I Inherited an IRA. Now What?

March 31, 2025  | By Nikki Yates CFP®

An Individual Retirement Account (IRA) is one of the most common assets to inherit. By some estimates, $84 trillion of assets could move from older generations to younger generations in the next two decades. If you inherited an IRA, it can be a significant windfall, but the associated rules and provisions can also be confusing. You’re probably also wondering if you should even spend this money, or save it for the future. 

In this article, we’ll explore the different types of inherited IRAs, the specific rules that apply to each, their tax implications, and how to decide what to do with these funds. 

Types of Inherited IRAs

An inherited IRA is an individual retirement account passed on to a beneficiary after the original account holder’s death. This beneficiary may be a spouse, child, grandchild, or someone else the account holder designated their account to. These accounts  can either be traditional IRAs or Roth IRAs and may have multiple beneficiaries for each. Like other IRAs, Inherited IRAs allow the assets within them to grow tax-deferred or tax-free, depending on the account type. 

The SECURE Act of 2019, along with proposed IRS regulations introduced in 2022, created new rules for non-spouse beneficiaries who inherit IRAs from individuals who passed away in 2020 or later. These updated rules will apply to distributions beginning in January 2025. If the original account holder died in 2019 or earlier, the previous rules still apply.

There are two main types of inherited IRAs: non-spouse and spouse. The type of beneficiary you are determines your available options for managing your  inherited IRA.  

Non-Spousal inherited IRA 

You are considered a non-spouse beneficiary if you were one of the following to the original account owner:

• Child
• Grandchild
• Sibling or other relative
• Friend

Generally, most non-spouse beneficiaries inheriting from an original owner must withdraw the entire balance of their account within 10 years, unless they qualify as an Eligible Designated Beneficiary (EDB).

10-Year Rule

1. If the original owner passed away before beginning required minimum distributions (RMDs), you can transfer the assets to an inherited IRA in your name and withdraw the entire account balance at any time, as long as it is fully distributed within 10 years.
2. If the original owner passed away after starting RMDs, you must continue taking RMDs in years one through nine, with the remaining balance fully withdrawn  by the end of year ten.

Keep in mind: withdrawals from a non-Roth inherited IRA are considered ordinary income and subject to both federal and state income taxes in the year they’re taken.

Strategic Withdrawals Under the 10-Year Rule

With option 1, you can be strategic about when you take your withdrawals. If you expect higher income in one year and lower income in  the next, you might delay taking a distribution in the year of high income until your income drops, potentially reducing your tax liability. 

Once you take a distribution and pay any applicable taxes, you have flexibility with how to use  the funds. You can spend the money, or save it in a high-yield savings account, or invest it in a brokerage account. However, you cannot redeposit the distribution into an IRA unless it qualifies under specific rollover rules. If you do move the funds into a traditional IRA through a trustee-to-trustee transfer (only applicable for certain situations) they become subject to  traditional IRA rules, including the requirement to leave the funds in the account until you are age 59 ½ without incurring a 10% penalty.

Exceptions for Eligible Designated Beneficiaries (EDBs)

Certain beneficiaries qualify as Eligible Designated Beneficiaries (EDBs) and are exempt from the standard 10-Year Rule. These EDBs include:

• Minor children of the original account holder 
  • Note: When a minor child reaches the age of majority in her/his respective state of residence, the 10-Year Rule typically begins.
• Individuals who are disabled or chronically ill
• Individuals who are less than 10 years younger than the original account holder Spouse of the original account holder

If you are an EDB, you may have the option to  take lifetime distributions based on your own life expectancy instead of emptying the account within 10 years.  However, you may also elect to follow the 10-year rule if that better suits your goals. 

Inherited IRAs for Spouses

Beneficiaries of inherited IRAs who are spouses of the original owner have significantly more flexibility than non-spouse beneficiaries, including these options: 

1. You can treat the inherited IRA as your own, either by rolling the assets into an existing IRA or opening a new IRA in your name. If your spouse had already begun taking RMDs but you haven’t reached RMD age (currently 73, increasing to 75 in 2033) this option lets you delay distributions until you reach the required age. This is a good option if you do not need to access these funds long term.
2. You can transfer the assets to an inherited IRA. This allows you  to begin taking withdrawals from the account prior to age 59 ½ without incurring the 10% early withdrawal penalty.
3. You can roll the inherited IRA into a new or existing IRA, and convert it to a Roth IRA. While you’ll owe income tax on the converted amount, future growth and withdrawals will be tax-free (if certain conditions are met). This strategy can be beneficial if you anticipate being in a higher tax bracket in the future and don’t need immediate access to the funds.

Understanding Your Options

Now that we have the rules down, how do you decide what to do with your inherited IRA? That ultimately comes down to aligning your decisions with your short- and long-term goals.

Do you want to take a trip to Europe, buy a house, or purchase a new car? Do you have a robust emergency fund if a job loss were to occur? What about achieving financial independence at retirement age or sooner? 

Understanding your entire financial picture will help you make informed, strategic choices about how to use your inherited IRA so you can address important financial priorities. At Austin Wealth Management, we work closely with our clients to provide clarity around their financial goals and help create a path toward achieving them. If you’d like to speak with one of our advisors, reach out to schedule a conversation today.