Inherited IRAs: A Strategic Guide for Beneficiaries

When a loved one passes away, they can leave behind not only memories, but also financial assets, including retirement accounts. Among these, an Inherited IRA can be a powerful yet complex legacy. At first glance, an Inherited IRA may appear to be a simple transfer of assets. But beneath the surface there are opportunities to manage taxes and preserve wealth.

What Is an Inherited IRA?

An Inherited IRA is a retirement account passed on to a beneficiary after the original account holder’s death. It can originate from either a traditional or Roth IRA, as well as a 401(k) or 403(b) plan. Inherited IRAs come with specific rules about how and when the funds must be distributed. These rules vary depending on the relationship between the beneficiary and the deceased, the type of IRA, and the age of the original account holder at the time of death, among other things.

The SECURE Act of 2019 and its 2022 update, SECURE Act 2.0, introduced significant changes to how these accounts are handled—particularly for non-spouse beneficiaries. Understanding these rules is essential to avoid costly penalties and to make the most of the inherited assets. It is also important to review the date of death and the type of IRA to determine which rules apply to your situation. The more your earnings grow without being taxed, the more powerful the Roth IRA benefit becomes.

The 10-Year Rule: A New Standard for Most Beneficiaries

One of the most important changes introduced by the SECURE Act (which took effect Jan. 1, 2020) is the “10-year rule.” For most non-spouse beneficiaries, the IRS now requires that the entire balance of an Inherited IRA be distributed within 10 years of the original owner’s death. This rule replaced the “stretch IRA”, which previously allowed beneficiaries to take required minimum distributions (RMDs) over their own life expectancy. This was a powerful strategy that allowed younger beneficiaries to keep the funds invested in a tax-deferred account over a long period of time.

While the 10-year rule offers some flexibility in terms of when distributions are made, it also introduces tax planning challenges. Distributions from a traditional Inherited IRA are taxed as ordinary income. Large withdrawals in a single year can push beneficiaries into higher tax brackets. To reduce your overall tax burden, consider spreading distributions over multiple years, especially when your tax bracket may be lower.

Spousal vs. Non-Spousal Beneficiaries: Different Paths

Spouses have more flexibility than other beneficiaries when inheriting an IRA. They may treat the IRA as their own and delay required minimum distributions (RMDs) until age 73 or open an Inherited IRA and follow the applicable distribution rules. In contrast, non-spouse beneficiaries—such as adult children or other relatives—are generally required to follow the 10-year rule. However, there are exceptions.

Certain individuals, known as Eligible Designated Beneficiaries (EDBs), may still take distributions over their life expectancy. These include a spouse, minor children of the deceased (until they reach the age of majority), individuals who are disabled or chronically ill, and beneficiaries who are not more than ten years younger than the decedent. If you qualify as an EDB, consult a financial advisor to explore the potential advantages of lifetime distributions.

Tax Considerations

The IRS requires that, in some cases, beneficiaries of an Inherited IRA take Required Minimum Distributions (RMDs) each year. Under recent IRS guidance, RMDs are required if the deceased owner died on or after his or her Required Beginning Date, which is April 1 following the year he or she turned age 73.

Distributions from an Inherited IRA are generally subject to income tax, unless the account is a Roth IRA. Even then, the 10-year rule still applies. However, RMDs are not required for Inherited Roth IRAs. Distributions from a Roth IRA are typically tax-free if the account is held for at least five years.

For traditional IRAs, each withdrawal is taxed as ordinary income. Higher income can have a ripple effect across other areas of your financial life, including Medicare premiums, Social Security taxation, and eligibility for certain tax deductions and credits. Coordinate IRA withdrawals with other income sources if you wish to avoid pushing yourself into a higher tax bracket.

Avoiding Penalties and Pitfalls

Failure to comply with IRA distribution rules can lead to substantial penalties. As of 2025, the IRS imposes a 25% excise tax on any amount that should have been withdrawn but wasn’t. Fortunately, this penalty can be reduced to 10% if the mistake is corrected in a timely manner. Common mistakes include missing the first required distribution, mistakenly believing that Roth IRAs are exempt from the 10-year rule and neglecting to update beneficiary designations—an oversight that can result in unintended tax consequences or delays due to probate. To avoid these pitfalls, set calendar reminders for key distribution deadlines and review your beneficiary designations periodically.

Planning Opportunities

IRAs can play a powerful role in a broader wealth strategy but also pose unique tax issues for an estate that may be subject to federal estate tax (i.e., an estate over $14 million).¹ This is because a traditional IRA may be subject to both estate tax and income tax. To avoid all taxes on an IRA, the owner can designate a charity as the beneficiary instead of their children. Current rules allow you to name a Donor-Advised Fund or private foundation as the beneficiary of your IRA at death. In addition, IRA beneficiaries who are age 70 ½ or older can reduce their taxable income through Qualified Charitable Distributions (QCDs), which are direct payments from an IRA to a charitable organization (other than a Donor-Advised Fund or private foundation) that can satisfy your RMD. To make the most of these opportunities, consider working with an attorney, accountant, or financial planner to integrate your Inherited IRA into your estate plan.

A Tool for Generational Wealth

While Inherited IRAs come with various rules and responsibilities, they also offer an opportunity to preserve and grow wealth across generations. With the right guidance, beneficiaries can honor their loved one’s legacy while building a secure financial future of their own. At 1919 Investment Counsel, we welcome your inquiries about Inherited IRAs. Contact your Portfolio Manager or Client Advisor for more information.

Footnote
¹Note that with the portability of a deceased spouse’s unused exemption, an estate of over $14 million may still be exempt from estate tax. Further, the federal estate tax exemption will increase to $15 million per person in 2026. See https://1919ic.com/insight/portability-of-a-spouses-unused-exemption/

About 1919 Investment Counsel
1919 Investment Counsel is a registered investment advisor. Its mission for more than 100 years has been to provide investment counsel and insight that helps families, individuals, and institutions achieve their financial goals. The firm is headquartered in Baltimore and has offices across the country in Birmingham, Cincinnati, New York, Philadelphia, San Francisco and Vero Beach. 1919 Investment Counsel seeks to consistently deliver an extraordinary client experience through its independent thinking, expertise and personalized service. To learn more, please visit our website at 1919ic.com.

Disclosures
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Published: August 2025