaths before 2020, most heirs could "stretch" distributions over their own life expectancy, taking small amounts each year and letting the rest grow tax-deferred for decades. The SECURE Act ended that for most people. For account owners who died in 2020 or later, the majority of non-spouse beneficiaries must now withdraw the entire balance by December 31 of the 10th year after the year of death.
You do not have to take equal payments. You could take nothing for nine years and everything in year ten, or spread it out evenly. But there is an important wrinkle the IRS finalized in 2024: if the original owner had already begun required minimum distributions (RMDs) before they died, you must take an RMD in each of years 1 through 9 and empty the account by year 10. If the owner died before their RMD start age, you only face the year-10 deadline.
Spouses have options no one else does
A surviving spouse is treated specially. As the beneficiary, a spouse can generally choose among three paths:
- Spousal rollover — move the money into your own IRA and treat it as if it were always yours. RMDs are based on your age, and the 10-year rule does not apply. This is often best if you are under 73 and do not need the cash soon.
- Keep it as an inherited IRA — useful if you are under 59½ and need to take withdrawals, because inherited IRAs are never hit with the 10% early-withdrawal penalty.
- Disclaim it — formally decline the inheritance so it passes to the next beneficiary, occasionally used for estate-planning reasons.
Because a spouse has this flexibility, the choice deserves real thought. If you have recently lost a partner, our guide on grief after losing a spouse and a checklist for what to do when someone dies may help you slow down before making irreversible financial moves.
Who can still "stretch"? Eligible designated beneficiaries
The SECURE Act carved out a group of eligible designated beneficiaries (EDBs) who can still take distributions over their life expectancy instead of within 10 years. You are an EDB if you are:
- The surviving spouse of the account owner
- A minor child of the owner (only until the age of majority, then the 10-year clock starts)
- Disabled or chronically ill, as defined by the IRS
- Not more than 10 years younger than the deceased (for example, a sibling or close-in-age partner)
Everyone else, including most adult children, grandchildren, and friends, is a non-eligible designated beneficiary subject to the 10-year rule. A non-person beneficiary such as an estate or many trusts may face an even shorter 5-year window, which is one reason naming people directly usually beats leaving a retirement account to your estate.
Traditional vs. Roth: the tax difference that matters most
The single most expensive mistake is ignoring how the account is taxed. The contrast is stark:
| Feature | Inherited Traditional IRA | Inherited Roth IRA |
|---|---|---|
| Tax on withdrawals | Taxed as ordinary income | Qualified withdrawals generally tax-free |
| 10-year rule (non-spouse) | Applies | Applies |
| Annual RMDs in years 1–9 | Required if owner had started RMDs | Generally not required during the 10 years |
| 10% early-withdrawal penalty | Never applies to inherited IRAs | Never applies to inherited IRAs |
| Smart strategy | Spread withdrawals to manage brackets | Often let it grow, then withdraw in year 10 |
With a traditional account, every dollar you withdraw adds to your taxable income that year. Pulling a $300,000 balance in one lump sum could push you from a 22% bracket into 32% or higher. Spreading withdrawals across the decade often keeps you in a lower bracket. With an inherited Roth, the tax is already paid, so many heirs let it grow tax-free and withdraw near the deadline.
Common, costly mistakes to avoid
- Cashing out immediately. A reflexive lump-sum withdrawal of a traditional IRA can trigger a huge, avoidable tax bill.
- Missing an RMD. Skipping a required distribution can mean a penalty of up to 25% of the amount you should have taken (reduced to 10% if corrected promptly).
- Rolling a non-spouse inheritance into your own IRA. Only spouses can do this. A non-spouse who does it can accidentally make the whole account taxable at once.
- Forgetting the year-10 deadline. The clock is unforgiving; an empty account by December 31 of year ten is mandatory.
- Ignoring state taxes. A few states tax inheritances or retirement income differently, so where you live matters.
If you are managing several accounts at once, our settling an estate checklist can help you track deadlines alongside everything else.
A note on getting it right
Inherited IRA rules are genuinely complex, and the IRS has changed the details several times since 2019. This article is general information, not legal, tax, or financial advice. Before you take a single withdrawal, talk with a qualified tax professional or financial advisor who can look at your specific account type, your relationship to the deceased, and your own tax picture. The right plan can preserve thousands of dollars and a great deal of peace of mind.