What is an inherited IRA? An inherited IRA is a retirement account you open to hold money left to you as the beneficiary of someone else’s IRA or workplace plan, such as a 401(k). The tax shelter carries on, but the rules change. You can’t add money to it, and in most cases the IRS sets a deadline for taking everything out.
The account passes according to the beneficiary form on file with the custodian, and the will doesn’t override it. That surprises a lot of families. If you’ve seen “JT TEN” on a brokerage statement and looked up the JT TEN meaning, you know joint accounts go straight to the surviving owner. IRAs can’t be owned jointly, so the beneficiary form decides who gets the money.
How an inherited IRA works
The custodian moves the assets into a new account titled in the deceased owner’s name for your benefit. The tax treatment comes along with the money. Withdrawals from an inherited traditional IRA are taxed as ordinary income, while inherited Roth withdrawals are generally tax-free as long as the Roth had been open at least five years. The 10% early withdrawal penalty doesn’t apply, even if you’re younger than 59½.
Which rules apply to you
Surviving spouses.
You can roll the money into your own IRA or keep it as an inherited account. If you’re under 59½ and may need the cash soon, keeping it inherited at first lets you withdraw without the 10% penalty. You can still roll it into your own IRA later.
Eligible designated beneficiaries.
This group covers people who, when the owner died, were the owner’s minor child, disabled, chronically ill, or no more than 10 years younger than the owner. They can spread withdrawals over their life expectancy. A minor child gets that treatment only until reaching majority, and then the 10-year clock starts.
Everyone else: the 10-year rule.
Adult children, siblings, and friends must empty the account by the end of the 10th year after the year of the owner’s death. There’s a catch many people miss. If the owner had already reached their required beginning date for RMDs, you also have to take annual RMDs during the 10 years, starting in 2025. The IRS waived these annual withdrawals from 2021 through 2024, and that relief is over. Missing an RMD now triggers a 25% excise tax on the shortfall, which drops to 10% if you correct it promptly.
A hypothetical example
Say Priya, 45, inherits a $400,000 traditional IRA from her father, who was 78 and already taking RMDs when he died in 2025. She must take an RMD each year from 2026 on and empty the account by the end of 2035.
If she takes only the minimums, a large balance could be left for 2035, all taxed in one year, likely at a higher bracket than she’d pay by spreading withdrawals out. Pulling more in lower-income years, like a sabbatical or the year before her own retirement, usually costs less overall. This is the same trade-off lottery winners face between a lump sum and annual payments, and running numbers through our lottery annuity calculator shows how much the tax timing matters.
For smaller inheritances, our guide ” I inherited 100k what should I do” walks through the options.
Mistakes that are hard to undo
- Taking a check made out to you. Non-spouse beneficiaries can’t do a 60-day rollover, so that money is a taxable distribution with no way back. Ask for a direct trustee-to-trustee transfer.
- Retitling the account in your own name if you aren’t the spouse. The IRS treats that as a full distribution.
- Skipping the year-of-death RMD. If the owner hadn’t taken their full RMD for the year they died, the beneficiary has to.
- Assuming “10-year rule” means you can wait until year 10. If annual RMDs apply, skipping them costs you.
Your first steps
- Get several certified copies of the death certificate.
- Call the custodian and ask whether you’re named on the beneficiary form.
- Work out your beneficiary category and whether the owner had started RMDs.
- Check whether the year-of-death RMD was taken.
- Open the inherited IRA through a direct transfer before making any withdrawal decisions.
What to do next
Knowing and understanding what an inherited IRA is is less important than knowing which category you fit into, because the latter one determines your deadline and whether you need to have yearly withdrawals or not. Knowing this, the primary concern is the timing of the withdrawals to work out the tax bill into manageable bites. Building that withdrawal schedule makes the fee-only financial planner much more appropriate.
This article by Windwall Advisors is intended for informational purposes only, and is not tax or legal advice. There are rules that apply to trusts, estates, and accounts passed down before 2020. The full details are in IRS Publication 590-B, and a tax professional will know what is applicable for you.