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Settling an estate can be a complex process involving myriad legal, tax, and financial issues, but none more confounding than dealing with an inherited IRA. If you expect to inherit an individual retirement account, you need to brace yourself for a cascade of rules and procedures that will make your head spin. One wrong move can be costly, and you’re not likely to get any empathy from the IRS.

Understanding how an inherited IRA works and your responsibilities in the transfer process is critical to ensuring an optimal outcome.

What is an Inherited IRA?

An inherited IRA is a separate IRA established by the beneficiary for the purpose of receiving a bequeathed retirement account. Generally, the inherited IRA receives the same tax treatment as the original IRA, including tax deferral of account earnings and taxes owed on withdrawals. But the IRS has imposed additional requirements that affect the timing of withdrawals.

When you inherit a qualified retirement account, which could include a traditional IRA, Roth IRA, SEP IRA, or 401k, the IRS imposes specific rules and requirements about how it can be used, including the timeframe required to withdraw funds. That’s because the account owner has been able to defer taxes throughout their lifetimes, and the IRS expects them to be paid at some point. It used to be that an IRA beneficiary could “stretch” mandatory IRA withdrawals or required minimum distributions (RMDs) over their own lifetimes based on their life expectancies. That allowed them to minimize taxes owed on withdrawals in any given year. That changed with the enactment of the SECURE Act in 2019.

The SECURE Act eliminated the stretch option for most non-spouse IRA beneficiaries, who are now required to distribute the entire value of an inherited IRA within ten years. There’s no RMD requirement, but beneficiaries must empty the account by the end of the tenth year following the original owner’s death (though a proposed rule change by the IRS could impose RMDs for each of the ten years). Failure to withdraw all funds results in a penalty assessment by the IRS of 50% on any remaining funds.

The consequence for IRA inheritors (except for Roth IRAs) is their tax rates could increase in the years they take withdrawals—substantially for large inherited IRAs. Outside of being one of the exceptions to the rule (discussed below), there’s little that can be done to avoid it.

How an Inherited IRA Works

While anyone can inherit an IRA, the rules and requirements vary depending on your relationship with the original owner. Surviving spouses have several choices for an inherited IRA, while non-spouses generally have just one option of the 10-year rule. For minor children or beneficiaries who are chronically ill or disabled, there are exceptions to the 10-year rule.

Rules for Surviving Spouses

Surviving spouses are a primary exception to the 10-year rule. They may continue to apply the stretch IRA rules, basing withdrawals on life expectancy using RMD calculations. Spouses have three options for taking control of an inherited IRA.

Roll IRA funds into a separate IRA: The spouse has total control over the IRA with the ability to name new beneficiaries. RMDs will be based on the life expectancy of the spouse. Any withdrawals made before age 59 ½ will be subject to a 10% early withdrawal penalty on top of taxes owed.

Take ownership of the IRA: Spouses may take over ownership of the deceased’s IRA with RMDs based on their own life expectancies. If the deceased was 72 and started making RMDs, the spouse must take any unfulfilled RMD owed by the deceased in the year they die. Otherwise, surviving spouses don’t need to take their own RMDs until age 72. Surviving spouses are allowed to take early withdrawals before age 59 ½ without penalty.

Stay on as a beneficiary: The spouse can simply stay on as the beneficiary of the account, assuming RMDs based on the deceased owner’s age. However, withdrawals made by the spouse prior to age 59 ½ are subject to a 10% early withdrawal penalty.

Rules for Non-Spouses

The rules for non-spouses are relatively straightforward. Non-spouses are required to withdraw all funds from the inherited IRA by December 31 of the tenth year following the year of death of the original owner, which means you actually have eleven years to drain the account.

Because there is no RMD requirement, the beneficiary can choose how they want to withdraw the money—all at once upfront or just before the 10-year deadline or piecemeal each year. This allows them to plan the best distribution strategy based on their current and future tax situation.

Exceptions to the Non-Spouse Rules

Minor children: Younger children may take RMDs based on their age until they reach the age of majority in their state, which is typically age 18. From then on, they are subject to the 10-year rule. This exception does not apply to grandchildren.

Disabled or chronically ill individuals: Beneficiaries who meet the IRS definition of disabled or chronically ill may take RMDs based on their life expectancy.

Individuals within ten years of age of the deceased are allowed to take RMDs based on their life expectancy.

Regardless of which option a beneficiary—spouse or non-spouse–chooses, they are required first to fulfill any RMD owed by the deceased in the year they die or suffer a 50% penalty on the amount owed. If the original owner dies before age 72, there is no RMD requirement.

Proposed IRS Rule May Require RMDs During 10-Year Period

The IRS has proposed a new rule which would, in effect, require beneficiaries to take RMDs during the 10-year period. That means you would no longer be able to wait to take withdrawals from an inherited IRA. RMDs would not be based on your life expectancy but rather an installment formula dictated by the IRS. Failure to comply will result in a 50% penalty on the unfulfilled RMD.

As of September 2022, the rule is still in the proposal stage and may or may not go into effect this year. If you expect to inherit a qualified retirement account, you should stay in touch with your financial advisor for any developments with the rule change.

Using an IRA Inheritance Trust to Protect Your Legacy

One tool can help you avoid these problems and gain control over how your IRA assets are distributed – an IRA Inheritance Trust, also referred to as a Standalone Retirement Trust. When you name the trust as your beneficiary, you have the ability to control all aspects of how, when, and to whom your IRA assets are to be distributed. You can even dictate how the assets are to be used. You can be as specific as instructing the trust to distribute assets along a timeline in predetermined amounts to different beneficiaries.

When your assets are held in an IRA Inheritance Trust, you can direct the trust to stretch RMDs over the life expectancy of the youngest beneficiary, which could be a grandchild. If any of your beneficiaries have special needs, you can create a sub-trust that will allow the beneficiary to have access to available government assistance.

Finally, assets transferred through an IRA Inheritance Trust maintain the protections of the original owner, keeping them free from claims and liabilities. The protections remain in place as long as the assets are held in the trust.

In setting up an IRA Inheritance Trust, it is crucial to ensure it is expertly drafted. If provisions of the trust are murky, it could be difficult for custodians to correctly ascertain the qualified beneficiaries, which could mean the IRA ends up going to the estate. That would present all sorts of problems for heirs, including the imposition of the IRS’s accelerated (5-year) distribution rules.

Critical Steps to Follow When Expecting an Inherited IRA

Determine How Many Beneficiaries Share the IRA

It’s not uncommon for multiple beneficiaries to be named on an IRA. If that’s the case, each beneficiary must establish their own inherited IRA account. Designated beneficiaries must be determined by September 30, following the year of the original owner’s death.

Beneficiaries must show proof to the custodian of their beneficiary status on the account.

Open an Inherited IRA

Each beneficiary needs to open a separate inherited IRA account to receive the inherited funds. You can open an inherited IRA at most financial institutions but check to see which ones are experienced in handling inherited IRAs.

Correctly Title the Account

When establishing an inherited IRA, the first critical step is to ensure it has been titled correctly. Only a surviving spouse can transfer an inherited IRA into their name. All others must establish a separate account to receive the inherited funds. To meet IRS requirements, the separate IRA must include the original owner’s name and be identified as an inherited IRA. For example, the title should read:

Malcom Smith Jr. Beneficiary IRA, Malcolm Smith Sr. deceased 7/15/21.

Request the Transfer of Inherited Funds

You will need to provide benefactor information to your custodian so it can verify their death. Provide a digital copy of the deceased owner’s death certificate and Social Security number. You will receive a request to process and a notification when the transfer is completed.

Name a Beneficiary

Your inherited IRA will need a beneficiary. Understanding the distribution rules as they apply to your beneficiaries is essential. For IRAs inherited after December 31, 2019, non-spouse beneficiaries are subject to the 10-year rule for emptying the account. If the original beneficiary dies, there is no reset of the 10-year rule for the successor beneficiary, who must still drain the account ten years following the original owner’s death.

Determine the Distribution Amount

Non-spouse beneficiaries who inherited IRAs after 2020 are not required to take an annual distribution. Their only requirement is they must drain the entire account by the end of the 10-year period. However, annual distributions are required for surviving spouses and beneficiaries who inherited IRAs before 2020.

To calculate required distributions, you will need to know the prior year-end account value and life expectancy. For example, to calculate distributions for 2022, you will use the account value as of December 31, 2021.

To determine life expectancy, non-spouse beneficiaries use the IRS Single Life Expectancy Table to find their age in the year after the original owner’s death. Each year that follows, beneficiaries subtract one year from the prior year’s factor to determine the current year’s distribution.

Determine the After-Tax Basis in the IRA

Many beneficiaries neglect to determine if their inherited IRA includes an after-tax basis, which could reduce their tax liability. The only way to determine that is to go back through the original owner’s tax returns to see if Form 8606 had ever been filed. If so, you will need to file Form 8606 to claim the non-deductible portion of your required minimum distribution.

Develop a Strategy for Taking Distributions

If you are a non-spouse beneficiary, you are required to empty the inherited account by the end of 10 years following the death of the original owner. However, that doesn’t mean you don’t need a strategy for taking distributions. Your biggest consideration is taxes. A large distribution in any year could push you into higher tax brackets. Based on current and projected future earnings, you need to determine if you would be better off taking distributions throughout the 10-year period or waiting until the end after the account has benefited from ten additional years of tax-deferred, compounded earnings.

You won’t have that concern if you inherit a Roth IRA from which distributions can be received tax-free. However, you still must satisfy the five-year holding period that began with the original owner’s first Roth conversion or contribution. You should determine when the account was established and how much of its value is comprised of contributions versus earnings. Since earnings come out last from a Roth IRA, you can take out an amount equal to contributions or conversion amounts without consideration for the five-year rule.

Educate Yourself

The IRS couldn’t have made the rules and requirements for inherited IRAs any more complicated—and they’re still trying to change the rules. When you find out you are going to be a beneficiary of an IRA, it’s critical to take the time to educate yourself on what to expect. The best free source for help is the IRS website which offers details on IRA beneficiary rules and requirements. And there’s no shortage of educational content online. Your IRA custodian can also provide specific information based on your plan regarding procedures to follow.

Do Nothing Until You Meet with a Financial Advisor

While the IRS website, online resources, and your custodian can get you up to speed on the ins and outs of inherited IRAs, they can’t provide customized advice on which options are best for your circumstances. It would be in your best interest to work with a financial advisor experienced in inherited IRAs. They are best equipped to help you navigate the legal, tax, and financial implications of your options and how to avoid the many pitfalls that could derail your windfall. Be sure to work with a fiduciary advisor who is obligated to work in your best interests.


While an inherited IRA can be a windfall, it can also be a curse due to an inadvertent and irreversible misstep. If you expect to inherit an IRA, your first step should be to take a pause and learn everything you can about inheriting an IRA and how to ensure the best outcome for your situation. The advisors at Dechtman Wealth Management are knowledgeable and experienced with inherited assets, potentially saving you time and heartache as you navigate the complex world of inherited IRAs.

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Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Dechtman Wealth Management, LLC [“DWM”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from DWM. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. DWM is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the DWM’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at

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