Inheriting an Individual Retirement Account (IRA) can be both a blessing and a challenge. On one hand, it can give you a substantial boost in building financial security. On the other hand, it comes with rules, deadlines, and tax implications that can quickly eat into the value of your inheritance if you’re not careful.
Many people make expensive mistakes simply because they don’t understand how inherited IRAs work. Rules differ depending on whether you’re inheriting from a spouse or a non-spouse, and small missteps such as taking withdrawals too early, too late, or in the wrong way can trigger penalties and unnecessary taxes.
By knowing the rules and planning ahead, you can protect your inherited assets and make them work harder for you.
1. Identify What Type of Beneficiary You Are
The first step is to understand which category you fall into.
Spouse Beneficiary
If you inherit an IRA from your spouse, you have the most flexibility:
- Treat it as your own: Transfer it into your name and follow your own Required Minimum Distribution (RMD) schedule. This option works best if you’re older and don’t need immediate access to the funds.
- Roll it into an inherited IRA: If you’re younger than 59½, this lets you take withdrawals without the usual early-withdrawal penalties.
- Take a lump sum: This gives you full access to the money right away, but the entire amount will be taxed as regular income in the year you withdraw it, which could push you into a higher tax bracket.
Non-Spouse Beneficiary
When inheriting an IRA, most non-spouse heirs must follow the 10-year rule under the SECURE Act of 2019. This requires the account to be emptied within 10 years of the original owner’s death, and if the deceased had already begun RMDs, annual withdrawals may also be required.
2. Know the Rules for Inherited Roth IRAs
Roth IRAs are often seen as “tax-free,” but they still have distribution rules for beneficiaries. Inherited Roth IRAs are subject to the same 10-year rule, although withdrawals are usually tax-free if the account has been open for at least five years.
While the original owner never had to take RMDs from a Roth, beneficiaries must make sure the account is emptied on time to avoid IRS penalties.
3. Manage Withdrawals to Reduce Taxes
One of the biggest mistakes people make is taking all the money at once. While tempting, this can cause a spike in your taxable income, leading to a much higher tax bill.
A better approach is to spread withdrawals over several years. This not only keeps your taxes more manageable, but also gives the remaining balance time to continue growing tax-deferred. With the right strategy, you can stretch the value of the inheritance far beyond the initial amount you received.
4. Review and Realign the Investments
Inheriting an IRA doesn’t need to keep the same investments chosen by the original owner. Their financial goals, risk tolerance, and retirement timeline may have been very different from yours.
Take time to review the holdings and decide whether they still make sense for your needs. This could mean shifting toward more conservative investments if you’ll be using the funds soon, or taking a more growth-oriented approach if you have time before you need to access the money.
5. Understand the Option to Disclaim
In some situations, you might decide not to accept the inherited IRA at all. This is called disclaiming the inheritance, and it can be a smart move if:
- Accepting it would create a large, unwanted tax liability.
- You want the assets to pass directly to another beneficiary, such as a child.
- You don’t need the funds and prefer to avoid complicating your own financial situation.
If you choose this path, you must act within nine months of the original owner’s death, and the decision is permanent.
How Scout Tax Can Help
The rules around inheriting an IRA are complex, and the stakes are high. At Scout Tax, we specialize in helping beneficiaries navigate these situations with clarity and confidence.
Here’s how we can assist:
- Clarifying your options based on your beneficiary type (spouse or non-spouse)
- Creating a tax-efficient withdrawal strategy to minimize the amount you owe
- Helping you select or adjust investments so they match your goals and timeline
- Ensuring full compliance with IRS rules, including the 10-year rule and RMD requirements
Led by Enrolled Agent Gil Pocker, our team brings deep expertise in both tax law and practical financial strategy. We take the guesswork out of inherited IRA management, so you can focus on making the most of your inheritance.
Take Control of Your Inheritance
An inherited IRA can be a stepping stone toward lasting financial stability, but only if it’s handled with the right approach. The decisions you make today will determine whether your inheritance grows into something more or is diminished by unnecessary taxes and penalties.
An inheritance is more than dollars and cents — it’s a legacy. Let’s help you turn it into opportunity. Contact Scout Tax today and secure your financial advantage.
