What Should I Do With an Inherited IRA?
09/19/2025Blog Categories
At TrustTree Financial, we often encounter situations where clients inherit money.
Inheritances come in all shapes and sizes, whether an heirloom left to you by a loved one or a life-changing financial windfall.
Regardless of the form it takes, figuring out what to do next can be a crucial question.
This is especially true with inherited IRAs, which can be very well funded, but also come with very specific and complicated rules you must follow to unlock the assets within them. The rules below currently stand for IRAs inherited after 2019.
This guide will walk you through the basics of what to do. From there, we can review your personal situation together to help ensure you don’t overlook anything important.
You will fall into one of the following categories:
“Eligible” Designated beneficiary. You are considered this if you are any one of the following:
“Non-Eligible” Designated beneficiary. You are the person named as the beneficiary, but you are NOT one of the above eligible beneficiaries.
“Non-Designated” beneficiary. You (a “person”) are not named as the beneficiary on the retirement account itself, but you may inherit the IRA as a trust, charity, or estate.
Another important step you might have to take early: If the owner of the account you inherit was taking required minimum distributions (RMDs)—the mandatory withdrawals from tax-deferred retirement account that start when the account owner reaches age 73—you’ll need to make that withdrawal before the end of the current calendar year. If you don’t, you’ll risk triggering a 25% penalty on the amount of that distribution.
Keep in mind that a Roth IRA owner is always considered to have died before his RBD.
Now we can look at the options…
Disclaim it: We don’t see this often. But if, for any reason, you don’t want to accept the IRA—such as avoiding tax consequences from additional income—you can refuse it by disclaiming it. If you decide to take this route, you must disclaim within nine months of the account owner’s death. The IRA will then be passed to an alternate beneficiary or to the estate.
Take a lump-sum: You can opt to withdraw all the funds of the IRA at once. If it’s a traditional IRA, the IRS will tax the withdrawal as income, which may bump you into a higher tax bracket. If it’s a Roth IRA, the withdrawal is tax-free, but the account must be at least five years old to avoid incurring a 10% penalty.
Withdraw assets over time: If you don’t want to take a lump sum, you can keep the assets in an inherited IRA, where they can continue to grow tax deferred. This is where things get a bit more complicated, depending on what type of beneficiary you are.
If you’re a non-eligible beneficiary, you must empty the inherited IRA within 10 years to avoid penalties on undistributed amounts. The clock starts ticking a year after the original owner’s death. So if the original owner died in 2024, you’d have until December 31, 2034 to empty the account.
Also, if the original account owner had already started taking RMDs, you’ll have to continue taking them based on your own life expectancy each year to avoid penalties. (Don’t worry about calculating your own life expectancy. The IRS does that for you through its life expectancy tables. We can also work with you to make sure you get it right.)
If you’re an eligible designated beneficiary, you generally aren’t subject to the 10-year rule. You’ll have to take RMDs, but you can calculate the amount based on your own life expectancy and hold onto the inherited IRA indefinitely. An exception to this is minor children. For them, the 10-year rule will kick in at age 21.
If you’re a non-designated beneficiary inheriting the IRA through a will or an estate, your requirements are determined by the account owner’s age. If the account owner hadn’t reached the age where distributions were required, you must empty the account within five years. And if the account owner had begun taking RMDs, you will continue to take RMDs based on the same timeline.
Transferring funds to your own IRA: If you are a surviving spouse, you have the option to roll the assets from an inherited IRA into an IRA in your own name. If the original account owner hadn’t taken an RMD for the current year, you’ll have to take that RMD on their behalf before moving the funds.
Making the right choices around an inherited IRA can help you avoid big tax bills and penalties. But of all the things there are to know about inherited IRAs, the most important is that you don’t have to figure those choices out alone. We’re here to help you understand your options and move forward with a tax-efficient strategy that supports your financial goals.
Admittedly, it’s a lot to remember all the unique nuances that come into play. And if you attempt this on your own, be mindful of the rules. Not all of the rules were mentioned above, some are really granular and get into the weeds. Hopefully we have you thinking about some of the main considerations but reach out to me or a financial professional to help navigate.
Brandon
Inheritances come in all shapes and sizes, whether an heirloom left to you by a loved one or a life-changing financial windfall.
Regardless of the form it takes, figuring out what to do next can be a crucial question.
This is especially true with inherited IRAs, which can be very well funded, but also come with very specific and complicated rules you must follow to unlock the assets within them. The rules below currently stand for IRAs inherited after 2019.
This guide will walk you through the basics of what to do. From there, we can review your personal situation together to help ensure you don’t overlook anything important.
What Kind of Beneficiary Are You?
When you inherit an IRA, the very first step is to figure out what type of beneficiary you are. Here’s why: There are three main types, and the rules around key issues like withdrawal requirements will differ depending on which type you are.You will fall into one of the following categories:
“Eligible” Designated beneficiary. You are considered this if you are any one of the following:
- Spouse or minor child of the account owner.
- Someone not more than 10 years younger than the account owner. (Someone whose age is equal to or greater than the age of the account owner minus 10.)
- Someone who meets the IRS’s definition of chronically ill or disabled.
“Non-Eligible” Designated beneficiary. You are the person named as the beneficiary, but you are NOT one of the above eligible beneficiaries.
“Non-Designated” beneficiary. You (a “person”) are not named as the beneficiary on the retirement account itself, but you may inherit the IRA as a trust, charity, or estate.
Another important step you might have to take early: If the owner of the account you inherit was taking required minimum distributions (RMDs)—the mandatory withdrawals from tax-deferred retirement account that start when the account owner reaches age 73—you’ll need to make that withdrawal before the end of the current calendar year. If you don’t, you’ll risk triggering a 25% penalty on the amount of that distribution.
A Very Important Question
Did the IRA owner die before or after his required beginning date (RBD) for RMDs? The RBD is April 1 of the year following the year the IRA owner reaches his first RMD year. Under most recent law, the first RMD year is age 73 (SECURE 2.0). This affects most options.Keep in mind that a Roth IRA owner is always considered to have died before his RBD.
Now we can look at the options…
Options for Your Inherited IRA
When you inherit an IRA, you have several choices for how to handle that account.Disclaim it: We don’t see this often. But if, for any reason, you don’t want to accept the IRA—such as avoiding tax consequences from additional income—you can refuse it by disclaiming it. If you decide to take this route, you must disclaim within nine months of the account owner’s death. The IRA will then be passed to an alternate beneficiary or to the estate.
Take a lump-sum: You can opt to withdraw all the funds of the IRA at once. If it’s a traditional IRA, the IRS will tax the withdrawal as income, which may bump you into a higher tax bracket. If it’s a Roth IRA, the withdrawal is tax-free, but the account must be at least five years old to avoid incurring a 10% penalty.
Withdraw assets over time: If you don’t want to take a lump sum, you can keep the assets in an inherited IRA, where they can continue to grow tax deferred. This is where things get a bit more complicated, depending on what type of beneficiary you are.
If you’re a non-eligible beneficiary, you must empty the inherited IRA within 10 years to avoid penalties on undistributed amounts. The clock starts ticking a year after the original owner’s death. So if the original owner died in 2024, you’d have until December 31, 2034 to empty the account.
Also, if the original account owner had already started taking RMDs, you’ll have to continue taking them based on your own life expectancy each year to avoid penalties. (Don’t worry about calculating your own life expectancy. The IRS does that for you through its life expectancy tables. We can also work with you to make sure you get it right.)
If you’re an eligible designated beneficiary, you generally aren’t subject to the 10-year rule. You’ll have to take RMDs, but you can calculate the amount based on your own life expectancy and hold onto the inherited IRA indefinitely. An exception to this is minor children. For them, the 10-year rule will kick in at age 21.
If you’re a non-designated beneficiary inheriting the IRA through a will or an estate, your requirements are determined by the account owner’s age. If the account owner hadn’t reached the age where distributions were required, you must empty the account within five years. And if the account owner had begun taking RMDs, you will continue to take RMDs based on the same timeline.
Transferring funds to your own IRA: If you are a surviving spouse, you have the option to roll the assets from an inherited IRA into an IRA in your own name. If the original account owner hadn’t taken an RMD for the current year, you’ll have to take that RMD on their behalf before moving the funds.
Let Us Simplify the Process for You
Inheriting an IRA, like receiving any inheritance, can feel both meaningful and overwhelming. It’s a reminder that someone cared for you, but it comes with important financial decisions.Making the right choices around an inherited IRA can help you avoid big tax bills and penalties. But of all the things there are to know about inherited IRAs, the most important is that you don’t have to figure those choices out alone. We’re here to help you understand your options and move forward with a tax-efficient strategy that supports your financial goals.
Admittedly, it’s a lot to remember all the unique nuances that come into play. And if you attempt this on your own, be mindful of the rules. Not all of the rules were mentioned above, some are really granular and get into the weeds. Hopefully we have you thinking about some of the main considerations but reach out to me or a financial professional to help navigate.
Brandon