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Inherited IRAs: Learn About The Options

| December 13, 2023

At some point in our lives, we all have to navigate the death of a close family member; it can be difficult to endure. When a loved one is lost, those first thoughts likely won’t be about what to do with their IRA. But for beneficiaries, it’s essential to make wise decisions to avoid excess taxes and penalties. So to be better prepared for this common eventuality, we wanted to share some information that can help you, or someone close to you, navigate the proper steps in the event of being of beneficiary on an IRA account.

Everyone: Any beneficiary can take all the account assets as a lump sum payment without incurring a 10% early withdrawal penalty. However, if it’s a traditional IRA, income taxes will be paid on the amount distributed, which might push the recipient into a higher tax bracket. If a Roth IRA is less than five years old, taxes will be owed on the earnings. If the departed was over the Required Minimum Distribution (RMD) age of 73, you’d need to determine whether they took their RMD for the year they passed. If they didn’t, beneficiaries must take an RMD before the end of the calendar year or incur a 50 percent penalty on the RMD amount.

Surviving spouse: A surviving spouse has the most options. They can:

  • be designated as the owner of the spouse’s account,
  • transfer the funds into individual IRAs,
  • or take the IRA as a beneficiary (thus, an inherited or stretch IRA).


With the latter, RMD amounts will be based on the spouse’s age and life expectancy per the IRS Single Life Expectancy Table, and the spouse must begin taking RMD payments by December 31 of the year after the owner's death or December 31 of the year the owner would have reached RMD age.

10-year rule and eligible designated beneficiary: Generally, a designated beneficiary is required to liquidate the account by the end of the 10th year following the year of death of the IRA owner (this is known as the 10-year rule). However, there are exceptions for certain eligible designated beneficiaries, defined by the IRS as someone who is either:

  • The IRA owners' spouse.
  • The IRA owner's minor child (although once they reach the age of majority, they'll become subject to the 10-year rule).
  • An individual who is less than 10 years younger than the IRA owner.
  • Disabled (as defined by the IRS).
  • Chronically ill (as defined by the IRS).


Generally, an eligible designated beneficiary may use the lifetime distribution rules.

Other relative or friend: For those that don’t fall into the categories above and don’t choose to take a lump payment, there will be the need to create an inherited IRA account and transfer the funds. No new contributions can be made to the account. There are no annual required distributions, but all the money must be withdrawn within 10 years.  

Five-year rule: Any individual beneficiary may elect to distribute the inherited IRA assets over the five years following the owner's death. The distribution must be completed by the end of the year containing the fifth anniversary of the owner's death.

This doesn’t cover all the rules and options regarding inherited retirement accounts, but it gives a general overview of the options. We would be happy to explain different possibilities and their ramifications, or work with your attorney and accountant to guide you through any decisions you may face in the future. If this is a situation you find yourself in in the future, please don’t hesitate to reach out.