When you inherit an IRA or 401(k), federal law usually gives you ten years to empty the account, and every dollar you pull from a traditional account is taxed as ordinary income at your marginal rate. That is the short version of the retirement account inheritance rules and tax implications most beneficiaries face after the SECURE Act of 2019 ended the old “stretch IRA” for most non-spouse heirs.1Internal Revenue Service. Retirement Topics – Beneficiary What actually applies to you depends on three things: your relationship to the person who died, whether the account is traditional or Roth, and whether the owner had already started taking required minimum distributions.
Which Beneficiary Category You Fall Into
Federal law sorts every heir of a retirement account into one of three groups, and your group controls how fast the money has to come out.
Eligible designated beneficiaries get the most flexibility. This group covers surviving spouses, minor children of the account owner (not grandchildren) under age 21, disabled or chronically ill individuals as defined under federal law, and anyone not more than ten years younger than the deceased owner. These beneficiaries can generally spread withdrawals over their own life expectancy instead of squeezing everything into ten years.1Internal Revenue Service. Retirement Topics – Beneficiary
Designated beneficiaries are named individuals who don’t qualify as eligible. Adult children, grandchildren, siblings, and friends land here. This group is locked into the ten-year rule.
Non-designated beneficiaries are the decedent’s estate, charities, and most trusts. These entities face the tightest timelines, often a five-year window when the owner died before their required beginning date. A “see-through” trust that meets specific IRS requirements can be treated as a designated beneficiary so the underlying individuals get the ten-year rule instead of the five-year rule. If a trust is the named beneficiary, verifying its status with an estate attorney is worth the cost.
The 10-Year Rule and Whether You Owe Annual Withdrawals
The ten-year rule requires the entire inherited balance to be distributed by December 31 of the tenth year after the owner’s death.2Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans The deadline to empty the account and the requirement to take money out each year along the way are two separate obligations, and this is where beneficiaries get tripped up.
If the original owner died after their required beginning date (generally April 1 of the year after turning 73), designated beneficiaries must take an annual minimum distribution during each of the first nine years, calculated using the beneficiary’s life expectancy, and clear out whatever’s left by the end of year ten.2Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans If the owner died before their required beginning date, no annual distributions are required inside the ten-year window; you just have to empty the account by the deadline.3Internal Revenue Service. Notice 2024-35
That distinction changes your planning. An adult child who inherits from a 78-year-old parent must take annual withdrawals every year until the account is empty. The same child inheriting from a 65-year-old parent who hadn’t yet begun distributions can time withdrawals however they want inside the ten years, front-loading them in low-income years to soften the tax hit.
Missing a required distribution triggers a 25% excise tax on the amount that should have come out. The penalty drops to 10% if you correct the shortfall within two years.4Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs If you have a reasonable explanation, you can request a waiver by filing Form 5329 with a written statement describing the error and how you fixed it.5Internal Revenue Service. Instructions for Form 5329
The Year-of-Death Distribution
If the original owner died after their required beginning date and hadn’t yet taken their full required minimum distribution for that year, the beneficiary has to finish it.6Internal Revenue Service. Publication 590-B – Distributions From Individual Retirement Arrangements (IRAs) Someone who inherits an IRA in March from a parent who died in February still owes the parent’s distribution for that calendar year.
The amount is calculated the way the original owner would have calculated it, and the beneficiary reports it as income on their own Form 1040. Missing this distribution carries the same 25% excise tax as any other missed RMD.4Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs If the owner died before their required beginning date, no year-of-death distribution is owed.
How the Money Is Taxed When You Withdraw It
Every dollar withdrawn from an inherited traditional IRA or traditional 401(k) is taxed as ordinary income at your marginal federal rate.1Internal Revenue Service. Retirement Topics – Beneficiary A large inherited account can easily push you into a higher bracket. If you earn $80,000 and withdraw $150,000 in one year, a substantial slice of that withdrawal gets taxed at 24% or higher. Spreading withdrawals across several years, whenever the ten-year rule leaves you that flexibility, is the single most effective way to reduce the total tax bill.
Retirement accounts don’t get a step-up in cost basis at death. That’s a critical difference from inherited stocks or real estate. With a house, the heir’s basis resets to the market value on the date of death, wiping out decades of appreciation for tax purposes. Retirement accounts carry the full original tax liability forward. Every dollar of pre-tax contributions and growth the original owner never paid taxes on becomes taxable income to you when withdrawn.
Most states also tax inherited retirement distributions as ordinary income. A handful of states have no income tax at all, and several others offer partial exemptions for retirement income, so check your state’s rules before you plan the timing of withdrawals.
Inherited Roth IRAs
Inherited Roth accounts work differently because the original owner already paid taxes on the contributions. Withdrawals of both contributions and earnings are generally tax-free, provided the original owner held the Roth for at least five years before death.1Internal Revenue Service. Retirement Topics – Beneficiary The five-year clock starts on January 1 of the year the owner made their first contribution to any Roth IRA, not just the one you inherited. If the owner died before that five-year mark, contribution withdrawals are still tax-free but the earnings portion may be taxable.
The ten-year distribution deadline still applies to non-spouse designated beneficiaries of a Roth. You can’t leave the money growing indefinitely. But because withdrawals carry no tax, the strategic move is often the opposite of what you’d do with a traditional account: let it grow tax-free for the full ten years and take it all out at the end.
Special Rules for Surviving Spouses
Spouses have options no other beneficiary gets. A surviving spouse can roll the inherited account into their own IRA and effectively become the owner. From that point forward the account follows the spouse’s own retirement timeline, with no required distributions until the spouse reaches age 73.7Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) For a spouse who doesn’t need the money right away, this is usually the best move.
The rollover has a catch that bites younger spouses. Once the money is in your own IRA, any withdrawal before age 59½ carries the standard 10% early withdrawal penalty on top of income tax. A surviving spouse under 59½ who needs access to the funds is often better off keeping the money in an inherited IRA, where distributions are taxed as income but carry no early withdrawal penalty. Model both scenarios before committing.
Minor children of the account owner take distributions based on their own life expectancy while they’re under 21. Once they turn 21 the ten-year clock starts, so a child who inherits at age 5 could have until age 31 to fully empty the account.1Internal Revenue Service. Retirement Topics – Beneficiary Disabled and chronically ill beneficiaries, and individuals not more than ten years younger than the deceased, can stretch distributions over their own life expectancy for as long as they live and aren’t subject to the ten-year rule at all.
Claiming the Account and 401(k) Versus IRA Mechanics
Your first step is to contact the financial institution or plan administrator. You’ll need certified copies of the death certificate (order several, since other agencies will need them too), the deceased owner’s Social Security number and account numbers, and your own identification. The custodian provides a claim form where you specify that you’re opening an inherited IRA. That designation is critical: it ensures the assets transfer directly into a new account titled in your name as beneficiary rather than being paid out to you as a taxable distribution. The title typically reads something like “Jane Smith as beneficiary of John Smith.”
The ten-year rule and beneficiary categories apply to both 401(k) plans and IRAs, but 401(k)s add a layer: the plan document controls your distribution options.1Internal Revenue Service. Retirement Topics – Beneficiary Some plans let beneficiaries keep the assets in the plan and take periodic distributions. Others require a lump-sum payout. Ask the plan administrator what your specific plan allows.
Non-spouse beneficiaries who inherit a 401(k) can generally transfer the assets to an inherited IRA through a direct trustee-to-trustee transfer, which is usually preferable because IRAs offer more investment flexibility and more control over timing. The transfer has to go directly between institutions. If the custodian sends you a check, the full amount is treated as a taxable distribution, and depositing the money into an inherited IRA afterward will not undo it.
Refusing the Inheritance
You are not required to accept an inherited retirement account. If the tax burden would outweigh the benefit, or you’d rather the assets pass to the next beneficiary in line, you can formally refuse through a qualified disclaimer. The assets then pass as if you had predeceased the owner, typically to the contingent beneficiary named on the account.
A qualified disclaimer has to meet four federal requirements:8Office of the Law Revision Counsel. 26 USC 2518 – Disclaimers it must be in writing and irrevocable; it must reach the custodian or plan administrator within nine months of the owner’s death; you cannot have taken any distribution or exercised control over the account before disclaiming; and you cannot direct who receives the disclaimed assets, which pass under the beneficiary designation or the plan’s default rules.
The nine-month deadline is firm. Once it passes, or once you take even a partial distribution, you lose the ability to disclaim. Get tax advice quickly if this is on the table.
The Forms You’ll File
Each year you take a distribution, the custodian sends you a Form 1099-R reporting the amount. For inherited accounts, the form uses distribution code 4 (death).9Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498 You report the income on Form 1040, with the total on line 4a and the taxable amount on line 4b.6Internal Revenue Service. Publication 590-B – Distributions From Individual Retirement Arrangements (IRAs)
If the inherited IRA contains any after-tax (non-deductible) contributions the original owner made, file Form 8606 to calculate the taxable and non-taxable portions of each distribution. Without it, the IRS treats the entire distribution as taxable and you’ll overpay. If you inherited IRAs from more than one person, file a separate Form 8606 for each.10Internal Revenue Service. 2025 Instructions for Form 8606
If you missed a required distribution, file Form 5329 to report the shortfall and pay the excise tax. To request a waiver, enter “RC” on the dotted line next to line 54a or 54b along with the shortfall amount, and attach a written explanation of the reasonable cause and the corrective steps you’ve taken.5Internal Revenue Service. Instructions for Form 5329 The IRS reviews these individually and will notify you if the waiver is denied.