Inheriting money feels like a win until you realize the IRS is basically a silent partner in your grief. Honestly, most people think they can just let that money sit there and grow forever. They can’t. The rules for an inherited ira changed so drastically with the SECURE Act in 2019—and then got even weirder with IRS updates in 2024—that what your parents did with their inheritance probably won't work for you. You're looking at a ticking clock.
If you just found out you're a beneficiary, don't touch the money yet. Seriously. One wrong move, like taking a check in your own name instead of doing a trustee-to-trustee transfer, can trigger a massive tax bill that you can't undo. It’s brutal.
The Death of the Stretch IRA
For decades, the "Stretch IRA" was the holy grail of financial planning. You’d inherit an account and just take tiny bits out over your whole life. It was great. But the government wanted their tax money sooner. Now, for most non-spouse beneficiaries, the rules for an inherited ira require the entire account to be emptied by the end of the 10th year following the year of the original owner's death.
This is the 10-Year Rule. It applies to most children, grandchildren, and friends.
There is a huge misconception that you can just wait until year ten and take it all at once. While you could do that if the original owner died before they were required to take their own distributions (RMDs), the IRS recently clarified things. If the person you inherited from was already taking RMDs, you probably have to take annual distributions during those ten years too. You can't just let it sit. If you miss a distribution, the penalty used to be 50%. It’s down to 25% now (or 10% if you fix it fast), but that’s still a gut-punch for a simple paperwork mistake.
Spouses Still Have the "Easy" Path
Spouses are the "Eligible Designated Beneficiaries," which is just a fancy way of saying they get the best deal. If you're a spouse, you've basically got three choices. You can treat the IRA as your own, roll it into your own existing IRA, or stay as a beneficiary.
Most people just roll it over. Why? Because then you don't have to worry about the deceased spouse's age; you just follow the rules for your own age. But—and this is a big "but"—if you are younger than 59.5 and you might need the cash soon, keeping it as an inherited account is actually smarter. You can take money out of an inherited IRA without the 10% early withdrawal penalty, even if you’re only 40. If you roll it into your own name, you lose that "get out of jail free" card on penalties.
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The 10-Year Rule vs. The Exceptions
Not everyone is stuck with the 10-year limit. The IRS carved out a group called "Eligible Designated Beneficiaries" (EDBs). If you fall into this bucket, you can still "stretch" the payments over your life expectancy.
- Minor children of the owner: Note that this is only the owner's children, not grandkids. And the 10-year clock starts ticking the second they hit the "age of majority," which the IRS generally considers 21 regardless of state law.
- Disabled or chronically ill individuals: This requires some serious documentation. You can't just say you're sick; you have to meet the strict IRS definitions.
- People not more than 10 years younger than the deceased: This usually covers siblings or partners who weren't married. If your brother dies and he was 65 and you're 60, you're within that 10-year gap. You get to use your life expectancy instead of the 10-year wipeout.
What Happens if the Original Owner Never Retired?
The rules for an inherited ira care a lot about whether the deceased reached their "Required Beginning Date" (RBD). As of 2024/2025, that age is 73 for most people.
If they died at 65, the 10-year rule is simpler: just get the money out by December 31st of the 10th year. No annual requirements.
If they died at 80, they were already taking RMDs. That means you must take annual distributions in years one through nine, then empty the rest in year ten.
People forget this. They think "I have 10 years" means "I have 10 years of silence." It doesn't. If you're inheriting from someone who was already in their 70s or 80s, the IRS wants a cut every single year.
The Roth IRA Paradox
Inheriting a Roth IRA is a bit like winning the lottery, but you still have to follow the 10-year rule. The upside? The withdrawals are tax-free. The downside? You still have to empty the account.
Because the money grows tax-free, the smartest move is almost always to wait until the very last minute of the 10th year to take a single penny. Let that money compound without the IRS touching it for a decade. Even if the original owner was 90, you don't have to take annual RMDs from an inherited Roth. The IRS decided that since they aren't getting tax revenue from the distributions anyway, they don't care if you wait until the end of the decade to pull it all out.
Avoid the "Lump Sum" Trap
Unless you desperately need the money to avoid homelessness, taking a lump sum immediately is usually a massive tax mistake. Imagine you inherit a $500,000 Traditional IRA. You’re already a high-earner making $150,000. If you cash out that IRA in one year, your income for that year is now $650,000. You just vaulted into the highest tax bracket. You’ll lose nearly half of that inheritance to federal and state taxes.
Instead, you have to play the "Tax Bracket Game."
Look at your income. If you have a year where you’re between jobs or your business is slow, that’s the year to take a bigger chunk of the inherited IRA. Spread it out. Use those 10 years to "drain the lake" slowly so you stay in lower tax brackets. It’s basic math, but in the middle of dealing with an estate, basic math is the first thing to go out the window.
Successor Beneficiaries: The "Inception" of IRAs
What happens if you inherit an IRA from someone who already inherited it?
Let’s say your mom inherited an IRA from her sister in 2021. Your mom was on a 10-year plan. Then, mom passes away in year four. You are now the "successor beneficiary." You do not get a new 10-year clock. You are stuck with whatever is left of your mom's 10 years. If she had six years left, you have six years to empty it. This is a common trap where people think the clock resets. It never resets.
Practical Steps to Take Right Now
- Identify the type of IRA: Is it Traditional (taxable) or Roth (tax-free)?
- Determine the owner's death date: Was it before or after January 1, 2020? This determines if you’re under the old "Stretch" rules or the new 10-year rules.
- Check the owner's age: Did they reach age 73? If yes, check if they took their RMD for the year they died. If they didn't, you have to take it for them and pay the taxes, or you’ll face a penalty.
- Open an Inherited IRA account: Use a "Trustee-to-Trustee" transfer. Do not let the bank cut a check to you personally. The account name should look something like: "[Deceased Name] for the benefit of [Your Name]."
- Update your own beneficiaries: Life is unpredictable. Ensure that if something happens to you, the remaining funds in this inherited account have a clear path to the next person.
The rules for an inherited ira are a moving target. The IRS issued "final" regulations in 2024, but even those have nuances that tax pros are still debating. If the account is large, it is worth paying a fee-only financial planner for one hour of their time just to check your math. It’s better to pay a few hundred dollars for advice than tens of thousands in penalties to the government.
Don't let the emotional weight of an inheritance cloud the logistical reality. The 10-year window moves fast. Start mapping out your withdrawal strategy now so you aren't forced into a massive tax spike in year ten.