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Inherited IRA distribution rules

Inherited IRA distribution rules:

  • Generally, you must take distributions during your lifetime or within five years after the original account holder passed away.
  • With an Inherited Traditional IRA, you’ll pay taxes on any distributions you take.
  • Rollover, SEP, and SIMPLE IRAs become Inherited Traditional IRAs.
  • With an Inherited Roth IRA, you don’t pay taxes on distributions.
  • To evaluate the potential impact an inheritance might have on your overall tax situations, we recommend you also consult your tax advisor.

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Traditional Spouse inherits

If you inherit a Traditional, Rollover, SEP, or SIMPLE IRA from a spouse, you have several options, depending on whether your spouse was under or over age 70½. Most commonly, those who inherit an IRA from a spouse transfer the funds to their own IRA.

Account Holder was under 70½

If your spouse (the account holder) was under 70½, these are your choices:

Option #1: Spousal transfer (treat as your own)
Account type You transfer the assets into your own existing or new IRA.
Money is available At any time, but a penalty will apply to withdrawals made before you reach age 59½.
Other considerations
  • Only available if the you are the sole beneficiary.
  • IRA assets can continue growing tax-deferred.
  • If you are under 59½ you'll be subject to the same distribution rules as if the IRA had been yours originally, so you cannot take distributions without paying the 10% early withdrawal penalty—unless you meet one of the IRS penalty exceptions.
  • You may designate your own IRA beneficiary.
Option #2: Open an Inherited IRA: Life Expectancy Method
Account type You transfer the assets into an Inherited IRA held in your name.
Money is available Distributions must begin no later than 12/31 of the year the account holder would have reached 70½.
Other considerations
  • Your annual distributions are spread over your single life expectancy, which is determined by your age in the calendar year following the year of death and reevaluated each year.
  • If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary.
  • Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-deferred.
  • You may designate your own IRA beneficiary.
Option #3: Open an Inherited IRA: 5 Year Method
Account type You transfer the assets into an Inherited IRA held in your name.
Money is available At any time up until 12/31 of the fifth year after the year in which the account holder died, at which point all assets need to be fully distributed.
Other considerations
  • You are taxed on each distribution.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-deferred for up to five years.
  • You may designate your own IRA beneficiary.
Option #4:Lump Sum Distribution
Account type None. All assets in the IRA are distributed to you.
Money is available All at once.
Other considerations
  • You will pay income taxes on the distribution all at once.
  • You will not incur the 10% early withdrawal penalty.
  • You may move to a higher tax bracket depending on the amount of the distribution and your current income level.

Account Holder was over 70½ 

If your spouse (the account holder) was over 70½, these are your choices.

Option #1: Spousal transfer (treat as your own)
Account type You transfer the assets into your own existing or new IRA.
Money is available At any time, but a penalty will apply to withdrawals made before you reach age 59½ .
Other considerations
  • Only available if the you are the sole beneficiary.
  • IRA assets can continue growing tax-deferred.
  • You must take an RMD for the year of death (if the account holder did not already take it).
  • If you are under 59½ you'll be subject to the same distribution rules as if the IRA had been yours originally, so you cannot take distributions other than RMD for the year of the death without paying the 10% early withdrawal penalty.
  • You may designate your own IRA beneficiary.
Option #2:Open an Inherited IRA: Life Expectancy Method
Account type You transfer the assets into an Inherited IRA held in your name.
Money is available

You must begin taking an annual RMD over your life expectancy beginning no later than 12/31 of the year following the original account holder's death.

Note: If the original account holder did not take an RMD in the year of death, an RMD must be taken from the account by 12/31 of the year the original account holder died.
Other considerations
  • Your annual distributions are spread over your single life expectancy (determined by your age in the calendar year following the year of death and reevaluated each year) or the deceased account holder's remaining life expectancy, whichever is longer.
  • If there are multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary.
  • Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-deferred.
  • You may designate your own IRA beneficiary.
Option #3:Lump Sum Distribution
Account type None. All assets in the IRA are distributed to you.
Money is available All at once.
Other considerations
  • You will pay income taxes on the distribution all at once.
  • You will not incur the 10% early withdrawal penalty.
  • You may move to a higher tax bracket depending on the amount of the distribution and your current income level.

Traditional Non-spouse inherits

If you inherit a Traditional, Rollover, SEP, or SIMPLE IRA from a friend or family member, you have several options, depending on whether the account holder was under or over age 70½. 

Account Holder was under 70½

If the account holder was under 70½, these are your choices:

Option #1: Open an Inherited IRA: Life Expectancy Method
Account type You transfer the assets into an Inherited IRA held in your name.
Money is available Distributions must begin no later than 12/31 of the year after the account holder died.
Other considerations
  • Your annual distributions are spread over the beneficiary's single life expectancy determined by your age in the calendar year following the year of death and reevaluated each year.
  • If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary.
  • Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-deferred.
  • You may designate your own IRA beneficiary.
Option #2: Open an Inherited IRA: 5 Year Method
Account type You transfer the assets into an Inherited IRA held in your name.
Money is available At any time up until 12/31 of the fifth year after the year in which the account holder died, at which point all assets need to be fully distributed.
Other considerations
  • You are taxed on each distribution.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-deferred for up to five years.
  • You may designate your own IRA beneficiary.
Option #3: Lump Sum Distribution
Account type None. All assets in the IRA are distributed to you.
Money is available All at once.
Account type
  • You will pay income taxes on the distribution all at once.
  • You will not incur the 10% early withdrawal penalty.
  • You may move to a higher tax bracket depending on the amount of the distribution and your current income level.

Account Holder was over 70 ½

If the account holder was over 70½, these are your choices.

Option #1: Open an Inherited IRA: Life Expectancy Method
Account type You transfer the assets into an Inherited IRA held in your name.
Money is available

You must begin taking an annual RMD over your life expectancy beginning no later than 12/31 of the year following the original account holder's death.

Note: If the original account holder did not take an RMD in the year of death, an RMD must be taken from the account by 12/31 of the year the original account holder died.
Other considerations
  • Your annual distributions are spread over your single life expectancy (determined by your age in the calendar year following the year of death and reevaluated each year) or the deceased account holder's remaining life expectancy, whichever is longer.
  • If there are multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary.
  • Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-deferred.
  • You may designate your own IRA beneficiary.
Option #2: Lump Sum Distribution
Account type None. All assets in the IRA are distributed to you.
Money is available All at once.
Other considerations
  • You will pay income taxes on the distribution all at once.
  • You will not incur the 10% early withdrawal penalty.
  • You may move to a higher tax bracket depending on the amount of the distribution and your current income level.

Roth–Spouse inherits

If you are inheriting a Roth IRA as a spouse, you have several options—including opening an Inherited IRA.

Option #1: Spousal transfer (treat as your own)
Account type You transfer the assets into your own existing or new Roth IRA.
Money is available At any time, but earnings generally will be taxable until you reach age 59½ and the five year holding period has been met.
Other considerations
  • Only available if the spouse is the sole beneficiary.
  • You'll be regulated by the same distribution rules as if the IRA had been yours originally; normally early withdrawal penalties may still apply.
  • You may designate your own IRA beneficiary.
Option #2: Open an Inherited IRA: Life Expectancy Method
Account type You transfer the assets into an Inherited IRA held in your name.
Money is available

Required Minimum Distributions (RMDs) are mandatory and you have the option to postpone distributions until the later of:

  • When the decedent would have attained age 70½, or
  • December 31 of the year following the year of death.
Other considerations
  • Distributions are spread over the beneficiary's single life expectancy.
  • If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death in order to use your own single life expectancy; otherwise, distributions will be based on the life expectancy of the oldest beneficiary.
  • Distributions may be taken without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-free.
  • You may designate your own beneficiary.
Option #3: Open an Inherited IRA: 5 Year Method
Account type The assets are transferred into an Inherited IRA held in your name.
Money is available At any time up until 12/31 of the fifth year after the year in which the account holder died, at which point all assets need to be fully distributed.
Other considerations
  • Your distributions can be spread over time, but all assets must be withdrawn by 12/31 of the fifth year after the year in which the account holder died.
  • Distributions may be taken during that period without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-free for up to five years.
  • You may designate your own beneficiary.
Option #4: Lump Sum Distribution
Account type None. All assets in the Roth IRA are distributed to you.
Money is available All at once. 
Other considerations
  • If the account is less than five years old at the time of the account holder's death, earnings are taxable.

Roth–Non-spouse inherits

If you are inheriting a Roth IRA from a friend or family member, you have several options—including opening an Inherited IRA.

Option #1: Open an Inherited IRA: Life Expectancy Method
Account type You transfer the assets into an Inherited IRA held in your name.
Money is available Required Minimum Distributions (RMDs) are mandatory and distributions must begin no later than 12/31 of the year following the year of death.
Other considerations
  • Distributions are spread over the beneficiary's single life expectancy.
  • If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death in order to use your own single life expectancy; otherwise, distributions will be based on the life expectancy of the oldest beneficiary.
  • Distributions may be taken without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-free.
  • You may designate your own beneficiary.
Option #2: Open an Inherited IRA: 5 Year Method
Account type The assets are transferred into an Inherited IRA held in your name.
Money is available At any time up until 12/31 of the fifth year after the year in which the account holder died, at which point all assets need to be fully distributed.
Other considerations
  • Your distributions can be spread over time, but all assets must be withdrawn by 12/31 of the fifth year after the year in which the account holder died.
  • Distributions may be taken during that period without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-free for up to five years.
  • You may designate your own beneficiary.
Option #3: Lump Sum Distribution
Account type None. All assets in the Roth IRA are distributed to you.
Money is available All at once.
Other considerations
  • If the account is less than five years old at the time of the account holder's death, earnings are taxable.
Zemelman
Ines Zemelman, EA is the founder of Taxes for Expats
She may be reached at: +1-646-397-2887