Have You Inherited an IRA?
Even if you haven’t yet, you might someday. There’s more than $17 trillion in retirement accounts called IRAs—and that means many people will inherit one during their lifetime.
But here’s the problem: the rules for inherited IRAs can be really confusing. In 2019, a law called the SECURE Act changed how these accounts work when someone dies and leaves their IRA to someone else. Since then, the IRS has made a few more changes, and now it’s hard to know what to do.
To make things easier, I’m writing a few short posts to help explain it. Let’s start with the rules that apply to most people who inherit an IRA and are not the spouse. These people are called Non-Eligible Designated Beneficiaries, or non-EDBs for short.
Are You a Non-Eligible Beneficiary?
If you inherit an IRA, you’re a non-EDB unless you can say “yes” to one of these questions:
· The surviving spouse of the account owner
· A minor child of the account owner (only until they reach the age of majority; then the 10-year rule kicks in.
· A disabled individual(as defined by the IRS: unable to engage in substantial gainful activity due to a physical or mental condition)
· A chronically ill individual(as defined by the IRS: requiring long-term care or assistance with daily living activities)
· An individual not more than 10 years younger than the deceased account owner (such as a sibling or close-in-age friend)
If none of those apply to you, then you’re a non-EDB—and special rules apply.
What Happens Next?
Next, ask this question: Had the person who owned the IRA started taking their required yearly withdrawals (RMDs)?
Here’s what to do depending on the answer:
If they died before the year they turned 73:
· You don’t have to take money out every year.
· But—you must empty the account by the end of 10 years.
If they had already started taking RMDs (age 73 or older):
· You still have to empty the account by year 10, but
· You must take money out each year (starting again in 2025).
· The IRS has special tables that tell you how much to take out each year.
⚠️Note: If you inherited an IRA between 2020 and 2024, and didn’t take your yearly withdrawals, you won’t be penalized. The IRS gave people a break during this time because the rules were unclear.
What If It Was a 401(k) or Other Work Plan?
If the person was still working and owned less than 5% of the company, they weren’t required to take money out yet.
As long as you keep that money separate from other IRAs you inherit, you don’t need to take money out during the first 9 years—even if it’s eventually moved into an IRA.
What About Roth IRAs?
The same 10-year rule applies to Roth IRAs, but there’s one big difference: you don’t have to pay any taxes on the money you take out.
Should You Take Money Out Early—or Wait?
If you don’t have to take money out in the first 9 years, should you anyway? It depends.
· Roth IRA: Usually better to leave it alone. Let it grow tax-free for as long as possible.
· Traditional IRA: It depends on your situation.
You have two main choices:
1. Spread it out – Take a little each year. This might keep your taxes lower and avoid a big tax hit in year 10.
2. Wait until year 10 – Take it all at once. This could mean paying a lot more tax in one year—and possibly higher Medicare premiums the next year.
There’s no one-size-fits-all answer. It depends on your income, tax bracket, and health care costs.
Need Help?
Starting in 2025, the IRS will require annual withdrawals again from inherited IRAs. So now is a good time to review your plan.
If you’ve inherited an IRA—or expect to—we can help. Let’s talk about what’s best for your situation and make a smart plan for your future.
👉 [Click here to schedule a short meeting.]