Inherited IRA

An inherited IRA is a retitled account that holds retirement assets passed to a beneficiary after the original owner's death. The money keeps its tax character: traditional IRA balances are ordinary income on withdrawal, and inherited Roth balances stay tax-free once the five-year rule is met. There is no step-up in basis and no re-titling as the beneficiary's own account, so the beneficiary's own RMD clock, contribution room, and withdrawal rules never mix with it.

The distribution schedule depends on who inherited. Eligible designated beneficiaries — spouses, minor children, the disabled, the chronically ill, and anyone no more than ten years younger — can stretch withdrawals over their own life expectancy. Everyone else, the majority of beneficiaries, operates under the 10-year rule: the account must be fully emptied by December 31 of the tenth year after death. Under the IRS final regulations issued in 2024, where the original owner had reached their RMD age, annual minimum distributions are also required in years one through nine.

The mechanics start with the retitling: the account moves from the owner's name into an inherited IRA in the beneficiary's name, keeping the deceased's cost basis and tax character. The transfer itself is not taxable; the tax arrives with each withdrawal. From there the schedule is set by beneficiary class. Eligible designated beneficiaries stretch distributions over their own single-life expectancy, recalculated each year. All other beneficiaries fall under the 10-year rule, with the account fully drained by the end of year ten.

The 2024 final regulations added the wrinkle most beneficiaries miss: if the original owner died at or after their RMD age, the beneficiary owes annual distributions in years one through nine as well, sized from the balance and the beneficiary's single-life divisor. A $400,000 inherited IRA at a beneficiary age of 50 carries a divisor near 34.2, making the year-one minimum roughly $11,700. Miss a required distribution and the excise is 25% of the shortfall, cut to 10% if corrected within the correction window. Inherited Roth accounts carry the 10-year deadline without the annual minimums and without the tax, provided the five-year seasoning is met.

The 10-year rule turned inherited IRAs from a stretch-tax shelter into a scheduled tax bill, and the schedule lands on top of the beneficiary's own earning years. A $400,000 traditional IRA emptied in year ten, on top of a full salary, can push a 24% earner into the 32% bracket for a single tax year. Spread evenly across the decade, the same money often stays near its lower bracket. The planning decision is worth tens of thousands of dollars.

I watched a colleague named Brent (yes, that Brent) inherit his mother's $400,000 IRA at 49, hear that he had ten years, and do nothing for nine of them. The year-ten lump landed on top of a promotion-year salary. The federal bill at the 35% bracket was roughly $140,000, against roughly $96,000 had the same withdrawals spread evenly at 24%. His tax preparer's invoice was the only inheritance planning he did.

The highest-leverage thing most beneficiaries can do is build the ten-year schedule in the first year. Empty the account roughly evenly, watch the brackets, and coordinate the withdrawals with the RMD calculator and the income tax calculator. Spouses have the additional option of assuming the account as their own, which changes every rule in this entry.