Inherited IRAs: What Happens to a Retirement Account After Someone Dies?

When someone inherits an IRA, the rules change.

The account is still tax-advantaged, but the distribution rules are no longer based on the original owner’s retirement timeline. Instead, they depend on the beneficiary.

That shift is where much of the confusion begins.

Inherited IRA rules are not primarily about investment management. They are largely about distribution timing and tax law, which is why these accounts often require a different type of planning than a traditional retirement account.

The SECURE Act Changed the Rules

This applies to traditional IRAs, SEP IRAs, SIMPLE IRAs, and most employer retirement plans.

Before 2020, most beneficiaries could “stretch” distributions from an inherited IRA over their own lifetime.

That rule largely ended with the SECURE Act.

Today, most non-spouse beneficiaries must distribute the entire inherited account within 10 years of the original owner’s death.

This is commonly referred to as the 10-year rule.

(See Internal Revenue Code §401(a)(9)(H); IRS Publication 590-B.)

Inherited IRA rules ultimately depend on two factors:

• who the beneficiary is

• whether the original owner had already begun Required Minimum Distributions (RMDs)

Inherited IRA Rule Map

When someone inherits an IRA, the first question is who the beneficiary is.

Step 1: Are you the spouse of the original account owner?

If yes, several options may be available:

• Roll the inherited IRA into your own IRA

• Treat the account as your own retirement account

• Remain a beneficiary and follow inherited IRA rules

Each option creates a different distribution timeline and tax treatment.

Step 2: If you are not the spouse

Certain beneficiaries receive special treatment under the law.

These include:

• Minor children of the original owner

• Disabled individuals

• Chronically ill individuals

• Beneficiaries who are less than ten years younger than the original owner

These beneficiaries may generally take distributions based on life expectancy rather than the 10-year rule, although special rules apply to minor children once they reach adulthood.

Step 3: If neither of those categories applies

Most other beneficiaries fall under the 10-year rule.

That means the entire inherited IRA must generally be distributed by the end of the tenth year following the original owner’s death.

If the original owner had already begun Required Minimum Distributions, the beneficiary generally must take annual distributions during the ten-year period in addition to emptying the account by the end of year ten.

This structure is why inherited IRA rules often appear confusing. The timeline depends both on the beneficiary and on the status of the original account owner.

A Common Misunderstanding

One of the most common misunderstandings is assuming the inherited IRA rules are handled automatically by the custodian.

In many cases the custodian processes withdrawals and provides tax reporting, but determining the correct distribution schedule may still require interpretation of the tax rules.

That is one reason inherited IRAs often benefit from early review.

When the First Withdrawal Must Occur

Inherited IRA timelines begin in the year the original owner dies.

If annual distributions are required, the first beneficiary distribution generally must occur by December 31 of the year following the year of death.

Example:

If an IRA owner dies in 2025, the first inherited distribution that may be required must generally occur by December 31, 2026.

However, this rule applies primarily when:

• the beneficiary uses life-expectancy distributions

• the beneficiary is subject to the 10-year rule and the original owner had already begun RMDs

If the 10-year rule applies and the original owner had not yet begun RMDs, annual withdrawals may not be required. The key requirement is simply that the account must be fully distributed by the end of the tenth year.

Roth IRAs Are Different

Roth IRAs are also subject to the 10-year rule for most beneficiaries.

However, distributions are generally not taxable if the Roth account satisfies the five-year holding requirement.

Even so, the account must typically still be fully distributed by the end of the tenth year following the owner’s death.

What Happens If a Required Withdrawal Is Missed?

Inherited IRA rules include specific deadlines.

If a required withdrawal is missed, the IRS may assess a penalty on the amount that should have been withdrawn.

Historically, this penalty was 50 percent of the missed distribution. Recent legislation reduced the penalty to 25 percent, and it may be reduced further to 10 percent if the error is corrected promptly.

Correcting a Missed RMD

If a required distribution was missed, the first step is usually to take the missed withdrawal as soon as the error is discovered.

Once the distribution is taken, the taxpayer typically files IRS Form 5329, which reports the missed Required Minimum Distribution and requests a waiver of the penalty.

The IRS instructions allow taxpayers to include a brief explanation describing:

• why the distribution was missed

• how the mistake was discovered

• the steps taken to correct it

In many situations, taxpayers who correct the error promptly and demonstrate reasonable cause may receive relief from the penalty.

In practice, these corrections are often straightforward when addressed early.

Rules and penalty-relief procedures may change, and individual circumstances vary.

Timing Matters.

If a required withdrawal was missed, it is generally best not to delay addressing it.

Taking the missed distribution and correcting the reporting quickly may allow the issue to be resolved with reduced penalties or, in some cases, a waiver of the penalty entirely.

Waiting multiple years to correct the issue can make the situation more complicated.

Why Inherited IRAs Can Be More Technical Than They Appear.

Many financial advisors are highly skilled at building investment portfolios.

However, inherited IRA administration often involves a different type of expertise.

Unlike traditional IRAs or employer retirement plans, custodians do not always calculate inherited IRA distributions automatically.

In many cases they will:

• maintain the account

• process withdrawals when requested

• provide tax reporting

But determining how much must be withdrawn and when may fall on the beneficiary or their advisor.

Inherited IRA calculations can involve several technical steps, including:

• determining whether the decedent had already begun RMDs

• calculating life-expectancy distributions for eligible beneficiaries

• applying the 10-year rule correctly

• determining whether annual withdrawals are required

• correcting missed distributions when necessary

These rules are not primarily about selecting investments. They are about applying tax law correctly.

Because of that, inherited IRAs often sit at the intersection of financial planning, tax planning, and retirement law.

When these details are reviewed early, the process is usually straightforward. When they are overlooked for several years, correcting the situation can become more complicated.

A Final Thought

Inherited IRAs often arrive during emotionally difficult periods.

The tax rules do not pause during those moments.

By the time many beneficiaries begin evaluating distribution timing, several years of planning opportunity may already be gone.

Inherited IRA rules are manageable, but they are rarely simple. They often benefit from early review.

Our clients rely on our guidance for these kinds of decisions. You do not have to go it alone.

If you have recently inherited an IRA, or expect to inherit one in the future, it may be worth scheduling a meeting to review how the distribution timeline fits into your broader financial picture.

Sources:

Internal Revenue Code §401(a)(9)Internal Revenue Code §401(a)(9)(H)Internal Revenue Code §401(a)(9)(E)Internal Revenue Code §4974

Treasury Regulations under IRC §401(a)(9)https://www.ecfr.gov/current/title-26/section-1.401(a)(9)

IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)https://www.irs.gov/publications/p590b

IRS Required Minimum Distribution FAQshttps://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

IRS Instructions for Form 5329https://www.irs.gov/forms-pubs/about-form-5329

SECURE Act of 2019 and SECURE 2.0 Act of 2022.

Disclosure

This article is provided for informational purposes only and should not be considered individualized tax, investment, or legal advice. Inherited IRA rules vary depending on beneficiary classification, account structure, and individual circumstances. Readers should consult a qualified professional regarding their specific situation.