Yes, an inherited IRA is generally considered taxable income, but the details depend on what kind of IRA you inherited. Distributions from an inherited traditional IRA are added to your other income and taxed at your ordinary federal rate for the year you take them, because the original owner deducted the contributions and the money has never been taxed.1Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts Inherited Roth IRAs are different: the original contributions were made with after-tax dollars, and most beneficiaries receive the money tax-free.
Traditional Inherited IRAs Are Fully Taxable
Every dollar you pull from an inherited traditional IRA counts as ordinary income on your federal return. The IRS treats it the way it treats wages, so the withdrawal pushes your total taxable income higher and is taxed at whatever bracket that income lands in. Federal brackets currently run from 10% to 37%, and a large distribution can easily bump you into a higher bracket if you take it all in one year.2Internal Revenue Service. Federal Income Tax Rates and Brackets
The IRA custodian will send you a Form 1099-R showing the amount distributed. Inherited-account distributions carry distribution code 4 in Box 7, which tells the IRS the payment went to a beneficiary after the owner’s death.3Internal Revenue Service. Instructions for Forms 1099-R and 5498 You report the taxable amount on lines 4a and 4b of Form 1040.4Internal Revenue Service. Instructions for Form 1040
One piece of good news: distributions from an inherited IRA are exempt from the 10% early withdrawal penalty that normally applies to IRA withdrawals before age 59½. Your age doesn’t matter for that purpose.
Inherited Roth IRAs Are Usually Tax-Free
Because the original owner funded a Roth with after-tax money, the contributions come out tax-free to you as beneficiary.5Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs The only open question is the earnings, and that turns on a five-year rule. If the original owner opened the Roth at least five tax years before their death, the entire distribution, contributions and earnings alike, qualifies as tax-free. If the account is younger than five years, the earnings portion can be subject to ordinary income tax while the contributions remain untaxed.
Ask the custodian for the account’s original opening date before you take anything. Once the five-year window has passed, withdrawals create no federal income tax at all.
How Much You’ll Owe Depends on Timing
With a taxable inherited IRA, the size of your bill is largely a function of when you withdraw. Most non-spouse beneficiaries are working under the ten-year rule created by the SECURE Act: if the original owner died after 2019 and you don’t qualify as a spouse or other eligible designated beneficiary, you must empty the account by December 31 of the tenth year after the year of death.6Internal Revenue Service. Retirement Topics – Beneficiary
Are Annual Withdrawals Required?
Whether you also have to take a distribution each year inside that decade depends on the owner’s age at death. If the owner died before reaching their required beginning date (currently age 73), you can withdraw any amount in any year, so long as the account is empty by the end of year ten. If the owner died on or after that date, you must take annual required minimum distributions during the ten-year period and clear the balance by the end of year ten.7Internal Revenue Service. Notice 2024-35 – Certain Required Minimum Distributions for 2024
Spreading the withdrawals roughly evenly across the ten years is usually the smartest tax move. Waiting until year ten and taking everything at once can throw a big chunk of income into a single tax year and push you into a higher bracket than necessary.
The Penalty for Missing a Required Distribution
Skipping a required distribution triggers an excise tax of 25% on the amount you should have withdrawn. Correct the shortfall within two years and the penalty drops to 10%.8Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Either figure is steep enough to make a distribution calendar worth building.
Spouses Have an Extra Option
A surviving spouse can roll the inherited IRA into their own IRA and treat it as if they had always owned it. That resets the clock: no distribution is required until the spouse reaches their own RMD age, and the account keeps growing tax-deferred until then.9Internal Revenue Service. Publication 590-A – Contributions to Individual Retirement Arrangements (IRAs) For a spouse who doesn’t need the money soon, this delays the tax hit as long as possible.
The catch is age. If you roll the account into your own name and then need money before 59½, the standard 10% early withdrawal penalty applies on top of income tax. A spouse who might need access before 59½ can leave the account titled as an inherited IRA, which stays penalty-free at any age but comes with a set distribution schedule.6Internal Revenue Service. Retirement Topics – Beneficiary
Beneficiaries Who Can Still Stretch Distributions
The SECURE Act killed the lifetime stretch for most people, but a few categories of “eligible designated beneficiary” can still take distributions over their own life expectancy instead of within ten years:6Internal Revenue Service. Retirement Topics – Beneficiary
- A surviving spouse.
- A minor child of the deceased, until they turn 21, at which point the ten-year clock starts.
- A disabled individual, using the tax code’s disability definition.
- A chronically ill individual, certified by a licensed health care provider.
- An individual not more than ten years younger than the deceased owner.
Stretching distributions across decades spreads the taxable income thinly enough to keep each year’s bill manageable.
Estates, Trusts, and Charities Face Shorter Clocks
When an IRA passes to a non-individual beneficiary such as an estate, a charity, or a trust that doesn’t qualify as a see-through trust, a different timetable applies. If the original owner died before their required beginning date, the account must be fully distributed by the end of the fifth year after the year of death. If the owner died on or after that date, distributions can be spread over the owner’s remaining single life expectancy.10Internal Revenue Service. Required Minimum Distributions for IRA Beneficiaries
The five-year version stings. A sizeable IRA squeezed through an estate within five years concentrates the taxable income, and estates and trusts hit the top federal bracket at far lower income thresholds than individuals do. Naming individual beneficiaries directly on the IRA, rather than letting it pour through a will, usually avoids this outcome.
The Section 691(c) Deduction for Estate Tax Paid
If the deceased owner’s estate was large enough to owe federal estate tax, Section 691(c) lets a beneficiary who reports inherited IRA income deduct the portion of estate tax attributable to those IRA assets.11Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents The deduction is proportional to the IRA’s share of the total estate. It’s available whether or not you itemize other deductions. This only comes up for very large estates, since the federal estate tax exemption sits above $13 million per person, but when it applies the savings can be significant.
Don’t Forget State Income Tax
Most states with an income tax treat inherited IRA distributions the same way the IRS does: as ordinary income. A few states have no income tax, and some offer partial exclusions for retirement income. Rules vary enough that it’s worth checking your state’s tax authority before taking a large withdrawal, especially if you have flexibility on timing.