Introduction
Inheriting an IRA can come with unexpected tax consequences—especially after the changes introduced by the SECURE Act and SECURE 2.0. Whether you’ve inherited a Traditional IRA or a Roth IRA, it’s essential to understand the IRS rules, deadlines, and strategies to avoid unnecessary taxes and penalties.
This guide covers the types of beneficiaries, the 10-year withdrawal rule, exceptions, tax reporting requirements, and strategies to minimize the tax impact of inherited IRAs in 2025.
Types of Inherited IRAs and Beneficiaries
1.1. Traditional vs. Roth Inherited IRA
- Traditional IRA: Distributions are taxable as ordinary income.
- Roth IRA: Qualified distributions are tax-free, but withdrawals are still required.
1.2. Beneficiary Categories Under SECURE Act
| Beneficiary Type | Withdrawal Rule |
|---|---|
| Spouse | May roll over into own IRA or stretch over life |
| Eligible Designated Beneficiaries (EDBs) | May take RMDs over life expectancy |
| Non-Eligible Designated Beneficiaries | Must empty account within 10 years |
| Non-Designated Beneficiaries | Must distribute over 5 years (if deceased before RBD*) |
*RBD = Required Beginning Date for original IRA holder
Eligible Designated Beneficiaries (EDBs) Include:
- Surviving spouse
- Minor child of the deceased (until age of majority)
- Chronically ill or disabled individuals
- Beneficiaries not more than 10 years younger than the decedent
The 10-Year Rule Explained (IRC § 401(a)(9)(H))
Under the SECURE Act, most non-spouse beneficiaries must:
- Fully withdraw the inherited IRA within 10 years
- No annual RMDs required unless the decedent died after RBD (then RMDs are required in years 1–9)
Example:
You inherit a Traditional IRA worth $200,000 in 2025.
- You must withdraw the full amount by December 31, 2035.
- If the original owner was over age 73, RMDs are required each year (in addition to the 10-year rule).
Tax Implications of Inherited IRAs
Traditional IRA
- Withdrawals are fully taxable as ordinary income.
- Large withdrawals may push you into a higher tax bracket.
Roth IRA
- If the account was open for at least 5 years, withdrawals are tax-free.
- Still must comply with the 10-year distribution rule.
Inherited IRA Distributions Appear On:
- Form 1099-R – Reports amount withdrawn
- Reported on your Form 1040 as income
- May require Form 5329 if RMDs are missed
Strategies to Minimize Taxes on Inherited IRAs
4.1. Spread Distributions Over 10 Years
- Avoid large lump-sum withdrawals that trigger higher taxes
- Withdraw smaller amounts annually to stay in a lower tax bracket
4.2. Use Roth IRA Inheritance to Your Advantage
- If inheriting a Roth IRA, delay withdrawals until the 10th year to allow tax-free growth
- Take out funds when your own income is low to optimize tax-free benefits
4.3. Consider Timing Withdrawals Around Income
- Plan distributions in years when income is lower (e.g., between jobs, early retirement)
- May help you qualify for lower capital gains or tax credit thresholds
4.4. Use the “Stretch IRA” Strategy if You Qualify as an EDB
- Eligible beneficiaries can take smaller annual RMDs over their own life expectancy
4.5. Use Charitable Planning If Appropriate
- Designate a charity as beneficiary to eliminate income tax on IRA assets
- Especially useful for Traditional IRAs that would otherwise be fully taxable
Key Deadlines and IRS Reporting
| Form | Purpose |
|---|---|
| Form 1099-R | Reports distributions from the inherited IRA |
| Form 5329 | Reports missed RMDs and calculates penalty waivers |
| Form 1040 | Main tax return where distributions are reported |
Missed RMD Penalties (IRC § 4974)
- Penalty: 25% of amount not withdrawn (can be reduced to 10% if corrected within 2 years)
- Must file Form 5329 to report and potentially request penalty relief
Common Mistakes to Avoid
- Missing the 10-year deadline – triggers full taxation of any remaining balance
- Assuming Roth IRAs don’t have required withdrawals – beneficiaries must still withdraw funds
- Not calculating RMDs in years 1–9 (if original owner died after RBD)
- Not coordinating with your overall tax plan – could cause bracket creep
- Ignoring state income tax on IRA withdrawals
Conclusion
Inheriting an IRA can be a financial opportunity—but only with careful tax planning. Understanding the 10-year rule, using smart withdrawal timing, and knowing whether you’re an eligible beneficiary can save you thousands in taxes.
To create a personalized inherited IRA plan, schedule a consultation with Anshul Goyal, CPA EA FCA. Book an appointment here:
About Our CPA
Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant in the United States, an Enrolled Agent (EA) admitted to practice before the IRS, and a cross-border tax expert. He specializes in retirement taxation, IRS compliance, and helping American families and Indian expatriates manage inherited IRAs and avoid unnecessary tax liabilities.
Frequently Asked Questions (FAQs)
- What is the 10-year rule for inherited IRAs?
Most non-spouse beneficiaries must fully withdraw the inherited IRA within 10 years of the original account holder’s death.
- Are inherited Roth IRAs taxable?
No, if the account was held for at least 5 years, withdrawals are tax-free, though they must still be taken within 10 years.
- Do I have to take RMDs from an inherited IRA?
If you’re an eligible beneficiary, yes—annually based on life expectancy. If not, you must comply with the 10-year rule (and in some cases, take annual RMDs in years 1–9).
- What happens if I miss a required distribution?
You may face a 25% penalty, but it can be reduced to 10% if corrected quickly and reported using Form 5329.
- Can a spouse roll over an inherited IRA into their own name?
Yes, a surviving spouse can treat the inherited IRA as their own, delaying RMDs until they reach the applicable age.