What happens to an IRA when someone dies?

When an IRA owner dies, the account is typically inherited by a designated beneficiary (spouse, child, trust, etc.), who must establish an "inherited IRA" and follow specific distribution rules, most notably the SECURE Act's 10-year rule for most non-spousal heirs, requiring full withdrawal by the end of the 10th year following the owner's death, though spouses and some others have more flexible options like rolling it into their own IRA or taking life expectancy distributions. The inherited funds are usually taxable (for traditional IRAs) and must be distributed according to these rules, avoiding probate if a beneficiary is named.

Do beneficiaries pay tax on IRA inheritance?

Yes, beneficiaries usually pay taxes on inherited IRA distributions, but the amount and timing depend on the IRA type (Traditional or Roth) and the beneficiary's relationship to the deceased, with most non-spouse beneficiaries facing the 10-Year Rule requiring full withdrawal by the 10th year, taxed as ordinary income. Spouses have more options, and Roth IRA withdrawals are generally tax-free if the 5-year rule is met. 

What is the best thing to do with an inherited IRA?

What to do with an inherited IRA

• "Disclaim" the inherited retirement account.
• Take a lump-sum distribution.
• Transfer the funds into your own IRA.
• Open a stretch IRA.
• Distribute the assets within 10 years.
• Distribute assets received through a will or estate.

How long does it take to inherit an IRA after death?

Five-year rule

Any individual beneficiary may elect to distribute the inherited IRA assets over the five years following the owner's death. The distribution must be completed by the end of the year containing the fifth anniversary of the owner's death.

Does an inherited IRA have to be cashed out?

Yes, if you inherit an IRA, you likely have to take distributions, generally emptying the account within 10 years (the 10-year rule for most non-spouses). For those inheriting from owners who were already taking Required Minimum Distributions (RMDs), you must also take annual RMDs within that 10-year window, starting the year after death, with the whole balance gone by year 10. Spouses have more flexibility, while minor children have different rules, but the overarching requirement is to follow IRS guidelines, often involving the 10-year rule and annual RMDs. 

🚨 Your 401(k) After Death: Who Gets Your Money? 💰

What happens to an inherited IRA when the owner dies?

When an IRA owner dies, the account passes to the named beneficiary, becoming an "inherited IRA," with rules depending on the beneficiary type (spouse, eligible designated (EDB), or non-designated) and the SECURE Act. Most non-spouses must withdraw the entire amount within 10 years, possibly requiring yearly RMDs if the original owner was taking them, while spouses have more options like rolling it into their own IRA. All distributions from traditional inherited IRAs are taxable, but Roth IRA distributions are tax-free if qualified. 

Do I have to pay state taxes on an inherited IRA?

State taxes: In addition to federal taxes, state income taxes may apply to IRA distributions, depending on the state in which the beneficiary lives. Penalties: Failing to take required distributions results in a penalty tax on the amount that should have been distributed but was not.

What is the disadvantage of an inherited IRA?

The downside is that there's a 10% penalty on withdrawals before age 59½, and there might be accelerated RMDs if the surviving spouse was older than the deceased spouse.

What is the new rule for inherited IRAs?

New inherited IRA rules, largely from the SECURE Act, require most non-spouse beneficiaries to empty the account within 10 years (the 10-year rule), replacing the old life-expectancy "stretch" option, with a key 2025 change mandating annual withdrawals if the original owner was taking RMDs. Spouses still have flexibility to treat it as their own, while exceptions to the 10-year rule (Eligible Designated Beneficiaries like disabled/chronically ill/minor children) have different rules.
 

When must an IRA be completely distributed when a beneficiary is not named?

If an IRA owner dies without naming a beneficiary, the account typically defaults to the estate, and the entire IRA must be fully distributed by December 31st of the fifth year following the owner's death (the 5-Year Rule), regardless of the owner's age, to avoid penalties, although specific rules for estates and charities can vary slightly under IRS guidance. 

What is the first thing you should do when you inherit money?

Assess Your Financial Situation

It's important to determine your overall wealth once you receive inherited money. Before you spend or give away any money or assets, decide to move, or leave your job, your Wealth Advisor should help you decide what to do with inheritance money.

Is $500,000 a big inheritance?

$500,000 is a big inheritance. It could have a significant impact on your financial situation, depending on how it is managed and utilized. As you can see here, there are many complex, moving parts involving several financial disciplines.

Can I roll an inherited IRA into my own IRA?

Yes, a surviving spouse can roll an inherited IRA into their own IRA, treating it as their own, but a non-spouse beneficiary generally cannot and must set up a new "inherited IRA" and follow the 10-year rule (with exceptions). Spouses have the flexibility to transfer funds, convert to a Roth (paying taxes now), or delay distributions, while non-spouses face strict withdrawal deadlines, usually needing to empty the account within 10 years, requiring specific "beneficiary" titling. 

What is the best thing to do if you inherit an IRA?

The rules around inherited IRAs are different for spouse and non-spouse beneficiaries. Non-spouse beneficiaries can open and transfer funds into an inherited IRA, take a lump-sum withdrawal or turn down the inheritance. Spouse beneficiaries can roll the funds into an existing IRA account or open a new account.

Is there a difference between an inherited IRA and a beneficiary IRA?

There's no difference: "Inherited IRA" and "Beneficiary IRA" refer to the same thing—an IRA passed down after the original owner dies, managed under special rules. The key distinctions aren't between the terms themselves but rather who inherits it (spouse vs. non-spouse) and how it's handled (e.g., taking distributions within 10 years for most non-spouses, or rolling it into a spousal IRA).
 

What is the 10 year beneficiary rule?

The 10-Year Rule, established by the SECURE Act for deaths after 2019, generally requires most non-spouse beneficiaries to empty inherited retirement accounts (like IRAs and 401(k)s) by the end of the 10th year following the original owner's death, replacing the old "stretch IRA" for most people, with specific exceptions for spouses, minor children (until they reach majority), the disabled, the chronically ill, and those within 10 years of the owner's age. While distributions might not be required annually for the first nine years if the owner died before their Required Beginning Date (RBD), the entire balance must be gone by the 10th year's end, or a penalty applies.
 

How do I avoid paying taxes on my inherited IRA?

If you inherit a Roth IRA, you won't owe taxes on distributions, though you will still be required to empty the account within 10 years. 3. The tax rules are more lenient for spouse beneficiaries. Spouses can roll over the inherited IRA into their personal IRA or put the money into a new, inherited IRA account.

Is it better to inherit a Roth IRA or a traditional IRA?

Inheriting a Roth IRA is generally better due to tax-free growth and withdrawals, making it a more valuable legacy than a taxable Traditional IRA, especially for non-spouses who must empty it in 10 years but avoid income tax. However, for spouses, a Traditional IRA offers flexibility to roll into their own account and delay taxes, while Roth rules (like the 5-year rule for earnings) still apply, so the "best" choice depends on your tax bracket and financial goals, though Roth offers unmatched tax-free income. 

How much tax will I have to pay on an inherited IRA?

Inherited Roth IRAs

Withdrawals of contributions from an inherited Roth are tax free. Most withdrawals of earnings from an inherited Roth IRA account are also tax-free. However, withdrawals of earnings may be subject to income tax if the Roth account is less than 5-years old at the time of the withdrawal.

Should you cash out an inherited IRA?

Generally, non-designated beneficiaries must withdraw the inherited IRA funds within 5 years of the IRA owner's death. If the owner had reached RBD before death, then RMDs are generally required in years 1-5 based on the life expectancy of the owner.

How long can a beneficiary keep an inherited IRA?

You generally have 10 years to empty an inherited IRA for most non-spouse beneficiaries after the original owner's death (under the SECURE Act), with the entire balance due by December 31st of the 10th year following the year of death, though you might need to take annual RMDs within that decade if the original owner had started them, with key exceptions for spouses, minor children (until age 21), disabled/chronically ill individuals, and those close in age. 

Does an inherited IRA count as income?

Yes, distributions from an inherited Traditional IRA are generally taxed as ordinary income to the beneficiary, while inherited Roth IRA withdrawals are usually tax-free if the 5-year rule is met, but both types must follow SECURE Act rules (like the 10-year payout for most non-spouses). You report these withdrawals as income, typically receiving a Form 1099-R, but avoid the 10% early withdrawal penalty. 

Does my beneficiary have to pay taxes on my IRA?

Yes, beneficiaries usually pay taxes on inherited IRA distributions, but the amount and timing depend on the IRA type (Traditional or Roth) and the beneficiary's relationship to the deceased, with most non-spouse beneficiaries facing the 10-Year Rule requiring full withdrawal by the 10th year, taxed as ordinary income. Spouses have more options, and Roth IRA withdrawals are generally tax-free if the 5-year rule is met. 

Can I convert an inherited IRA to a Roth?

You generally cannot directly convert an inherited IRA to a Roth IRA unless you are the surviving spouse; non-spouse beneficiaries are prohibited from doing so, but spouses can roll the traditional IRA into their own IRA and then perform a Roth conversion, paying taxes on the converted amount. Non-spouse beneficiaries must follow the 10-year rule for distributions, but can roll assets from an inherited qualified plan (like a 401(k)) into an inherited Roth IRA, which is a taxable event. 

What happens if a child inherits an IRA?

When a minor inherits an IRA, an adult (parent, guardian, or trustee) must manage the account, as minors can't hold IRAs directly; the inherited IRA must be moved into an inherited IRA, and while the minor benefits from life expectancy distributions until age 21 (if the original owner was of RMD age), they then face the SECURE Act's 10-year rule, requiring the entire balance to be withdrawn by the end of the 10th year after turning 21, facing penalties for failure to do so, with the child responsible for taxes on distributions.