Inheriting an IRA: What you need to know
Without proper planning, new IRS rules for inherited IRAs could leave you with a hefty tax bill.
Summary
- While most inheritances are tax-free, inherited traditional IRAs come with tax obligations for the beneficiary as distributions are made.
- Different rules apply based on the type of IRA (traditional vs. Roth) and beneficiary status (spouse vs. non-spouse), with spouses having more flexible distribution options.
- The SECURE Act of 2019 requires most non-spouse beneficiaries to empty inherited IRAs within 10 years, replacing the previous 'stretch' provision that allowed distributions over a lifetime. Additionally, under IRS rules issued in July 2024, non-spouse beneficiaries inheriting from someone in RMD payout status must take annual distributions rather than having the flexibility to distribute the funds as they choose within the 10-year period.
IRA beneficiary taxes
There’s never a downside to getting an inheritance, right? You get to splurge on that sailboat you’ve always wanted. Or pay off the debt that’s been your financial ball and chain. Best of all, with most inheritances, you won’t owe any taxes. You won’t even have to report them to the IRS.
There is one important exception, however: If you inherit an individual retirement account (IRA), any taxes on IRA distributions that would have been owed by the deceased will now be owed by you. Without careful planning—reminder: your TIAA Wealth Management advisor can help—the distributions from an inherited IRA could even push you into a higher tax bracket.
It used to be much easier to minimize the tax hit from inherited IRAs. Prior to 2020, nonspouse beneficiaries were obliged to start taking required minimum distributions (RMDs) no later than December 31 of the year following the death of the original account holder, but the rules thereafter were lenient. Nonspouse beneficiaries could spread out the distributions over their own life expectancies.
In other words, a 50-year-old who inherited a $100,000 IRA from his late father had 30 years to empty the account. This so-called “stretch” provision helped minimize the beneficiary’s yearly tax liability, while also allowing more of the inherited IRA money to grow tax deferred.
The SECURE Act, passed in 2019, eliminated the stretch provision for IRAs inherited after 2019. Now nonspouse beneficiaries are generally required to empty inherited IRAs within 10 years. “Many of the people who inherit IRAs are adult children in their 50s,” said Jonathan Fishburn, a tax-and-estate specialist with TIAA’s wealth planning strategies group. “They’re in their prime earning years. So requiring them to take all the distributions over their next 10 years means requiring them to pay the taxes at the highest marginal rates.”
Five tips for inherited IRAs
This is a high-class problem, of course. Few people would complain about any inheritance, even one with tax liabilities. That said, Fishburn offered five tips on how beneficiaries can smooth the inherited IRA process and minimize the tax hit.
1. First step, set up an inherited IRA in your own name. You’ll need a copy of the decedent’s death certificate and information on the account you’ll be inheriting. Your TIAA wealth advisor can help you through the process. Once the new account is set up, you can then transfer the inherited funds from the original account.
2. It matters what
3. The tax rules are more lenient for spouse beneficiaries. Spouses can roll over the inherited IRA into their personal IRA or put the money into a new, inherited IRA account. Either way, spouse beneficiaries are exempt from the 10-year rule. They can take the RMDs and pay the taxes gradually over their lifetimes instead of over 10 years.
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4. For most nonspouse beneficiaries, timing is everything. They must empty the inherited IRA account within 10 years. However, if the original account holder had not started taking RMDs, they are not obligated to take a distribution every year. This provision makes it easier to avoid an ill-timed distribution that could bump a beneficiary into a much higher tax bracket. “If you know you will be getting a big bonus in 2026, maybe you don’t take a distribution that year,” said Fishburn. “If you know you won’t be getting one, maybe you do.” Here's another scenario: Say you’re a 67-year-old about to retire, and you want to delay taking your Social Security or pension until age 70, when the monthly payments will be higher. It might make sense to use your inherited IRA money to bridge the gap between ages 68 and 70. For a newly retired couple with little other income coming in, a $120,000-a-year distribution from an inherited IRA would be taxed at only the 12% marginal rate (assuming the couple takes the standard deduction).
5. You need to determine whether the original account holder had already started taking RMDs or had reached the age when he or she was supposed to have started taking them. Under either circumstance, the 10-year rule applies for most nonspouse beneficiaries. According to new rules issued by the IRS in July 2024, nonspouse beneficiaries who inherit from someone who was in RMD payout status are now required to take a distribution every year. They are required to commence taking RMDs in the calendar year following the original IRA holder’s death and then continue taking RMDs annually until the account is fully emptied by the end of year 10. That said, the new rules didn’t take effect until 2025 and only apply to IRAs inherited after 2019. Check with your TIAA wealth advisor if you have questions about how the RMD rules apply to your own inherited IRA.
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Source: Federal Register, "Required Minimum Distributions," July 19, 2024,