When the owner of an IRA dies, the account passes directly to whoever is named on the beneficiary designation form on file with the custodian, bypassing the will and probate entirely. What happens to an IRA when the owner dies after that point depends on two things: the beneficiary’s relationship to the deceased, and whether the account is a traditional or Roth IRA. Those two facts determine how quickly the money must come out and how much of it is taxable.
Who Actually Inherits the Account
An IRA is a contract between the owner and a financial institution, and the beneficiary form attached to that contract controls where the money goes. A will cannot override it. When a valid form is on file, the custodian pays the named person directly, skipping court supervision, legal fees, and creditor claims that come with probate.
If more than one person is named, each beneficiary receives their designated share and can generally ask the custodian to split the account into separate inherited IRAs. That lets each heir manage withdrawals on their own timeline.
If the owner never named a beneficiary, or every named beneficiary died first, the IRA usually falls into the owner’s estate and passes through probate. The tax result is worse too: an estate is not a “designated beneficiary” for federal tax purposes, so the account must be emptied within five years when the owner died before their required beginning date for distributions.1Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
A named beneficiary who does not want the money can file a qualified disclaimer instead. The disclaimer has to be in writing, delivered within nine months of the owner’s death, and the disclaiming person cannot have already accepted any benefit from the account.2eCFR. 26 CFR 25.2518-2 – Requirements for a Qualified Disclaimer The funds then pass to the next beneficiary in line. The person disclaiming cannot direct where the money goes.
Options for a Surviving Spouse
A surviving spouse has more choices than any other beneficiary, and the right choice usually comes down to age.
Rolling the IRA Into Your Own
A spouse can roll the inherited funds into their own IRA and become the account owner outright.3Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts After the rollover, the usual owner rules apply: no required withdrawals until age 73.4Internal Revenue Service. Retirement Topics – Required Minimum Distributions The catch is that any withdrawal before age 59½ triggers the 10% early withdrawal penalty on top of income tax, so a younger surviving spouse who needs cash should think twice before rolling over.
Keeping It as an Inherited IRA
The alternative is to leave the money in an inherited IRA with the spouse as beneficiary. Distributions from an inherited IRA are never hit with the 10% early withdrawal penalty, no matter the beneficiary’s age. A surviving spouse who chooses this route is also exempt from the 10-year distribution rule and can spread withdrawals over their own life expectancy.5Internal Revenue Service. Retirement Topics – Beneficiary For a younger spouse who needs access now, this is often the better structure.
The 10-Year Rule for Most Other Beneficiaries
Adult children, friends, siblings more than ten years younger, and most other non-spouse heirs fall under the 10-year rule. The entire inherited IRA must be emptied by December 31 of the tenth year after the owner’s death.1Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans The SECURE Act put this rule in place for deaths after 2019, replacing the older “stretch IRA” approach that let heirs draw down over their whole lifetime.
You cannot always sit on the money and take one big withdrawal in year ten. Whether annual withdrawals are also required depends on when the owner died.
If the owner died on or after age 73 (their required beginning date), the beneficiary must take annual distributions during the 10-year window, calculated from the beneficiary’s life expectancy, starting the year after the owner’s death.6Federal Register. Required Minimum Distributions Whatever is left has to come out by the end of year ten.
If the owner died before age 73, there are no mandatory annual amounts, only the final deadline. Even then, spreading withdrawals across the ten years is usually a smaller tax hit than emptying the account in one taxable year.
Who Can Still Stretch Distributions
A narrow group of “eligible designated beneficiaries” is exempt from the 10-year rule and can withdraw over their own life expectancy:
- Surviving spouses, as covered above.
- Minor children of the deceased owner, who qualify for life-expectancy distributions until age 21; after that the 10-year clock starts on whatever is left. Only the owner’s own children qualify. Grandchildren, stepchildren, nieces, and nephews do not.1Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
- Disabled individuals, meaning a person unable to perform substantial work due to a physical or mental condition expected to result in death or last indefinitely.
- Chronically ill individuals, certified by a licensed health care practitioner as unable to perform at least two activities of daily living for an indefinite period.
- Anyone not more than ten years younger than the deceased, such as a sibling or partner of similar age.
Disability or chronic illness status has to be documented to the custodian by October 31 of the year after the owner’s death. Chronic illness requires the practitioner’s certification; a Social Security Administration disability determination satisfies the disability standard.7eCFR. 26 CFR 1.401(a)(9)-4 – Determination of the Designated Beneficiary
How Withdrawals Are Taxed
Traditional IRAs
Distributions from an inherited traditional IRA are taxed as ordinary income in the year you receive them.8Internal Revenue Service. Publication 590-B, Distributions from Individual Retirement Arrangements If the original owner made only deductible contributions, every dollar is taxable. If some contributions were nondeductible, part of each withdrawal is a tax-free return of those after-tax dollars, and you report the split on Form 8606.
Custodians withhold 10% for federal income tax on nonperiodic distributions from traditional IRAs by default unless you elect otherwise.8Internal Revenue Service. Publication 590-B, Distributions from Individual Retirement Arrangements If your bracket is higher, 10% will not cover the full bill, and you may need estimated payments to avoid a surprise at tax time.
Roth IRAs
Inherited Roth IRAs follow the same timing rules (10-year rule, spousal options, or eligible designated beneficiary stretch), but the tax picture is far better. If the original owner held any Roth IRA for at least five tax years before dying, everything you withdraw, contributions and earnings alike, comes out completely tax-free.8Internal Revenue Service. Publication 590-B, Distributions from Individual Retirement Arrangements If the owner died before that five-year holding period was met, contributions are still tax-free on the way out, but earnings are taxable until the period is satisfied.
Because qualified Roth withdrawals are tax-free, beneficiaries usually gain by leaving a Roth alone as long as the rules allow and letting it keep growing.
The Penalty for Missing a Deadline
Missing a required distribution, whether an annual amount during the 10-year window or the final emptying of the account, triggers an excise tax of 25% on the shortfall.9eCFR. 26 CFR 54.4974-1 – Excise Tax on Accumulations in Qualified Retirement Plans On a $200,000 missed distribution, that is $50,000. If you catch the mistake and withdraw the correct amount within the correction window, the penalty drops to 10% of the shortfall. Calendar reminders for the annual and final deadlines are cheap insurance.
Inherited IRAs Are Exposed to Your Creditors
Your own IRA is shielded in bankruptcy up to $1,711,975 under federal law.10Office of the Law Revision Counsel. 11 USC 522 – Exemptions An inherited IRA is not. In 2014, the Supreme Court ruled unanimously that inherited IRAs are not “retirement funds” for bankruptcy purposes because the beneficiary can drain the account at any time, cannot add contributions, and must take distributions regardless of age.11Justia. Clark v. Rameker, 573 US 122 (2014) Some states protect inherited IRAs by statute, but the protection varies. If you inherit a sizeable IRA and face any creditor exposure, ask a lawyer what your state does.
When a Trust Is the Named Beneficiary
Some owners name a trust rather than a person, usually to control how young or inexperienced heirs receive the money. If the trust is valid under state law, becomes irrevocable at the owner’s death, has identifiable individual beneficiaries, and the required documentation reaches the custodian, the IRS “looks through” the trust and treats the individual trust beneficiaries as the designated beneficiaries for distribution timing.
If the trust misses any of those requirements, the IRA is treated as having no designated beneficiary, which pushes it into the five-year rule (owner died before 73) or distributions based on the deceased owner’s remaining life expectancy. The mistakes accelerate the tax bill, so setting up a trust as beneficiary is work for an estate planning attorney.
Claiming the Account
Every custodian starts with the same paperwork: a certified copy of the death certificate, your Social Security number, a government-issued photo ID, and the deceased owner’s account information. The custodian supplies claim forms asking how you want the inherited account set up and how you want distributions handled.
The inherited account has to be titled to show both names, in a format such as “Jane Smith, deceased, for the benefit of John Smith.” That titling signals to the IRS and the custodian that beneficiary rules apply, not ordinary owner rules.5Internal Revenue Service. Retirement Topics – Beneficiary Once the documentation clears, the custodian moves the assets into the newly titled account, usually within one to three weeks.
If you want the money at a different firm, request a trustee-to-trustee transfer so the funds move directly between custodians. Confirm the receiving institution titles the new account correctly before the transfer goes through; a mistake there can turn the whole balance into a taxable distribution.