Inheriting an IRA from someone you love is often one of the last things on your mind in the weeks after a loss. But the rules that govern inherited IRAs are time-sensitive, and the decisions you make in the early months can have significant financial consequences for years to come.
This is an area where I strongly encourage families to get informed quickly, even before the grief has fully settled.
Before we get into what to do, it helps to understand the landscape. The SECURE Act was passed in 2019 and took effect January 1, 2020. It fundamentally changed how most beneficiaries must handle an inherited IRA. If you inherited before 2020, different rules may apply to you. If you inherited after, here is the framework that governs your situation.
Under the old rules, beneficiaries could stretch distributions over their own lifetime, spreading the tax burden across decades. The SECURE Act largely eliminated that option for most non-spouse beneficiaries, replacing it with a 10-year distribution requirement. A follow-on law, SECURE 2.0, was passed in December 2022 and added further adjustments, particularly for surviving spouses.
(See IRS Publication 590-B and the IRS Retirement Topics: Beneficiary page for the full regulatory framework.)
The IRS does not treat all beneficiaries the same. Your relationship to the deceased and your own circumstances determine which category you fall into, and that category determines your options.
Eligible Designated Beneficiaries still have access to more favorable treatment. This group includes surviving spouses, minor children of the account owner (until age 21), disabled or chronically ill individuals, and beneficiaries who are not more than ten years younger than the deceased. Surviving spouses have the additional option to roll the inherited IRA into their own account and defer distributions accordingly.
Non-Eligible Designated Beneficiaries are subject to the 10-year rule. This applies to most adult children, siblings, and other individuals who do not meet the criteria above. It means the entire account must be fully distributed by December 31st of the tenth year following the year of the account owner's death.
Importantly, if the original account owner had already reached their Required Beginning Date for RMDs before they passed away, most non-eligible designated beneficiaries must also take annual distributions in years one through nine, in addition to depleting the account by year ten. This is not optional, and the IRS penalty relief that had been in place for 2020 through 2024 has ended. Annual distributions are required beginning in 2025 for those in this situation.
(IRS Notices 2022-53, 2023-54, and 2024-35 provided the prior relief; that relief is no longer in effect.)
Non-Designated Beneficiaries, such as estates, charities, or certain trusts, operate under a five-year rule or must follow the remaining life expectancy of the original owner, depending on whether required minimum distributions had already begun.
Once you know which category applies to you, a few things need attention relatively quickly.
The first is titling. An inherited IRA must be properly retitled in a specific format that identifies both the deceased and you as the beneficiary. If funds are distributed before the account is properly set up, they may be treated as a fully taxable withdrawal, with no ability to return the money to the account.
The second is the final year RMD. If the original account owner had already reached the age requiring distributions and had not yet taken their distribution for the year of death, you may be responsible for taking that final distribution on their behalf. Missing it carries a penalty.
The third is deciding on your distribution strategy. If you are subject to the 10-year rule, you have some flexibility in how you time distributions across those years, but the decision deserves thought. Taking everything in year ten could push you into a significantly higher tax bracket. Spreading distributions more evenly, or timing them around lower-income years, can reduce the overall burden considerably.
This is an area that deserves special attention. When an IRA is payable to a trust rather than directly to an individual, the rules become more complex. Not all trusts qualify for favorable treatment, and a trust that was not drafted with IRA beneficiary rules in mind may inadvertently trigger accelerated taxation.
If you are a trustee or beneficiary of a trust that has inherited an IRA, do not assume the trust automatically handles this correctly. It is worth having an attorney and a financial advisor review the trust language and the distribution options available to you.
Illinois does not have a separate inheritance tax, but it does impose an estate tax with an exemption threshold lower than the federal level. Depending on the size of the estate you are inheriting from, there may be state-level considerations that affect timing and planning decisions.
The rules around inherited IRAs are genuinely complicated, and the stakes are high enough that getting informed advice early makes a real difference.
If you have recently inherited an IRA and are trying to understand your options, we are glad to help you think through the planning side of it.
This article is for informational purposes only and is not intended as legal advice. Please consult a qualified estate planning attorney or financial advisor regarding your specific situation.