What to Do With an Inherited IRA: Beneficiary Categories, Rules, and Taxes

When you inherit an IRA, what to do with an inherited IRA comes down to three decisions in sequence: identify which beneficiary category federal law puts you in, title and transfer the account correctly, and follow the withdrawal timeline that matches your category. Surviving spouses have the widest set of choices, including treating the account as their own. Most other individual heirs must empty the account within ten years. Miss a required distribution and the IRS charges a 25% excise tax on the amount you should have taken.¹

Start by Identifying Your Beneficiary Category

Federal law sorts inherited IRA recipients into three groups, and nearly every rule that follows depends on which group applies to you.²

Eligible designated beneficiaries: surviving spouses, minor children of the account owner (not grandchildren), individuals who are disabled or chronically ill, and anyone not more than ten years younger than the deceased owner.
Designated beneficiaries: any individual heir who doesn’t fit the criteria above, typically adult children, grandchildren, siblings, or friends named on the account.
Non-designated beneficiaries: entities rather than people, including estates, charities, and trusts that don’t qualify as “see-through” trusts.

If a trust is involved or the paperwork is unclear, resolve the category question before you make any other move. It controls your withdrawal timeline, your rollover options, and the tax bill.

If You’re a Surviving Spouse

Spouses have the most flexibility. You can roll the inherited IRA into your own existing or new IRA and treat the funds as if they had always been yours.³ After a spousal rollover, the account follows standard IRA rules: no required minimum distributions until you reach age 73, and you name your own beneficiaries.¹

You can also keep the account titled as an inherited IRA rather than rolling it over. This is often the better move if you’re younger than 59½, because distributions from an inherited IRA are exempt from the 10% early withdrawal penalty that normally applies to IRA distributions before that age.⁴ Keeping the inherited titling lets you tap the money without that penalty while the rest keeps growing tax-deferred.

If the deceased spouse was younger than you, keeping the account as an inherited IRA can also delay required distributions, since they may be calculated on the deceased owner’s age rather than yours. Once you roll the funds into your own IRA, that decision is effectively permanent. You can’t undo it and return the assets to inherited IRA status.

If You’re a Non-Spouse Individual: The 10-Year Rule

If you’re an adult child, grandchild, sibling, or any other individual who isn’t an eligible designated beneficiary, you must withdraw the entire inherited IRA balance by December 31 of the tenth year after the owner’s death.² This is the 10-year rule from the SECURE Act of 2019, which replaced the older “stretch IRA” approach.

Whether you also owe annual withdrawals during that window depends on the original owner. If they had already reached their required beginning date for distributions before dying, you may need to take annual minimum withdrawals during the ten years, not just empty the account by year ten.⁵ If the owner died before that date, you have full flexibility year to year, as long as the balance is gone by the deadline.

Nothing requires equal annual distributions. You could take nothing for nine years and empty the account in year ten. But a single large withdrawal lands as ordinary income in one tax year and can push you into a higher bracket. Spreading distributions across multiple years usually lowers the total tax bill.

If You Qualify as an Eligible Designated Beneficiary

Eligible designated beneficiaries can generally stretch distributions over their own life expectancy, or the remaining life expectancy of the deceased owner, whichever is longer.⁵ They can also elect the 10-year rule instead if that works better.

Minor Children of the Account Owner

A minor child of the deceased owner qualifies until reaching the age of majority, which the SECURE Act sets at 21. During childhood, distributions come out based on the child’s life expectancy. Once the child turns 21, the 10-year clock starts, so the remaining balance must be fully withdrawn by age 31.² This eligible-beneficiary status is for the owner’s child specifically, not grandchildren.

Disabled or Chronically Ill Beneficiaries

Individuals who meet the IRS definition of disabled or chronically ill can take distributions over their own life expectancy for as long as they live. This is the longest withdrawal timeline available to any non-spouse beneficiary.

If an Estate, Charity, or Non-Qualifying Trust Inherits the IRA

Entities don’t have a life expectancy, so the rules are less flexible. If the original owner died before their required beginning date, the account must be fully emptied by December 31 of the fifth year after the year of death, known as the 5-year rule.²

If the owner had already started taking required distributions, the entity takes distributions based on the remaining life expectancy the deceased owner would have had, using IRS life expectancy tables.⁵ Estates often find these timelines restrictive because they force distributions during what may be a long probate. Charities, being tax-exempt, typically just liquidate the account.

Inherited Roth IRAs Work the Same Way, With Different Taxes

Inherited Roth IRAs follow the same beneficiary classifications and withdrawal timelines as inherited traditional IRAs. Spouses can roll them over, designated beneficiaries face the 10-year rule, and non-designated beneficiaries follow the 5-year rule.²

The tax treatment is what differs. Because the original owner already paid income tax on Roth contributions, most withdrawals from an inherited Roth IRA are tax-free. The exception: if the Roth account was less than five years old when the owner died, earnings you withdraw may be subject to income tax. The original contributions always come out tax-free regardless of the account’s age.

One thing surprises people. Original Roth owners never have to take required minimum distributions during their lifetime, but beneficiaries of inherited Roth IRAs do face required distribution timelines.⁶ Even when the withdrawals are tax-free, you still have to empty the account within the applicable window or owe the excise tax.

How the Withdrawals Are Taxed

Distributions from an inherited traditional IRA are taxed as ordinary income in the year you receive them. There is no capital gains treatment, even for investment growth inside the account.⁵ Each dollar you pull out gets added to your other income, which is why large single-year withdrawals can be expensive.

If the original owner made any nondeductible (after-tax) contributions, the portion of each distribution representing those contributions isn’t taxed again. You’ll need records of the owner’s nondeductible contributions, typically documented on Form 8606, to calculate the taxable portion correctly.

Regardless of account type, distributions from an inherited IRA are exempt from the 10% early withdrawal penalty, even if you’re under 59½.⁴ This applies to all beneficiaries, not just spouses. Income tax still applies; the extra 10% doesn’t.

Inherited IRAs are included in the deceased owner’s estate for federal estate tax purposes, but the federal estate tax exemption for 2026 is $15,000,000, so this only affects very large estates.⁷

Completing the Transfer Without Blowing Up the Tax Deferral

Start by gathering a certified copy of the death certificate (typically $15 to $25 depending on your jurisdiction), the decedent’s Social Security number, and the original account number. Contact the financial institution holding the IRA and request a Beneficiary Claim Form or Inherited IRA Application. On the form, select “Inherited IRA” as the account type.

Here’s the mistake that costs people the most. Non-spouse beneficiaries cannot roll inherited IRA assets into their own personal IRA. Only a surviving spouse can do that.⁸ If a non-spouse accidentally deposits inherited IRA funds into their own IRA, the IRS treats the whole amount as a taxable distribution plus an excess contribution, creating tax liability on both ends.

The inherited IRA must be titled in the name of the deceased owner for the benefit of the beneficiary. Something like “John Smith, deceased, IRA for the benefit of Jane Smith, beneficiary.” This titling preserves the inherited status and tells the custodian to apply the correct distribution rules. If a non-spouse retitles the account solely in their own name, the IRS may treat it as a complete distribution.

If you’re moving the inherited IRA to a different institution, request a trustee-to-trustee transfer. The funds move directly between custodians without you ever taking possession, which avoids withholding.⁹ If the custodian instead sends a check directly to you, the institution will withhold 10% for federal taxes by default on a traditional IRA distribution, and the entire amount may be treated as a taxable distribution if it isn’t properly deposited into an inherited IRA.

When Multiple Beneficiaries Share One Account

When an IRA names more than one beneficiary, each person’s withdrawal timeline defaults to the oldest beneficiary’s life expectancy, which shortens the distribution period for everyone. To avoid that, the beneficiaries can split the account into separate inherited IRAs, one per person, by December 31 of the year after the owner’s death. Once separated, each beneficiary follows the schedule that matches their own category and age.

Miss that deadline and it can be costly. If one beneficiary is a spouse and another is an adult child, failing to split the account can cost the spouse the option to take life-expectancy distributions or do a spousal rollover on their share. Contact the custodian early to begin separation.

Turning Down the Inheritance With a Qualified Disclaimer

You aren’t required to accept an inherited IRA. If you’d rather have the assets pass to the next person in line, whether for tax planning, Medicaid eligibility, or personal reasons, you can file a qualified disclaimer. Federal law then treats the assets as if you never received them.¹⁰

To qualify, the disclaimer must meet four requirements:

In writing and irrevocable, delivered to the account custodian or the estate’s personal representative.
Delivered no later than nine months after the date of the owner’s death, or the date you turn 21 if later.
No prior acceptance: you can’t have already accepted the IRA or taken any distributions or benefits from it.
No direction: the disclaimed assets must pass to the next beneficiary without you choosing who receives them. The beneficiary designation or state law controls where the funds go.

The nine-month deadline is strict and can’t be extended. If you’re considering a disclaimer, don’t take distributions or exercise control over the account beforehand, because either action can disqualify it.

A Warning on Creditor Protection

Unlike retirement accounts you fund yourself, inherited IRAs generally lack federal bankruptcy protection. In Clark v. Rameker (2014), the U.S. Supreme Court ruled that inherited IRAs are not “retirement funds” under federal bankruptcy law, because the account holder can’t make new contributions, must take required withdrawals regardless of age, and can withdraw the entire balance at any time without penalty.¹¹

That ruling applies to the federal bankruptcy exemption under 11 U.S.C. § 522.¹² State law varies. Some states have their own statutes that do protect inherited IRAs from creditors, even in bankruptcy. If you’re worried about creditor exposure, ask an attorney in your state what protections apply.

Naming Your Own Beneficiaries on the Inherited Account

If you inherit an IRA and then die before it’s fully distributed, your own beneficiaries, called successor beneficiaries, step into your position. They don’t restart the clock or use their own life expectancy. They continue under the timeline that applied to you.⁵

If you were an eligible designated beneficiary taking life-expectancy distributions, your successors must empty the remaining balance within ten years of your death. If you were already under the 10-year rule, your successors must finish draining the account by the same original deadline, without a fresh ten-year window. That’s why naming contingent beneficiaries on your inherited IRA matters. Without them, the account may pass through your estate and face the most restrictive timeline.

The Cost of Missing a Required Distribution

Failing to take a required distribution from an inherited IRA triggers an excise tax of 25% of the amount you should have withdrawn.¹ That applies whether you missed an annual required withdrawal or missed the 10-year or 5-year deadline entirely.

The penalty drops to 10% if you correct the shortfall within two years.⁶ Correcting means taking the missed distribution and filing Form 5329 with your tax return for the year the distribution was due. Even the reduced penalty can run into the thousands on a sizable account, so put every distribution deadline on the calendar the day you take title.

1
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
2
Internal Revenue Service. Retirement Topics – Beneficiary
3
Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust
4
Office of the Law Revision Counsel. 26 USC 72 – Annuities and Certain Proceeds of Endowment and Life Insurance Contracts
5
Internal Revenue Service. Publication 590-B, Distributions from Individual Retirement Arrangements
6
Internal Revenue Service. Retirement Topics – Required Minimum Distributions
7
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
8
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
9
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
10
Office of the Law Revision Counsel. 26 USC 2518 – Disclaimers
11
Justia Supreme Court Center. Clark v. Rameker, 573 U.S. 122 (2014)
12
Office of the Law Revision Counsel. 11 USC 522 – Exemptions