Yes — an inherited IRA can count as taxable income, but only when money comes out of it. Simply receiving the account does not trigger a tax bill. Distributions from an inherited traditional IRA are taxed as ordinary income in the year you withdraw them, while qualified distributions from an inherited Roth IRA are generally tax-free. How much you owe depends on the type of IRA, how quickly you take the money, and what else you earn that year.
Traditional IRA Withdrawals Are Ordinary Income
A traditional IRA grows tax-deferred. The original owner deducted contributions and never paid tax on the investment gains. When you inherit that account and take a distribution, the IRS treats every dollar as ordinary income on your return for that year.1Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts It does not matter whether you take a small monthly withdrawal or empty the account at once. The full withdrawal adds to your taxable income.
This catches beneficiaries by surprise because most inheritances — cash, real estate, personal property — arrive free of income tax. Inherited IRAs work differently because the money was never taxed on the way in. The tax the original owner deferred during their lifetime now passes to you.2Internal Revenue Service. Retirement Topics – Beneficiary
Inherited Roth IRA Withdrawals Are Usually Tax-Free
Roth IRAs work in reverse. Contributions go in with after-tax dollars, and qualified distributions come out tax-free. If you inherit a Roth IRA that was open for at least five tax years before the original owner died, your withdrawals are not included in your gross income.3Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs The money does not raise your taxable income at all.
If the Roth was open fewer than five years when the owner died, the earnings portion of your distributions may be taxable. Contributions the owner put in still come out tax-free regardless of the clock. Either way, timing rules still apply. The account cannot sit untouched forever.2Internal Revenue Service. Retirement Topics – Beneficiary
You Cannot Leave the Account Alone
Most non-spouse beneficiaries who inherited an IRA from someone who died in 2020 or later must empty the entire account by December 31 of the tenth year after the owner’s death.4Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans That deadline is what forces the income tax question. You will be taking money out; the only question is when.
If the original owner died on or after their required beginning date (generally April 1 of the year after they turned 73), you cannot wait until year 10 to pull everything at once. Final IRS regulations issued in 2024 require annual minimum distributions in years one through nine, with the remaining balance due by the end of year 10.5Federal Register. Required Minimum Distributions Every one of those annual withdrawals is taxable if the account is traditional.
If the original owner died before their required beginning date, you have more room. You can take distributions in any amount at any time during the 10-year window, or wait until the final year and withdraw the entire balance. The tax rule does not change: every dollar out of a pre-tax account is ordinary income in the year of withdrawal.
Beneficiaries Who Can Stretch Distributions
A narrow group can stretch distributions over their own life expectancy instead of following the 10-year rule: surviving spouses, minor children of the deceased (until age 21), disabled or chronically ill individuals, and beneficiaries who are not more than 10 years younger than the deceased. Surviving spouses have the most flexibility — a spouse can roll the inherited IRA into their own IRA and delay distributions until their own required beginning date. Even eligible designated beneficiaries who take life-expectancy distributions still owe ordinary income tax on each traditional-IRA withdrawal.4Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
What the Tax Actually Looks Like
Inherited IRA distributions stack on top of your wages, business profits, and investment income when the IRS figures your federal bracket. For tax year 2026, single-filer brackets run:
- 10%: up to $12,400
- 12%: $12,401 to $50,400
- 22%: $50,401 to $105,700
- 24%: $105,701 to $201,775
- 32%: $201,776 to $256,225
- 35%: $256,226 to $640,600
- 37%: over $640,600
A large withdrawal can push part of your income into a higher bracket. A single filer earning $48,000 from a job sits in the 12-percent bracket. Add a $60,000 inherited IRA distribution and the total rises to $108,000, moving a slice of income into the 24-percent bracket.6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The higher rate applies only to income above each threshold, not to your entire income, but the bill still climbs faster than many beneficiaries expect.
Withholding on the Distribution
When you take a withdrawal from an inherited IRA, the custodian withholds 10 percent of the taxable amount for federal income tax by default. You can change that rate — anywhere from zero to 100 percent — by filing IRS Form W-4R with your custodian. If your bracket is above 10 percent, the default withholding will not cover the full liability, and you may owe at filing time or face estimated tax penalties.
Ripple Effects Beyond the Bracket
A taxable distribution raises your adjusted gross income, which acts as a gatekeeper for other tax benefits. A higher AGI can phase out the Child Tax Credit and education credits, and it can eliminate the student loan interest deduction. If you are on Medicare, a large distribution can also trigger the income-related monthly adjustment amount (IRMAA) on Part B and Part D premiums. For 2026, a single filer with modified AGI above $109,000 (or $218,000 for joint filers) pays a surcharge on top of the standard $202.90 Part B premium, reaching $689.90 per month at the highest income tier.7Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles IRMAA uses your return from two years earlier, so a large withdrawal in 2026 shows up in 2028 premiums.
State Income Tax
Federal is only part of the bill. Most states with an income tax also treat inherited traditional IRA distributions as taxable income. About a dozen states fully exempt retirement plan distributions, and several have no state income tax at all. Check your state’s rules before choosing when to withdraw.
Ways to Reduce the Tax Hit
Spread Withdrawals Across Years
When you are not required to take annual RMDs during the 10-year window, spreading withdrawals across several years can keep you out of higher brackets. Roughly equal annual distributions usually beat one lump sum. Pairing bigger withdrawals with lower-income years — say, after a job change or in early retirement — helps too.
Qualified Charitable Distributions
If you are at least 70½, you can direct up to $111,000 per year (the 2026 limit) from an inherited traditional IRA straight to a qualifying charity. This qualified charitable distribution counts toward your required minimum distribution but is not included in your gross income.8Internal Revenue Service. Publication 590-B – Distributions from Individual Retirement Arrangements Keeping the amount off your return also avoids the AGI ripple on credits, deductions, and Medicare premiums. The payment must go directly from the custodian to the charity; you cannot take the money first and donate it.
The IRD Deduction on Large Estates
If the inherited IRA was part of an estate large enough to owe federal estate tax, you may be entitled to a deduction for the estate tax attributable to that IRA income. This income in respect of a decedent (IRD) deduction is claimed as a miscellaneous itemized deduction and is not subject to the floor that limits most miscellaneous deductions.9Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents The federal estate tax exemption for 2026 is $15,000,000 per individual, so the deduction only matters for estates that actually paid estate tax.6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Penalties for Missing a Required Withdrawal
Skipping a required distribution triggers an excise tax of 25 percent on the shortfall. If you catch the mistake and withdraw the missed amount within the correction window (roughly by the end of the second tax year after the miss), the rate drops to 10 percent.10GovInfo. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans You report and pay the penalty on IRS Form 5329.11Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Because the annual RMD rule during the 10-year period was only finalized in 2024, the IRS waived penalties on missed annual distributions for beneficiaries who inherited in 2020 through 2024. Going forward, the deadlines are enforced.
Needs-Based Benefits and Financial Aid
Inherited IRAs behave differently outside the tax code. For Supplemental Security Income, the account balance itself counts as a resource, and SSI’s countable resource limit is $2,000 for an individual and $3,000 for a couple.12Social Security Administration. SSI Resources Withdrawals then count again as unearned income. Medicaid uses similar resource and income tests, with rules that vary by state. If you receive either benefit, an inherited IRA can end your eligibility until you spend down or restructure the account.
The FAFSA does not ask about retirement account balances, so the inherited IRA itself is invisible. Any distribution you take, however, shows up as income on the federal return the FAFSA pulls from, and a single large withdrawal in a base year can shrink need-based grants and subsidized loans.