Inheriting an IRA from a parent or relative used to be simple. The SECURE Act changed everything, creating a complex web of rules regarding when you must withdraw the money and pay taxes.
Spouses vs. Non-Spouses
If you inherit an IRA from your spouse, you have extensive flexibility. You can usually roll it directly into your own IRA as if it was yours all along. However, if you inherit from anyone else (a parent, sibling, friend), strict rules apply.
The 10-Year Rule
For most non-spouse beneficiaries inheriting an IRA today, the core rule is the 10-Year Rule. You are required to completely empty the account by December 31 of the year containing the 10th anniversary of the original owner's death.
You can withdraw the money gradually over the 10 years, or take it all out in year 10. The flexibility is yours, but the deadline is absolute.
The Tax Implications
- Inherited Traditional IRA: Every dollar you withdraw is added to your taxable income for that year. If you inherit a large account and withdraw it all at once, it could easily bump you into the highest federal tax bracket. Careful tax planning (spreading withdrawals over the 10 years) is essential.
- Inherited Roth IRA: Withdrawals are completely tax-free. While you still must empty the account within 10 years, most experts advise leaving the money in the Roth to grow tax-free for as close to the 10-year deadline as possible.