Inherited IRA
A retirement account inherited from a deceased owner, subject to IRS rules requiring beneficiaries to distribute funds within 10 years.
What is Inherited IRA?
An inherited IRA (also called a beneficiary IRA) is an individual retirement account that is transferred to a named beneficiary after the original account owner's death. The SECURE Act of 2019 significantly changed the distribution rules: most non-spouse beneficiaries must now empty the inherited IRA within 10 years of the original owner's death (the '10-year rule'), though they have flexibility in when to take distributions within that window. Spouses who inherit an IRA have the most flexibility — they can roll it into their own IRA, stretch distributions over their lifetime, or treat it as an inherited IRA. Inherited Roth IRAs follow the same 10-year rule but distributions are generally tax-free, making the timing strategy particularly valuable. Inherited traditional IRA distributions are taxable as ordinary income.
Example
A 45-year-old inherits a $400,000 traditional IRA from a parent who died in 2024. Under the 10-year rule, she must empty the account by December 31, 2034. If she takes equal $40,000 distributions annually, she adds $40,000 to her ordinary income each year — potentially pushing her into a higher bracket. A tax advisor might instead suggest taking smaller distributions in years when her income is low (e.g., a sabbatical year) and larger distributions in others, optimizing the total tax bill across the decade.