If you’ve inherited an Individual Retirement Account (IRA), you’ll want to make sure you’re following the latest IRS rules to avoid big taxes.
“Be aware that sooner or later you may have to pay taxes on inherited money,” said Mark Stieber, director of tax information at tax firm Jackson Hewitt. USA Today (1).
While planning and taking required minimum distributions (RMDs) is a part of retirement life, those who have not yet reached retirement age probably don’t think about them until after an annual meeting with their financial advisor.
But if you’ve inherited an IRA, they can significantly affect your tax bill. Here’s what you need to do this year (and next) to minimize taxes and avoid IRS penalties.
Some heirs may mistakenly think they can withdraw money from an inherited IRA whenever they want or delay distributions until later. But under recent IRS rules, missing out on required withdrawals can lead to steep tax bills and IRS penalties — exactly what you’re doing. don’t Want as you file your 2026 tax return.
The Internal Revenue Service’s (IRS) final rules affecting inherited traditional and Roth IRAs took effect in September 2024 and apply to RMDs for calendar years beginning January 1, 2025 for inherited accounts after 2020.
The IRA beneficiary has the option of taking RMDs according to the rules set by the IRS, or they can take a single distribution. However, distributions from IRAs are taxable, and a lump sum means that part of that amount is taxed in a higher bracket.
The original owner of a traditional IRA is required to take RMDs when they reach age 73. The distribution is calculated by dividing the account balance as of December 31 of the previous year by the life expectancy factor in tables published by the IRS. It depends on whether the owner is single or married and if married, if the age difference is more than 10 years.
If you inherited an IRA from an account holder who died in 2020 or later, you may be subject to the 10-year rule. This rule states that the beneficiary must “vacate the entire account by the end of the 10th year following the year of death of the account owner (or eligible designated beneficiary).”
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If you are the spouse of the deceased, you can keep the account as an inherited account or you can roll it into your IRA. If you keep it as a legacy account and the original account holder has passed away before They take RMDs, then you can delay distributions until your late spouse reaches RMD age or you can take distributions based on your life expectancy (or follow the 10-year rule). Accounts inherited after starting RMDs can also take distributions based on your life expectancy.
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If you are a beneficiary other than a spouse or eligible designated beneficiary – this includes most people who inherit from a parent – then you need to follow the 10-year rule.
Although there are no RMD requirements for ordinary Roth IRA account holders, the same cannot be said for legacy Roth IRAs. If you inherit a Roth IRA, the rules are the same as for inheriting RMDs before a traditional IRA. The big difference is that withdrawals are tax-free (as they would be for the original account owner) because they’re funded with after-tax dollars — provided the account is at least five years old.
It all sounds very complicated – in fact, it’s best to consult a tax professional in this case to see which distribution option is right for you – but don’t ignore it, as you could face stiff penalties and a high tax bill.
If you inherited an IRA, you’ll need to confirm your beneficiary status, understand the IRS distribution schedule and plan your withdrawal schedule.
The IRS imposes a 25% penalty on the value of each RMD that is not taken by the due date, although this can be reduced to 10% if the RMD is corrected within two years.
If you’re following the 10-year rule, you’ll decide whether to let the money grow and buy it as a lump sum over 10 years or withdraw it over 10 years. Keep in mind that delaying withdrawals could force you to take larger distributions later, meaning a portion of those funds could be taxed at a higher rate.
The devil is in the details – and there are details beyond these basics that can apply to your situation. A tax professional can provide solutions to your needs, especially if large sums of money are involved.
If you inherited an IRA, strategic timing of your distributions can help you comply with IRS rules and manage your taxable income.
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This article provides information only and should not be used as advice. It is provided without warranty of any kind.
