What to Do When Inherit an IRA
Finding out you’ve inherited an IRA can feel overwhelming. On one hand, it’s a gift. On the other hand, it comes with rules… and yes, more rules. If you’ve recently become the beneficiary of a retirement account, you might be wondering, “Okay… now what?”
Let’s break it down in plain English.
What Is an Inherited IRA?
An inherited IRA is a retirement account you receive when someone passes away and names you as their beneficiary. It’s not quite the same as having your own IRA. There are special rules about when and how you can take the money out.
And the IRS definitely wants you to follow those rules.
Your Main Options
When you inherit an IRA, you usually have two basic choices:
1. Take All the Money at Once
You can withdraw the entire balance in one lump sum. Sounds simple, right? The catch: this could mean a big tax bill, depending on the type of IRA.
2. Move It to an Inherited IRA
You can transfer the money into an account set up in the original owner’s name (for your benefit). Then you can take withdrawals over time instead of all at once.
For many people, this helps manage taxes and gives the money more time to potentially grow.
The 10-Year Rule (Yes, There’s a Timer)
Most people who inherit an IRA (and aren’t the spouse) must empty the account by December 31 of the 10th year after the original owner’s death.
However, some people may have different rules. For example:
A surviving spouse
A minor child of the person who passed away
Someone who is disabled or chronically ill
Someone who is less than 10 years younger than the original owner
Spouses often have the most flexibility. They may even be able to treat the IRA as their own. The exact rules can also depend on whether the original owner had already started taking required withdrawals before they passed away. So it’s important to double-check your specific situation before making a decision.
Required Withdrawals
Some inherited IRAs require you to take minimum withdrawals each year. These are called Required Minimum Distributions (RMDs). If you miss a required withdrawal, the IRS may charge a penalty. And no one enjoys giving the IRS extra money.
Mark your calendar!
How Taxes Work
The taxes depend on the type of IRA you inherit.
Traditional IRA
Money you withdraw is usually taxed as regular income. That means it could increase your tax bill for the year.
Roth IRA
Withdrawals are generally tax-free if the account has been open at least five years. If it hasn’t, earnings might be taxed—but contributions are usually tax-free.
Federal and state tax rules can differ, so it’s smart to talk with a tax professional before making any big moves.
Common Mistakes to Avoid
Missing important deadlines
Taking out too much in one year and creating a surprise tax bill
Not understanding your beneficiary status
Forgetting to update paperwork
A little organization now can save a lot of stress later.
Simple Steps to Get Started
Here’s a quick checklist:
Confirm what type of IRA you inherited
Make sure the beneficiary paperwork is correct
Learn your withdrawal options
Keep track of deadlines
Meet with a financial advisor to build a plan
Acting sooner rather than later can help you protect what you’ve inherited and avoid unnecessary taxes.
If you’ve inherited an IRA and aren’t sure what to do next, you don’t have to figure it out alone. A clear plan can make the process much smoother—and a lot less stressful.
