Inherited an IRA? Here's What You Need to Know

If you've inherited an IRA in the last few years, there's a good chance you're doing it wrong. Not because you're careless — but because the rules changed twice in the last five years, and the IRS didn't finalize exactly how they work until 2024. Missing a required withdrawal can cost you 25% of what should have been taken out. Let's make sure that doesn't happen to you.

The 10-Year Rule

Here's the headline rule: if you inherited an IRA from someone who passed away in 2020 or later, and you're not their spouse, you have 10 years to completely liquidate the account. That's a big change from the old rules, which allowed you to stretch withdrawals based on your own life expectancy.

But here's the part that trips people up. Whether you're required to take income out every single year, or whether you can wait and take it all at the end, depends on one factor: had the original owner already started taking their RMDs before they passed away?

• If the original owner was already taking RMDs (meaning they'd hit the age-73 mark), you're required to take annual withdrawals in years one through nine, then empty whatever remains by year ten.
• If they passed away before reaching RMD age, you generally don't have an annual requirement. You have more flexibility on timing. You could even wait until year ten and take it all out at once, but the account still needs to be fully emptied by that same 10-year deadline.

This distinction wasn't fully clear for a few years. The IRS went back and forth, and issued penalty relief for people who didn't take annual withdrawals between 2021 and 2024 while the rule was in limbo. But that relief doesn't carry forward. If you're now in the "annual RMD required" category, you need to be taking them now.

Not Everyone Is Stuck With the 10-Year Rule

There's a category of beneficiaries called eligible designated beneficiaries — who can still stretch distributions over their own life expectancy, similar to the old rules. This includes:

• A surviving spouse
• A minor child of the original owner (though once they reach the age of majority, the 10-year window starts)
• Someone who's disabled or chronically ill, as defined by the IRS
• Someone who isn't more than 10 years younger than the original owner

If you fall into one of these categories, your options and your tax planning look very different.

Common Mistakes to Avoid

1. Assuming you don't need to take anything out during the 10-year window. If the original owner had already started RMDs, you need to be taking annual withdrawals. Skipping years triggers penalties.

2. Not accounting for the year-of-death RMD. If the original owner hadn't taken their RMD for the year they passed, that withdrawal generally still needs to happen. Usually by the beneficiary, by December 31 of that year.

3. Taking the whole balance out in year one or year ten instead of spreading it out. A large lump-sum withdrawal can push you into a much higher tax bracket in that year compared to spreading smaller withdrawals across the full window.

A Note for Spouses

If you inherited from a spouse, you generally have more flexibility than any other type of beneficiary. Most surviving spouses choose to roll the inherited IRA into their own IRA, which lets them treat it as if it had always been their account. That's a separate conversation on its own, but the key takeaway is: as a spouse, you're not automatically boxed into the 10-year rule the way other beneficiaries are.

The Bottom Line

Inherited IRAs sit right at the intersection of tax planning and estate planning, and getting the timing wrong can be an expensive mistake given the potential 25% penalty. If you've inherited an account and aren't sure which rules apply to you, it's worth having a conversation before making any withdrawals.

If you'd like guidance, feel free to reach out.