What happens when you inherit an IRA from a parent?

When you inherit an IRA from a parent, you generally must move the funds into a new Inherited IRA, which has strict withdrawal rules, most notably the 10-Year Rule requiring full distribution by the end of the 10th year after the parent's death (for most non-spouse beneficiaries). You can't add new money, and withdrawals from traditional IRAs are taxed as income, while Roth IRA withdrawals are usually tax-free if the original account met its five-year rule.

How do I avoid paying tax on an inherited IRA?

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.

What happens if you inherit an already inherited IRA?

When you inherit an IRA, you open an Inherited IRA, and depending on your relationship to the original owner (spouse vs. non-spouse) and the original account's status, you must withdraw funds, usually within 10 years (10-Year Rule), taking annual Required Minimum Distributions (RMDs) if the original owner was taking them, all while paying taxes on traditional IRA withdrawals as ordinary income. Spouses get more flexibility, often treating it as their own, while most other beneficiaries must empty the account by year 10, potentially managing annual RMDs and managing tax impacts with lump sums or yearly withdrawals. 

Do you pay taxes if you inherit a family members traditional IRA account?

Best of all, with most inheritances, you won't owe any taxes. You won't even have to report them to the IRS. There is one important exception, however: If you inherit an individual retirement account (IRA), any taxes on IRA distributions that would have been owed by the deceased will now be owed by you.

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. 

Inherited IRAs - What should I do with this?

What is the best thing to do with 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 much tax will I pay if I cash out an inherited IRA?

Inherited Traditional IRA withdrawals are taxed as ordinary income at your personal tax rate (e.g., 22%, 24%) and must follow a 10-year payout rule for most non-spousal beneficiaries, while inherited Roth IRA withdrawals are generally tax-free if the original account met the 5-year rule, but earnings might be taxed if not, and beneficiaries must still empty the account within 10 years, with exceptions for spouses who can stretch distributions over their lifetime. 

What is the new rule on 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.
 

Does IRA inheritance 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. 

How do I avoid the 10 year rule for an inherited IRA?

There are exceptions for certain eligible designated beneficiaries, defined by the IRS, as someone who is either:

1. The IRA owners' spouse.
2. The IRA owner's minor child.**
3. An individual who is not more than 10 years younger than the IRA owner.
4. Disabled (as defined by the IRS).
5. Chronically ill (as defined by the IRS).

Can my adult children inherit my IRA?

Anyone can inherit an IRA, including spouses, family members, and non-related individuals, as well as estates and trusts.

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. 

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 ultimate inheritance tax trick?

Give more money away

Lifetime gifting is a straightforward way to begin reducing your IHT bill. By gifting money during lifetime, that would have been part of an inheritance anyway, you reduce the size of your estate so that there is smaller amount subject to IHT on your death.

What happens if I inherit an inherited IRA?

If you inherit an IRA, it becomes an "inherited IRA," and you must follow specific rules, mainly the 10-year rule: empty the account by the end of the 10th year after the original owner's death (unless you're an eligible beneficiary like a spouse or minor child), often requiring yearly distributions if the original owner was taking them, with withdrawals typically taxed as ordinary income (Roth IRA withdrawals usually tax-free). If you're a "successor beneficiary" (inheriting from the first beneficiary), you inherit their rules, but for deaths after 2019, the 10-year rule usually applies, overriding any "stretch" options. 

Do you 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's the best thing to do with an inherited IRA?

As a spouse, you'll have the choice of moving the inherited balance into an inherited account or combining it with your own accounts. Deciding what's best for you will depend on your age, expected retirement date, tax considerations, immediate need for cash, and any need for creditor protection.

What is the big change for inherited IRAs in 2025?

There is an inherited IRA change for 2025 that could trigger an IRS penalty of up to 25% before year-end. Starting in 2025, certain non-spouse heirs, including adult children, must start taking required minimum distributions while emptying their inherited IRA over 10 years.

How long can you 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. 

How do I avoid paying taxes on an inherited traditional IRA?

One inherited IRA tax management tip is to avoid immediately withdrawing a single lump sum from the IRA. Instead, wait until RMDs are due, or, if you got the IRA from a non-spouse, stretch withdrawals over 10 years. RMDs are taxable and can change your tax bracket and increase your overall tax burden.

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 much can you inherit from your parents without paying inheritance tax?

IHT may have to be paid on the estate if it's worth more than the tax-free threshold of £325,000. This means that the first £325,000 of your estate is tax-free – the 40% tax only applies to any assets over this threshold.

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.