Learn About Required Minimum Distributions From Inherited IRAs

Understanding Inherited IRA Rules and the SECURE Act Changes

When someone passes away and leaves an Individual Retirement Account (IRA) to you, the account doesn't simply become yours to use however you wish. Instead, federal tax laws create specific rules about when and how you must withdraw money from an inherited IRA. These rules changed significantly in 2020 when Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which took effect on January 1, 2020.

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Before the SECURE Act, most non-spouse beneficiaries could stretch out IRA withdrawals over their entire lifetime, which meant they paid taxes gradually over many years. This strategy, sometimes called the "stretch IRA," allowed inherited money to grow tax-deferred for decades. The new law changed this approach for most inheritors, though some beneficiaries still have more flexibility than others.

The SECURE Act introduced a 10-year rule: most beneficiaries who inherit an IRA after December 31, 2019 must withdraw all the money within 10 years of the original owner's death. This doesn't mean you pay taxes on everything immediately—you simply must empty the account by the end of that 10-year window. However, the law also created exceptions for certain people, such as surviving spouses and minor children, who may have different withdrawal options.

Understanding these rules matters because failing to withdraw the required amounts can result in steep tax penalties. The penalty for not taking a required minimum distribution (RMD) is 25 percent of the amount you should have withdrawn but didn't. This penalty was increased from 10 percent under the SECURE 2.0 Act, which passed in December 2022. For example, if you were supposed to withdraw $5,000 and didn't, you could owe a $1,250 penalty in addition to income taxes on that $5,000.

Practical Takeaway: The year after someone dies and leaves you an IRA matters greatly. Laws changed in 2020, so inherited IRAs from deaths before and after that date may have different rules. Determine when the original IRA owner passed away, as this affects your withdrawal timeline and options.

Who Counts as an "Eligible Designated Beneficiary"

The SECURE Act created a special category called "eligible designated beneficiaries" who receive more favorable withdrawal rules than other inheritors. If you fall into this category, you may be able to stretch withdrawals over your lifetime instead of following the 10-year rule. Understanding whether you qualify for this status is one of the most important steps in managing an inherited IRA.

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Eligible designated beneficiaries include five groups. First, there are surviving spouses—the spouse of the person who died. Spouses have the most flexibility of any beneficiary group and can even treat the inherited IRA as their own. Second, there are minor children of the deceased, but only until they reach age 18 (or 24 if they remain full-time students). Once the child becomes an adult, they transition to the 10-year rule.

The third group includes individuals who are disabled as defined by federal law. Disability has a specific legal meaning: you must be unable to engage in substantial gainful activity because of a medically determinable physical or mental impairment expected to last at least 12 months or result in death. You'll likely need documentation from medical professionals to establish disability status. The fourth group consists of people who are chronically ill, meaning they require substantial and continuing care due to an illness or condition.

The fifth group is beneficiaries who are not more than 10 years younger than the original IRA owner. For example, if the IRA owner was 60 when they died and you were their 65-year-old sibling, you would be within 10 years of their age and would qualify for lifetime stretch options.

If you don't fall into any of these five categories, you are considered a "non-eligible designated beneficiary," and the standard 10-year withdrawal rule applies to you. Non-eligible designated beneficiaries include most adult children, grandchildren, friends, and non-spouse beneficiaries who are more than 10 years younger than the deceased owner.

Practical Takeaway: Write down which category best describes your relationship to the person who left you the IRA. Your category determines whether you have 10 years to withdraw funds or whether you can spread withdrawals over a longer period. If you believe you might qualify as disabled or chronically ill, gather relevant medical documentation now.

How Inherited IRA Required Minimum Distributions Work

Required minimum distributions, commonly called RMDs, are the dollar amounts you must withdraw from an inherited IRA each year. The amount changes depending on your age, the balance in the account, and which set of rules applies to you. The IRA custodian—the financial institution holding the account—typically calculates the RMD and notifies you of the amount, but you are responsible for ensuring the withdrawal actually happens.

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For most non-spouse beneficiaries inheriting IRAs under the current rules, the calculation is straightforward: divide the total account balance as of December 31 of the previous year by 10. For example, if an inherited IRA had $100,000 on December 31, 2024, your RMD for 2025 would be $10,000 ($100,000 divided by 10). In 2026, you would again use the remaining balance divided by 10, and so on until the account is empty after 10 years.

If you are an eligible designated beneficiary using the lifetime stretch option, the calculation is more complex. You would use the IRS life expectancy tables, which assign a distribution period based on your age. For example, a 45-year-old inheritor might have a life expectancy factor of 38.8 years according to the IRS tables. You divide the account balance by this factor to find your annual RMD. Each year, as you get older, the factor gets smaller, which means your required withdrawal amount gets larger.

There's an important timing rule: your first RMD from an inherited IRA is generally due by December 31 of the year following the death of the original owner. Some exceptions apply. For instance, if you inherit an IRA from your spouse, you may be able to delay the first RMD. The deadline is not flexible—missing it results in the 25 percent penalty mentioned earlier.

It's crucial to understand that RMDs are not optional, even if you don't need the money. The government treats inherited IRAs as taxable income, and it requires distributions to ensure taxes get paid. You cannot simply leave the money in the inherited IRA and avoid withdrawals.

Practical Takeaway: Contact the financial institution holding the inherited IRA and ask for a written statement showing the account balance as of December 31 of the previous year and your calculated RMD for the current year. Mark the December 31 deadline on your calendar for each year you own the inherited IRA.

Tax Implications and Income Reporting

Any money you withdraw from an inherited traditional IRA counts as ordinary income and must be reported to the IRS on your tax return. This is one of the biggest surprises for new IRA inheritors: the entire withdrawal amount is taxable, not just a portion of it. If you inherit an IRA with $150,000 and withdraw $15,000 in the first year, you owe income tax on the full $15,000. This tax is in addition to any other income you earn during the year.

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The tax situation differs for inherited Roth IRAs. Money withdrawn from a Roth IRA that the original owner held for at least five years is generally tax-free. This is one reason why inheriting a Roth IRA is advantageous compared to inheriting a traditional IRA. However, if the deceased owner had not held the Roth IRA for five years, some earnings in the account may be subject to income tax. The five-year rule is based on when the original owner first contributed to any Roth IRA, not when you inherited it.

The financial institution holding the inherited IRA sends you a Form 1099-R each January reporting the distributions you took during the previous year. You must include this information on your tax return when you file. The form shows the gross distribution amount and how much federal tax was withheld (if any). Many people make the mistake of assuming that because a financial institution withholds taxes, they don't need to report the