Note: This is an updated version of the blog titled 10 Things to Consider if You Have Inherited an IRA. It reflects the final inherited IRA regulations issued by the IRS in July 2024. If you inherited an IRA in 2020 or later, especially as a non-spouse beneficiary, these changes may affect your required minimum distributions (RMDs) and tax planning. Read on to learn what you need to know—and how to avoid costly mistakes.
If you inherited an individual retirement account (IRA) in 2020 or later, you may be uncertain what inherited IRA rules apply. You’re not alone. The IRS’s shifting guidance has left many beneficiaries confused. In February 2022, the IRS issued proposed regulations under the SECURE Act that included some unexpected twists and turns, creating considerable confusion for beneficiaries of inherited IRAs.
While many initially believed annual RMDs wouldn’t be required, the IRS clarified that “Non-Eligible Designated Beneficiaries” (NEDBs) would, in fact, need to take them. These regulations were finalized in July 2024. Fortunately, the IRS waived any penalties for beneficiaries who did not take RMDs for the 2021-2024 tax years. Due to this waiver, the new regulations will effectively take effect for RMDs required to be taken in 2025.
Inherited IRAs come with a unique set of estate, financial, and tax planning rules. Making the wrong move can have costly consequences and may be difficult to fix later. Making a wrong decision can cause expensive consequences. If you make a mistake, you may struggle to get the IRS to give you a do-over.
⚠️ Common Mistakes to Avoid When You Inherit an IRA
Inheriting an IRA can be overwhelming. Avoiding these common mistakes can save you time, taxes, and stress:
- Putting the inherited IRA in your own name
Doing so is treated as a full distribution, triggering a hefty, immediate tax bill. - Missing the deceased owner’s final RMD
If the decedent was subject to RMDs and didn’t take the full amount before their death, you must take it, or face a 25% penalty. - Combining inherited IRAs from different people
IRAs inherited from different original owners must remain separate. - Assuming you can convert to a Roth IRA
Roth conversions are not allowed for inherited IRAs. - Not naming a successor beneficiary
Failing to name a beneficiary can result in assets being distributed through the probate process, causing unnecessary delays.
💡 When in doubt, check with a financial planner or tax adviser before taking action. Undoing a mistake with an inherited IRA is difficult—and sometimes impossible.
11 Things to Consider When Applying Inherited IRA Rules 2025
Here are 11 things you need to know if you inherit an IRA from someone other than your spouse. (Please note that this blog does not address what happens if someone under the age of 21 receives an inherited IRA.)
1. Consider all your options before taking any action with your inherited IRA.
You do not need to rush. Take time to make informed decisions. First, you want to make sure the original IRA custodian (often a brokerage firm) has been notified of the IRA owner’s death. You also want to ensure the beneficiary account is set up correctly. The account title should read: “[Owner’s name], deceased [date of death], IRA FBO [your name], Beneficiary” (FBO means “for the benefit of”). If you put the account in your name, the full value of the account gets treated as a distribution. That’s not what you want. Why? It means the entire amount gets reported as income when you make that transfer. It’s very difficult to undo this error.
2. Don’t miss the decedent’s final RMD.
Say your father died on January 15, leaving you his IRA. He probably did not take his required minimum distribution (RMD). As the beneficiary, you must take it if the original owner didn’t. If you don’t know about or forget this rule, you can pay a penalty of up to 25% of the amount that you failed to distribute. This can be harder to determine on a timely basis if someone dies late in the year. What if your father dies on December 15 and hasn’t taken his full distribution? You may not even discover that you inherited the account, or if you do, you may not know how much he has withdrawn year-to-date. The last day of the calendar year is the deadline for taking that year’s RMD. (Note that if the deceased was not yet required to take distributions, then there is no year-of-death required distribution.) If more than one beneficiary shares the account, you can allocate any year-of-death distribution based on the collective wishes of the group. (If you learn you are subject to the 25% penalty described above, you can try to use the steps outlined here to try to get the penalty waived.)
3. You cannot make any contributions to an inherited IRA.
Special distribution rules apply to inherited IRAs. These rules mean you cannot make contributions to an inherited IRA. You also cannot commingle inherited IRAs. If you inherit IRAs from different owners, they cannot be combined into a single inherited IRA. If they are inherited from the same owner, you may be able to combine them.
4. You can move your inherited IRA.
If you don’t like the investment choices offered by the custodian where the account was held, you can move the account. If you prefer to hold the account at a different custodian/brokerage, you can transfer it to that preferred custodian. You can invest the account in any way allowed by the custodian that holds the account. If you decide to transfer the account, you must do so by direct transfer. The new account must also be an inherited IRA titled the same way as noted above. The rule allowing you to take a distribution and roll it over within 60 days (the 60-day rule) does not apply to inherited IRAs.
5. No Roth conversions.
Unfortunately, you cannot convert an inherited IRA into a Roth IRA.
6. Understand the 10-Year rule and RMD requirements
- Pre-2020: If you inherited the IRA before 2020, you must take annual RMDs. (Note: the CARES Act waived the RMDs in 2020.) These RMDs are based on your age at the time you inherit the IRA. The IRS provides tables to help you calculate the amount. This amount only represents a minimum that must be distributed each year. You can take more.
- 2020 and Beyond: Under the final regulations, you must also take RMDs from an IRA inherited in 2020 or later. You will be required to calculate an annual RMD in years 1-9. In Year 10, you must distribute the balance of the account. Since the balance must be distributed completely within a 10-year period, it may be beneficial to withdraw more each year. In fact, you could take more in any year or take less than 10 years to distribute the account balance. But the account balance must have a $0 balance after 10 years have passed. When deciding how much to distribute each year in relation to the RMD, consider your financial plan and tax situation.
7. You can make a qualified charitable distribution (QCD) from an inherited IRA.
If you are charitably inclined and are age 70 ½ or older, you may be able to use QCDs to lower your tax bill. QCDs require you to move your funds directly to the charity of your choice in a tax-free transfer. QCDs represent a more tax-efficient way to make charitable contributions. Why? QCDs also count toward your RMD for the year, providing a tax-efficient strategy for those already making charitable donations.”
8. Don’t worry about age-related penalties.
For regular IRAs, you generally must pay a 10% penalty if you take distributions before age 59 ½. This early distribution penalty does not apply to inherited IRAs. If you inherit a traditional IRA or 401k, the distributions are subject to regular tax only.
9. What if you inherit a Roth IRA?
You must still withdraw the funds over the prescribed period. (10 years if you inherit the account in 2020 or later.) Distributions should be tax-free. But you don’t have to take RMDs. You can let the account sit for 10 years and then distribute the entire balance.
10. Don’t forget to name a successor beneficiary.
When you inherit an IRA, you should name a beneficiary. If you don’t, the default provisions in the IRA document are likely to apply. As with most financial accounts, designating a beneficiary can keep the assets out of probate. This can save both time and money.
11. Inherited IRA Rules 2025—An example
Vicki is a Non-Eligible Designated Beneficiary who inherited an IRA from her father in 2022. At the time of his death, Vicki’s father was 85 years old and, thus, past his Required Beginning Date. As a result, Vicki is subject to both the 10-Year Rule and annual Stretch-style distributions. (Under the pre-2020 rules for inherited IRAs, beneficiaries were allowed to “stretch” inherited IRA distributions over their remaining life expectancy. For example, assume that Vicki was 55 in 2022. According to the IRS’s Single-Life Expectancy Table, her life expectancy at the time of her mother’s passing was 31.6. Under the pre-2020 rules, Vicki could stretch her distributions over her remaining life expectancy of 31.6 years.)
Assume that to date, Vicki has taken no distributions from her inherited IRA. Thanks to the IRS’s transitional relief, Vicki will not be subject to any penalty for failing to take her RMDs based on her life expectancy for 2023 or 2024.
Beginning in 2025, Vicki will, however, need to comply with the rules set forth in the Final Regulations. This means she must begin taking annual RMDs based on her life expectancy and fully deplete the inherited IRA by 2032, the 10th year after the year of her father’s death (and not 10 years after starting to take annual distributions).
- Inherited IRAs—A look at the math: As noted above, Vicki’s life expectancy at the time her father passed was 31.6. You reduce this figure by one each year, making it 28.6 in 2025. If the value of her mother’s IRA was $286,000 as of December 31, 2024, her RMD for this year is $10,000 ($286,000 ÷ 28.6). You can also use an inherited IRA RMD calculator like this one from Schwab to help with the calculations.
What should an inherited IRA beneficiary do now?
The rules governing inherited IRAs are complex. If you have inherited one, it’s important to assess the implications—financial, tax-related, and estate planning—before making decisions.
The tax impact may be substantial, especially if you inherit a large retirement account during your peak earning years. A wrong move could trigger unnecessary taxes or penalties, and many mistakes can’t be easily reversed.
If you have inherited an IRA and would like help navigating your options, please schedule a complimentary call with us.
Want a copy of our new Inherited IRA Checklist? Click here to download it now to ensure you’re on the right track.
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