Inheriting an IRA can feel like you’ve just been handed a treasure chest, but one that comes with a complicated instruction manual written in legal jargon. And if you’re the one planning to leave an IRA to your loved ones? You want to make sure they understand what they’re getting into so they don’t accidentally trigger massive tax penalties.

Here’s the truth: the rules around inherited IRAs changed dramatically in recent years, and most people have no idea. If you or your beneficiaries make the wrong move, you could lose tens of thousands of dollars to unnecessary taxes and penalties.

So whether you’ve recently inherited an IRA, you’re planning your own estate, or you’re simply trying to understand what happens to retirement accounts when someone passes away, this guide is for you. Let’s break down the 10 most important things you need to know, in plain English.

1. You Can’t Just Leave the Money Where It Is

When you inherit an IRA, you might think, “Great! I’ll just let it sit there and grow.” But you must open a separate inherited IRA account in your name as the beneficiary. You cannot:

• Leave the assets in the original IRA
• Treat the inherited IRA as your own (unless you’re a spouse)
• Make additional contributions to it
• Transfer the inherited funds into your existing IRA

Think of it like this: the inherited IRA needs its own special home, separate from everything else. This is a critical first step, don’t skip it.

2. The 10-Year Clock Is Ticking for Most Beneficiaries

Here’s where things get serious. Thanks to the SECURE Act of 2019, most non-spouse beneficiaries must withdraw all the money from an inherited IRA within 10 years of the original owner’s death (if the owner died on or after January 1, 2020).

That’s right, you have a deadline. And if you don’t meet it? You could face a 50% penalty on whatever’s left in the account. Let that sink in. Half of your inheritance, gone, just because you didn’t understand the rules.

This 10-year rule applies to adult children, siblings, friends, and most other beneficiaries. It’s designed to force the money out (and get it taxed) rather than letting it grow tax-deferred for decades.

3. You Might Need to Take Annual Withdrawals Too

Wait, it gets more complicated. If the person you inherited from had already started taking required minimum distributions (RMDs), meaning they’d reached the age where they were required to withdraw money each year, then you must take annual RMDs in years 1 through 9, AND empty the account by the end of year 10.

These new annual RMD requirements took effect in 2025, and they’ve caught a lot of people off guard. So you can’t just wait until year 10 and take it all out in one lump sum if the original owner was in RMD status. You need to take smaller distributions along the way.

4. The Deadline Starts Quickly

You need to start taking those required minimum distributions no later than December 31 of the year following the original account holder’s death.

And here’s another wrinkle: if the original owner was supposed to take an RMD in the year they died but didn’t get a chance to, you’re responsible for taking that RMD by December 31 of the year they died. Yes, that could mean you have just a few months to figure this out.

Time moves fast when you’re grieving and dealing with estate matters. Don’t let this deadline sneak up on you.

5. Spouses Get Special Treatment (And Better Options)

If you inherited an IRA from your spouse, breathe a little easier: you have more flexibility than other beneficiaries. You can:

• Treat the inherited IRA as your own
• Roll it into your own IRA
• Keep it as an inherited IRA and defer RMDs until you reach RMD age

Spouses are exempt from that harsh 10-year liquidation rule. This gives you significantly more control and potentially better tax planning opportunities. If you’re a surviving spouse, make sure you talk to an estate planning attorney or financial advisor about which option makes the most sense for your situation.

6. Some Beneficiaries Get Exceptions

Not everyone is subject to the 10-year rule. Eligible Designated Beneficiaries (EDBs) may have different distribution options available to them. Who qualifies as an EDB?

• Minor children (though this changes once they reach the age of majority)
• Disabled individuals
• Chronically ill individuals
• Beneficiaries not more than 10 years younger than the original owner

If you fall into one of these categories, you may be able to stretch distributions over your lifetime rather than being forced into the 10-year window. This is where personalized legal advice becomes invaluable.

7. At Least You Won’t Pay the Early Withdrawal Penalty

Here’s some good news: distributions from inherited IRAs are not subject to the 10% early withdrawal penalty, even if you’re under age 59½.

Normally, if you withdraw money from your own IRA before that age, you get hit with a 10% penalty on top of regular income taxes. But with inherited IRAs, you can take distributions at any age without that penalty. You’ll still owe income tax on the distributions (if it’s a traditional IRA), but at least you’re not getting penalized for accessing your inheritance.

8. Be Ready for a Tax Hit

Speaking of taxes, here’s what you need to know: RMD distributions from inherited traditional IRAs are taxed as ordinary income.

That means if you inherit a sizable IRA and are forced to take large distributions, you could bump yourself into a higher tax bracket. This can significantly impact your overall tax liability, especially if you’re still working and earning other income.

Even inherited Roth IRAs are subject to RMD requirements now (though the distributions themselves are tax-free if the account has been open for at least five years). Smart tax planning is essential here: you might want to spread distributions strategically across the 10 years to minimize your tax burden.

9. What You Don’t Take Out Keeps Growing

Until you withdraw the money, the remaining assets in your inherited IRA can continue to grow tax-deferred. This is actually an advantage.

If you’re strategic about when and how much you withdraw each year, you can maximize the tax-deferred growth while staying compliant with the RMD rules. Think of it as balancing two goals: minimizing taxes while maximizing growth.

10. Multiple Beneficiaries Need to Split Things Up

If you’re one of several beneficiaries of an IRA, separate inherited IRA accounts must be established by December 31 of the year following the year of death.

Why does this matter? Because if you don’t split the accounts, the RMD calculations for everyone will be based on the oldest beneficiary’s life expectancy. That could mean larger forced distributions and more taxes for the younger beneficiaries.

Make sure whoever is handling the estate understands this requirement. It’s a simple step that can save everyone a lot of money and headaches down the road.

What This Means for Your Estate Plan

If you’re reading this because you’re planning to leave an IRA to your loved ones, pay attention: the rules have changed, and your beneficiaries need to be prepared.

Consider these questions:

• Have you explained to your beneficiaries what to expect when they inherit?
• Would a different type of account or strategy serve them better?
• Should you be doing Roth conversions now to save them from a bigger tax burden later?
• Do you have minor children or special needs beneficiaries who need extra protection?

Your IRA might be one of your largest assets, but if your beneficiaries don’t understand these rules, they could lose a significant portion to taxes and penalties. That’s the opposite of the legacy you want to leave.

Your Next Step

Inherited IRAs are just one piece of the estate planning puzzle: but they’re an important piece. Whether you’ve recently inherited an IRA, you’re worried about the rules, or you want to make sure your own retirement accounts pass smoothly to your loved ones, personalized guidance makes all the difference.

At Law Offices of Sotera L. Anderson, we help families navigate these complex rules and create estate plans that actually protect what matters most.

Don’t leave your family’s financial future to chance. Don’t assume “everything will be fine” without a proper plan. And don’t wait until it’s too late to get the answers you need.

Call us today at 855-965-3666 or schedule a free 15-minute call at https://personallegacylawyer.as.me/schedule/6d7ffe2d.

Your family deserves clarity, protection, and peace of mind. Let’s make sure they get it.