Can I Cash Out an Inherited IRA? Timelines, Taxes, and Penalties

You can cash out an inherited IRA whenever you want. The funds are not locked, and the 10% early withdrawal penalty that normally applies to IRA distributions before age 59½ does not apply to money you take from an inherited account, no matter how old you are.¹ The catch is income tax: withdrawals from an inherited traditional IRA are taxed as ordinary income in the year you take them, and most non-spouse beneficiaries have to empty the account within 10 years of the original owner’s death.

So the real question is not whether you can take the money out. It’s how much tax you’ll pay and how quickly the IRS makes you finish.

How the Withdrawal Is Taxed

Every dollar you pull from an inherited traditional IRA gets added to your other income for the year and taxed at your regular federal rate. A single large withdrawal can push you into a higher bracket. If you earn $80,000 and cash out a $200,000 inherited IRA in one shot, you’re taxed on $280,000 of income that year. Spreading the same withdrawal across several years usually costs far less in total tax.

Inherited Roth IRAs work differently. Because the original contributions were made with after-tax money, distributions are generally tax-free as long as the account had been open at least five years before the owner’s death.² If the account had been open less than five years, your share of the earnings may be taxable, but the contributions themselves still come out tax-free.³ The distribution deadlines still apply either way. A tax-free account is not a permanent one.

The custodian will withhold 10% of a traditional IRA distribution for federal income tax by default. You can raise or lower that rate, from 0% to 100%, by filing Form W-4R with the custodian before the money goes out.⁴ If your actual tax rate is well above 10%, bumping withholding up saves you from a nasty surprise at filing time. Every distribution is reported to the IRS on Form 1099-R, which the custodian sends you in January.⁵

Then there’s state tax. Most states tax inherited IRA distributions as ordinary income at their regular rates, which run from around 2% at the low end to over 13% at the top. A few states have no income tax, and some carve out partial exemptions for retirement income. A small number of states also charge a separate inheritance tax, with rates that depend on how you were related to the deceased. Look up your state’s rules before you decide how much to take.

How Long You Have to Empty the Account

The SECURE Act, effective in 2020, changed the timeline for most beneficiaries. Where you fall depends on your relationship to the person who died.

Surviving Spouses

A surviving spouse has the most options. You can roll the money into your own IRA and defer required minimum distributions until you turn 73.² You can also keep it as an inherited IRA and take distributions over your own life expectancy, follow the 10-year rule, or cash out entirely. Keeping it as an inherited IRA is often the right move if you’re under 59½ and want penalty-free access to the money now.

Eligible Designated Beneficiaries

Four groups of non-spouse beneficiaries can stretch distributions over their own life expectancy instead of the 10-year window:⁶

Minor children of the deceased owner. Once the child turns 21, a fresh 10-year clock starts.⁷
People who meet the federal definition of disabled.
People who are chronically ill under federal health standards.
Anyone not more than 10 years younger than the original owner.

Everyone Else

If you’re an adult child, a sibling, a friend, or any other individual who doesn’t fit those categories, you have to withdraw the entire balance by December 31 of the 10th year after the year the owner died.⁶ Within that window you have flexibility. You can take a lump sum on day one, wait nine years and empty it in year 10, or take chunks along the way. But depending on when the original owner died, you may also owe annual minimum distributions during those 10 years.

Do You Have to Take Something Every Year?

Whether annual withdrawals are mandatory during the 10-year window turns on one question: had the original owner already reached the age at which they had to start taking their own RMDs (currently 73) before they died?

If the owner died before that age, you have full flexibility. No annual distribution is required. You can sit on the account for nine years and cash it out in year 10 if you want.³

If the owner died on or after that age, you must take an annual minimum distribution in years one through nine based on your life expectancy, and empty the balance by the end of year 10.⁸ The IRS waived penalties for missed annual distributions from 2021 through 2024 while it finalized the rules, but that relief has expired. Missing one now brings the excise tax described below.

The Year-of-Death Distribution

If the original owner had already started taking RMDs and had not yet taken the full amount for the year they died in, you as the beneficiary have to finish it. That final distribution is due by December 31 of the year of death and is separate from your own future distribution obligations.² If the owner had already taken the full amount before dying, you owe nothing for that year.

Ways to Reduce the Tax Hit

The most expensive way to handle an inherited traditional IRA is cashing it out in a single tax year. A few strategies help.

Spread withdrawals across the 10-year window. If the 10-year rule applies and the owner died before their required beginning date, you can take any amount in any year. Roughly even withdrawals keep your income level. Larger withdrawals in years when your other income drops, such as a career gap or a sabbatical, cost you less at the margin.

Qualified charitable distributions. If you’re at least 70½, you can send up to $111,000 a year directly from an inherited traditional IRA to a qualified charity. That amount counts toward any required distribution but is excluded from your taxable income.³ The money has to go straight from the custodian to the charity; you can’t take it first and then donate.

The income-in-respect-of-a-decedent deduction. If the estate was large enough to actually pay federal estate tax, you may be able to deduct the portion of that estate tax attributable to the IRA on your own return under 26 U.S.C. § 691(c).⁹ This only helps if federal estate tax was paid, which for most families it isn’t.

What Happens If You Miss a Required Distribution

Missing a required distribution triggers a 25% excise tax on the amount you should have withdrawn.⁶ Correct the shortfall within two years and the penalty drops to 10%. You report the miss and any excise tax on Form 5329.

The IRS can waive the penalty if the miss was due to reasonable error, such as not knowing you were a beneficiary or a custodian mistake. Attach a written explanation to Form 5329 describing what happened and how you’re fixing it, and take the missed distribution as soon as you find out.¹⁰

How to Actually Request the Money

Once you’ve decided when and how much to withdraw, the custodian will need documentation before releasing the funds. Requirements vary by institution, but most ask for:

A certified copy of the death certificate. Photocopies are usually rejected.
The deceased owner’s account number, Social Security number, and date of death.
Your Social Security or Taxpayer Identification Number and government-issued ID.
The custodian’s own beneficiary distribution form, where you elect a lump sum, partial withdrawal, or scheduled payments.
Form W-4R or the custodian’s equivalent to set your federal withholding rate.

For distributions above a threshold that’s commonly around $100,000, many custodians require a Medallion Signature Guarantee rather than a notary stamp. A Medallion Signature Guarantee is a certification from a financial institution that your signature is genuine and that the institution accepts liability if it turns out not to be. Notaries can’t issue one. You can get one from a bank, credit union, or brokerage where you already have an account.

Paperwork usually goes in through the custodian’s secure portal or by certified mail. Once your documents clear, you can receive the funds by check or electronic transfer. Processing times vary, so contact the custodian early if you’re up against a year-of-death deadline or a December 31 cutoff.

1
Office of the Law Revision Counsel. 26 US Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. Retirement Topics – Beneficiary
3
Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs)
4
Internal Revenue Service. Form W-4R – Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions
5
Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
6
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
7
The American College of Trust and Estate Counsel. Planning for the Young Under SECURE
8
Internal Revenue Service. Notice 2024-35, Certain Required Minimum Distributions
9
Office of the Law Revision Counsel. 26 US Code 691 – Recipients of Income in Respect of Decedents
10
Internal Revenue Service. Instructions for Form 5329 (2025) Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts