Inherited IRA Rules
Editor’s Note: After the passage of the Secure Act, some rules around inherited IRA have changed. Learn more about what has stayed the same, and what has changed here.
When you inherit an IRA from someone, you become the beneficiary of that account. Even if you’re already familiar with all the rules for an IRA you contribute to, the rules for beneficiaries are a bit different. In some cases, you’ll be able to avoid some of the penalties that go along with early withdrawals from other IRAs.
Death and the Traditional IRA
Beneficiaries don’t have to worry about the 10% early withdrawal penalty traditional IRAs have. This is true regardless of the IRA owner’s or beneficiary’s age. However, distributions from an inherited traditional IRA are taxable. This is referred to as “income in respect of a decedent.” That means if the owner would have paid tax, the income is taxable to the beneficiary.
If you inherit the IRA from your spouse, you have the option to treat the IRA as your own. So, you can defer the IRS required minimum distribution until you reach age 72 (70½ if you reached 70½ prior to January 1, 2020).
If you’re not a spouse (or you are a spouse but don’t choose to treat the IRA as your own), you might still qualify to get distributions over an extended period of time if the IRA owner died before January 1, 2020. There are different rules and methods to apply, depending on whether the owner reached age 70½, but in any case, distributions must start by December 31 of the year after the owner died. That generally means if the owner died in 2019, you must take your first distribution by December 31, 2020. Otherwise, the entire IRA balance must be distributed within 5 years.
If you inherit a traditional IRA from someone who died after December 31, 2019, the entire IRA balance must be distributed within 10 years. If you are the spouse you still have the option of treating the IRA as your own instead of following the 10-year rule. Additionally, there are exceptions if you are chronically ill, disabled, an underage child, or you are not more than 10 years younger than the IRA owner.
Death and the Roth IRA
If you inherit a Roth IRA, the money is usually tax-free if it’s a qualified distribution. To be a qualified distribution, the money must have been in the Roth account for five years, including the years it was in the Roth account during the IRA owner’s lifetime, before it’s withdrawn. These rules also apply:
If you inherit the Roth from your spouse, you can treat it as your own. So, there are no required withdrawals during your lifetime. However, if you’re not the deceased’s spouse, you’ll need to take required minimum distributions following the same rules that apply to inherited traditional IRAs, including the 10-year rule exceptions mentioned above. If the five-year holding period has not been met, a portion of the distribution may be subject to tax and penalty.
More Help With Inherited Retirement Accounts (And Tax Consequences of Them)
If you want help navigating how your taxes are impacted with inherited retirement accounts, connect with H&R Block. Learn about the many ways to file your taxes now.
Need copies of your old Forms W-2 or 1099? Learn about the four different ways to obtain IRS wage and income transcripts from the tax experts at H&R Block.
Did you forget to make an estimated payment on your taxes? Learn whether you may be subject to an underpayment penalty. Get tax answers at H&R Block.
Learn more about form CP42, why you received it, and how to handle an IRS balance due with help from the tax experts at H&R Block.
Forget to add credits or deductions to your return? Use Form 1040X to amend your taxes. Learn more from the tax experts at H&R Block.