Inherited IRAs and what you leave behind

What is an inherited IRA?

An inherited IRA is a new account created when you inherit someone else’s retirement account. It is titled in the name of the person who died, with you named as the beneficiary. That titling looks like paperwork and it is actually the whole point.

It is not your own IRA. You cannot add to it, and outside of one case you cannot merge it into an account of your own. Every rule below follows from that separation.

The one case is a surviving spouse, who has options nobody else gets — what a surviving spouse can do. Most of this page is written for everyone else, because everyone else is on a clock.

What are the new rules for inherited IRAs?

For most people inheriting from a parent, the lifetime stretch is gone. The account has to be emptied by the end of the calendar year that holds the tenth anniversary of the death.

It’s the difference between unloading a moving truck over a month and unloading it over a weekend. Nothing in the truck changed. The pace did, and so did what it takes out of you.

Notice that the deadline is a calendar year, not a rolling date. A death in December buys nearly a full extra year of room. A death in January does not. That is worth knowing before anyone plans around it.

The rule applies where the original owner died in 2020 or later. An inheritance from an earlier death can still be on the old lifetime schedule, which is why a friend’s experience may not transfer to yours.

• A surviving spouse is treated separately and is not on this clock.
• A minor child of the person who died is on a different schedule until they turn 21. The 10-year clock then starts — so the account has to be empty by about 31. It is a delay, not an exemption, and that is the half people miss.
• Someone disabled or chronically ill is also treated separately.
• Someone not more than 10 years younger than the owner is on a longer schedule based on their own life expectancy rather than the 10-year one, which usually means a sibling or a friend rather than a child.
• Everyone else — which is most adult children — is on the 10-year clock.

How do I calculate the distribution from an inherited IRA?

There are two different questions hiding inside this one, and mixing them up is where most of the confusion starts.

The first question is whether you owe anything in a given year at all. That depends on whether the original owner died on or after their required beginning date. If they did, you generally keep taking an annual amount during the window. If they died before it, the deadline may be the only requirement.

The second question is how much. Where an annual amount is required, you take the account balance at the end of the prior year. Then you divide it by a life-expectancy factor from an IRS table. The emptying deadline still applies on top of that. Meeting the annual minimum does not mean you are on pace to finish.

That last point is the one I would want a reader to leave with. The annual figure is a floor, not a plan.

One more thing decides the answer, and it is the calendar. Annual amounts were not enforced for several years after the 10-year rule changed, and they are enforced now. So someone who took nothing during that stretch is in a different position from someone inheriting today, and the answer genuinely differs by the year of the inheritance. If that describes you, it is worth establishing which years applied to your account before assuming you are behind.

Do beneficiaries pay tax on an inherited IRA?

Money taken out of an inherited traditional IRA is ordinary income to the person who inherits it. It is taxed at their rate, in the year they take it. Not at the rate of the person who died.

A retirement account does not get a step-up in basis. A taxable brokerage account largely does. People apply the brokerage answer to the IRA constantly, and it is the most expensive wrong assumption on this page.

An inherited Roth is the happier version. The window still applies, but withdrawals are not taxed the same way, so the timing question loses most of its teeth.

This is why the account matters as much as the balance. Two accounts can hold the same number and be worth noticeably different amounts to the person inheriting them.

When should you cash out an inherited IRA?

You can take it all whenever you want. The question is never whether you are allowed to. It is what a given year’s withdrawal sits on top of.

The failure mode I see most often is doing the smallest thing possible for years, then meeting the deadline all at once. The money was always coming out. Only the shape of it was ever in question.

What can I do now so my children don’t inherit a tax bill?

This is the same page read from the other end, and it is the end you can actually control.

A traditional IRA left to a child in their forties or fifties arrives during their peak earning years. It stacks on a salary, at their rate. Converting to a Roth does not change the 10-year clock. It changes whether the clock costs them anything.

The cheapest fix on this list is not a conversion. It is a form. Beneficiary designations on the account decide who receives it, and a will does not override them. Those forms drift out of date quietly, and they rarely match across every account someone owns.

While you are on those forms, there is a line most people fill in without reading. Naming a child answers who inherits if that child outlives you. On its own it does not answer what happens if the child dies before you do — whether that share passes down to the child’s own children, or is divided among your surviving children instead. Forms usually put this choice as per stirpes or per capita, in those words, and leaving it blank does not mean the question goes unanswered — it means something other than your own choice decides it. Which of the two you want is a drafting question for the attorney who wrote your will, and it is worth the two of them agreeing.

One more thing that is easy to miss: the federal estate tax is not the only one. A number of states run their own estate or inheritance tax, and several set the threshold far below the federal one, so a household with no federal exposure at all can have a live state problem. Some tax the estate, some tax the people who inherit, and a few do it by relationship. Whether yours is one of them is a question about where you live, and worth asking before it matters.

Trusts, probate, and the drafting of a will are real parts of this and they are an attorney’s work, not mine. I stay on the tax and account side of it. That line is worth me saying out loud rather than blurring.

What people get wrong about inherited IRAs

Almost every mistake here comes from applying a rule that is true somewhere else. The rules for taxable accounts, for your own IRA, and for an inherited one are three different sets.

• "My will decides who gets the IRA." The beneficiary form on the account decides. A will does not override it.
• "Inherited assets get a step-up, so there’s no tax." True of a taxable brokerage account. Not true of a retirement account.
• "I’ll take the minimum and sort the rest out later." That is how the deadline arrives as one enormous taxable year.
• "The 10-year rule means I take nothing until the end." An annual amount may still be required, depending on the original owner. Those annual amounts were also not enforced for several years after the rule changed, and they are enforced now — so the answer differs by the year you inherited, and taking nothing in those years is not the same as having missed something.
• "Converting to a Roth removes the deadline." It removes the tax on the withdrawals. The clock keeps running.
• "My bracket is the one that matters." The tax follows the account to whoever inherits it, at their rate.
• "I’ll roll it into my own IRA." Anyone other than a surviving spouse generally cannot, and trying can be treated as emptying the whole account at once.
• "All my beneficiary forms match." They usually don’t. Checking every account takes an afternoon and it is the highest-value afternoon on this page. And on a 401(k) there is a second step: if you are married and you named someone other than your spouse, that designation generally does not hold without your spouse’s written, witnessed consent. The form looks complete either way.

When this does NOT apply to you

Plenty of people read a page like this and worry about something that was never going to reach them. These are the cases where most of it simply does not.

• If you are the surviving spouse. You have options nobody else has, and this page is written for the others.
• If the original owner died before 2020. That inheritance may still be on the old lifetime schedule.
• If what you inherited is a Roth. The window applies and the tax conversation largely does not.
• If you are not more than 10 years younger than the person who died, or you are disabled or chronically ill. Different rules — life expectancy rather than the 10-year clock — though the 10 years can start running later, on your own death.
• If the account is going to charity. A charity receives a traditional IRA without the income tax, so none of the spreading arithmetic applies.
• If what you inherited is not a retirement account. A pension usually cannot be inherited at all, and a brokerage account works differently.

How this connects to the other six

What you leave behind is not a separate task at the end. It is the same set of decisions you were already making, viewed from further out.

• Roth conversions are the main lever here. Paying the tax at your rate is the alternative to your children paying it at theirs.
• Required minimum distributions (RMDs) and qualified charitable distributions (QCDs) shrink the account that eventually gets inherited, and giving directly to charity removes the most heavily taxed dollars first.
• Withdrawal strategy decides which accounts are still standing at the end, which is what your heirs actually receive.
• Social Security timing shapes the low-income years when conversions are cheapest to make.
• Healthcare in retirement is the cost of those conversions along the way, since income sets your Medicare surcharge two years later.