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Personal Finance/IRA
By Kayla James
Updated July 5th. 2023 09:00 am ET.
Inherited IRA Withdrawal Rules
Whether a spouse or non-spouse is named the beneficiary of an individual retirement account (IRA) when the IRA owner dies, the current tax law allows the inheritance, or the total sum in the account, to be accepted tax-free. Beneficiaries of the IRA can also withdraw from the account without penalty at any time.
Keep in mind, distributions from an inherited IRA are required, and any voluntary or required minimum distribution (RMD) from the account is taxable. Taxation depends on the type of IRA involved and the relationship of the beneficiary to the deceased.
How Beneficiary RMDs are Determined.
The factors that affect the distribution requirements for inherited retirement plan accounts and IRAs include:
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Whether the account owner died after 2019 (the SECURE Act made changes to the RMDs for beneficiaries if the death of the account holder occurred after 2019).
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The relationship of the beneficiary to the account owner and certain characteristics (spouse, minor child, disabled or chronically ill individual, entity other than an individual)
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Whether the original account owner died before or after their required beginning date (the first date the original account owner was required to begin taking RMDs).
The spouse of the account owner has more options than non-spouse beneficiaries, if they're the sole beneficiary. Determination of whether the spouse is the sole beneficiary is made by September 30 of the year following the year of the account holder's death.
For the year of the account owner's death, the RMD due is the amount the account owner was required to withdraw and did not withdraw before death, if any. Beginning the year following the owner's death, the RMD depends on certain characteristics of the designated beneficiary and the distribution option chosen by the beneficiary.
Death of the account holder occurred before 2020.
Spousal beneficiary options
If the death of the account holder occurred prior to the required beginning date, the spousal beneficiary's options are:
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Keep as an inherited account
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Take distributions based on their own life expectancy, or
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Follow the 5-year rule
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Rollover the account into their own IRA
If the death of the account holder occurred after the required beginning date, the spousal beneficiary's options are:
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Take distributions based on their own life expectancy.
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No 5-year rule available.
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Non-spouse beneficiary options
If the account holder's death occurred prior to the required beginning date (or if the account is a Roth IRA), the non-spouse beneficiary's options are:
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Take distributions based on their own life expectancy, beginning the end of the year following the year of death, or
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Follow the 5-year rule
If the account holder's death occurred after the required beginning date, the non-spouse beneficiary may:
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Take distributions based on the longer of their own life expectancy or the account owner's remaining life expectancy.
Death of the account holder occurred in 2020 or later.
Spousal beneficiary options
If the account holder's death occurred prior to the required beginning date, the spouse beneficiary may:
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Keep as an inherited account
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Delay beginning distributions until the employee would have turned 72
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Take distributions based on their own life expectancy
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Follow the 10-year rule
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Roll over the account into their own IRA
If the account holder's death occurred after the required beginning date, the spouse beneficiary may:
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Keep as an inherited account
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Take distributions based on their own life expectancy, or
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Rollover the account into their own IRA
Non-spouse beneficiary options
In 2020 and later, options for a beneficiary who is not the spouse of the deceased account owner depend on whether they are an "eligible designated beneficiary." An eligible designated beneficiary is:
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Spouse or minor child of the deceased account holder
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Disabled or chronically ill individual.
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Individual who is not more than 10 years younger than the IRA owner or plan participant
An eligible designated beneficiary may
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Take distributions over the longer of their own life expectancy and the employee's remaining life expectancy, or
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Follow the 10-year rule (if the account owner died before that owner's required beginning date)
Designated beneficiary (not an eligible designated beneficiary)
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Follow the 10-year rule.
Beneficiary that is not an individual
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Follow the rules described above as if the account owner died before 2020 (because the SECURE Act changes only apply to beneficiaries who are individuals)
The Bottom Line
If you inherit an IRA, you are generally required to take distributions from the account, which may be taxable. Taxation depends on the type of IRA involved and the relationship of the beneficiary to the deceased.
The SECURE Act requires the entire balance of the participant's inherited IRA account to be distributed or withdrawn within 10 years of the death of the original owner. However, there are exceptions to the 10-year rule, and spouses inheriting an IRA have a much broader range of options available to them.
Further Reading
How Alternative Investments Are Taxed: Real Property and more.
1031 Exchanges: Deferring and/or Eliminating Capital Gain Taxes.
What Are the Different Types of Alternative Investments.
1031 Exchanges: Deferring and/or Eliminating Capital Gain Taxes.
Investing in fine wine can be a lucrative alternative asset class.
