An IRRA, or inherited IRA, is a retirement account opened by someone who inherits IRA assets after the original account owner dies. Sometimes called a “beneficiary IRA,” it holds the funds you receive from a deceased person’s traditional or Roth IRA and comes with its own set of rules for when and how you must withdraw the money. Those rules depend largely on your relationship to the person who died and when they passed away.
How an Inherited IRA Works
When an IRA owner dies, the account doesn’t simply transfer to a beneficiary’s existing retirement account. Instead, the beneficiary opens a separate inherited IRA in their own name, with the deceased owner listed on the account. This distinction matters because inherited IRAs follow different withdrawal rules than regular IRAs, and the options available to you depend on whether you’re a spouse or non-spouse beneficiary.
The funds inside the inherited IRA continue to grow tax-deferred (or tax-free, in the case of a Roth IRA) until you take distributions. But unlike a regular IRA, you can’t make new contributions to an inherited IRA. It exists solely to hold and distribute the assets you’ve received.
Rules for Surviving Spouses
Surviving spouses have the most flexibility of any beneficiary type. If you inherit your spouse’s IRA, you can choose from several options. The most powerful one is rolling the inherited account into your own IRA, which effectively makes it yours. Once you do that, normal IRA rules apply: you contribute if you want, you take required minimum distributions (RMDs) based on your own age, and you name your own beneficiaries.
Alternatively, you can keep the account as an inherited IRA and take distributions based on your own life expectancy. If your spouse died before reaching the age when RMDs would have started, you can also delay distributions until the year they would have turned 73. Or you can simply follow the 10-year rule, withdrawing everything within a decade. Rolling the account into your own IRA is usually the best move if you don’t need the money right away, since it gives the assets the longest possible time to grow.
Rules for Non-Spouse Beneficiaries
If you’re a child, sibling, friend, or anyone other than the surviving spouse, your options are more limited. For deaths that occurred in 2020 or later, most non-spouse beneficiaries must withdraw the entire inherited IRA balance within 10 years. This is commonly called the “10-year rule,” and it was introduced by the SECURE Act.
How those 10 years play out depends on when the original owner died relative to their required beginning date for RMDs:
- Owner died before reaching RMD age: You must empty the account by the end of the 10th year after their death, but you can take the money out on any schedule you choose during that window. You could wait until year 10 and withdraw everything at once, or spread it across multiple years.
- Owner died after reaching RMD age: You must take a required minimum distribution every year in years one through nine, then withdraw whatever remains by the end of year 10. You don’t get to choose whether to skip years.
Your first annual distribution, when required, must happen no later than December 31 of the year following the original owner’s death.
Eligible Designated Beneficiaries
A small group of non-spouse beneficiaries qualifies for more generous treatment. The IRS calls these people “eligible designated beneficiaries,” and they can stretch distributions over their own life expectancy rather than being forced into the 10-year window. You qualify if you are:
- A minor child of the original owner (this exception ends when the child reaches the age of majority, at which point the 10-year clock starts)
- Chronically ill or disabled
- Someone who is not more than 10 years younger than the original owner (if you’re the same age or older, you also qualify)
Eligible designated beneficiaries must begin taking annual RMDs starting the year after the owner’s death. The amounts are calculated using the beneficiary’s own life expectancy, which for most people stretches distributions over decades rather than just 10 years. This can be a significant tax advantage, since smaller annual withdrawals may keep you in a lower tax bracket.
How Inherited IRA Withdrawals Are Taxed
Distributions from an inherited traditional IRA are taxed as ordinary income in the year you receive them. They’re added to your wages, freelance income, Social Security benefits, and everything else on your tax return. If you inherit a large IRA and withdraw it all at once, that lump sum could push you into a much higher tax bracket for that year.
This is why spreading withdrawals across multiple years, when the rules allow it, often makes sense. If you inherit a $500,000 traditional IRA and you’re subject to the 10-year rule without annual RMD requirements, withdrawing $50,000 per year for 10 years will generally result in a lower total tax bill than taking $500,000 in a single year.
Inherited Roth IRAs follow the same distribution timeline rules, but the tax treatment is different. Because the original owner already paid taxes on Roth contributions, qualified distributions from an inherited Roth IRA come out tax-free. You still need to empty the account within the required timeframe, but you won’t owe income tax on the withdrawals as long as the Roth account was open for at least five years before the owner’s death.
What Happens If You Miss a Distribution
Failing to take a required distribution from an inherited IRA triggers a penalty. The IRS charges an excise tax of 25% on the amount you should have withdrawn but didn’t. That penalty drops to 10% if you correct the shortfall within two years. Given that this penalty is on top of the regular income tax you’ll owe when you eventually take the distribution, missing an RMD deadline can be an expensive mistake.
Setting Up an Inherited IRA
Most brokerages and financial institutions handle inherited IRA transfers directly. You’ll typically need a copy of the death certificate, the deceased owner’s account information, and proof that you’re a named beneficiary (either on the account’s beneficiary designation form or through the estate). The process usually takes a few weeks once all paperwork is submitted.
The account title will include both your name and the deceased owner’s name, something like “Jane Smith, beneficiary of John Smith, deceased.” This labeling keeps the account properly classified so your brokerage applies the correct distribution rules. If you accidentally roll inherited IRA funds into your own regular IRA (and you’re not a spouse), the IRS may treat the entire amount as a taxable distribution, so it’s important to keep the accounts separate from the start.