Lately, we’ve been getting quite a few questions about inherited IRAs — especially from clients who inherited accounts from their parents or are trying to help adult children understand the rules. We have also seen several grandchildren inherit funds from their grandparents and aren’t aware of the many rule changes.
A big reason for the confusion is that the rules changed significantly a few years ago under the SECURE Act.
Here are a few key things to consider:
- Most non-spouse beneficiaries can no longer “stretch” IRA withdrawals over their lifetime.
- In many cases, inherited IRAs now must be fully distributed within 10 years.
- Traditional inherited IRAs may create significant tax consequences if withdrawals are poorly timed.
- Inherited Roth IRAs are generally tax-free — but they still often must be emptied within 10 years as well.
- Missing required distributions can create penalties and headaches.
One planning mistake we commonly see is that people wait until year 10 to address the inherited IRA, only to realize they’ve pushed a large taxable distribution into a high-income year. Sometimes it makes more sense to spread withdrawals strategically over multiple years — especially during lower-income periods, early retirement years, or before required minimum distribution (RMD) age.
For Roth IRAs, the distributions are often tax-free, which creates more flexibility around timing and long-term planning.
Inherited IRA rules also vary depending on whether the beneficiary is a spouse – most of what we’ve explained applies to non-spouse beneficiaries. There are also specific rules based on the age of the original owner and whether RMDs had already started.
It is very important to think through the bigger tax picture when dealing with Inherited IRA’s. There is also an emotional component, and we want to make the most of these gifts.
If you or your family members have recently inherited an IRA — or expect to at some point — it’s worth reviewing the strategy. A little planning can potentially save a meaningful amount in taxes and stress.
