Inherited IRA Non-Spouse

This article outlines the distribution rules and tax implications for non-spouse beneficiaries of inherited IRAs. It helps beneficiaries understand their options under the 10-year rule, how to avoid penalties, and strategies to manage taxes and preserve assets.

The Concept

When the owner of a traditional or Roth IRA or qualified retirement plan (such as a 401(k) account) dies, the named beneficiaries have three options: disclaim the inheritance, take it as a lump-sum taxable withdrawal, or open an inherited IRA (also known as a beneficiary IRA) and transfer the funds into it. (Because the rules are so similar, we use the terms “IRA” and “IRA beneficiaries” here to refer to all three types of retirement accounts listed and/or their beneficiaries unless otherwise noted.)

The distribution options for an inherited IRA differ from the regular required minimum distribution (RMD) rules that apply to original owners. IRA beneficiaries used to be able to “stretch” the IRA, taking smaller distributions over their life expectancy and leaving more time for the money to potentially accumulate gains - an option eliminated by the SECURE Act of 2019 for most non-spousal beneficiaries.

IRS final regulations issued in July 2024 make clear that beneficiaries who are not “eligible designated beneficiaries” (EDBs) must withdraw the entire balance of the inherited IRA by December 31 of the tenth year following the account owner’s death—a rule that applies to all IRAs inherited on or after January 1, 2020.

Eligible designated beneficiaries include a surviving spouse, a chronically ill or disabled individual, any other individual not more than 10 years younger than the original IRA owner, or the original owner’s minor child (who is allowed to stretch payments until age 21, at which time the 10-year distribution rule applies).

The SECURE Act established three classes of IRA beneficiaries:

•  Eligible designated beneficiaries (defined above)
•  Designated beneficiaries (people who do not qualify as EDBs - such as an adult child, grandchild, or friend—plus certain trusts)  
•  Non-designated beneficiaries (beneficiaries that are not people, such as estates, charities, or nonqualified trusts)

IRS rules governing distributions from inherited IRAs vary depending on the class of beneficiary and several other factors, including the beneficiary’s relationship to the deceased person, the age of the account owner at the time of their death, whether the original account owner started taking RMDs, and the beneficiary’s age at the time of inheriting the IRA.

Options for Non-Spouse Eligible Designated Beneficiaries

Non-spouse EDBs can typically stretch withdrawals over their single life expectancy, which is longer than 10 years for most beneficiaries.

If the IRA owner died before the required beginning date (RBD) for distributions, though, the 10-year rule may apply. (The RBD is the date on which the first RMD is due—generally April 1 of the year after an IRA owner turns 73.)

The plan document may:

•  allow a non-spouse EDB to choose between the 10-year rule or taking the full stretch over their life expectancy,
•  allow the original owner to elect the 10-year rule for the non-spouse EDB, or
•  make the 10-year rule applicable to all EDBs or certain categories of EDBs (an option unavailable if the IRA owner died after their required beginning date for distributions).

With a narrow exception, the election is final once the EDB selects an option.

Options for Designated Beneficiaries

Most designated beneficiaries must withdraw all the funds in an inherited IRA within 10 years of the original IRA owner’s death without the option to stretch the payments over their life expectancy.

If the original IRA owner died before their RBD, the designated beneficiary can determine the amount and timing of withdrawals from the inherited IRA during the following 10 years with no RMDs.  

If the original IRA holder died on or after their RBD, the designated beneficiary is subject to RMDs from the inherited IRA in years one through nine, with the amount determined by the beneficiary’s life expectancy.

In either case—whether the original IRA owner died before or after their RBD—there is no 10% tax penalty for taking withdrawals under age 59½. There is a tax penalty on any funds remaining in the account after December 31 of the tenth year following the owner’s death (since these funds are considered a missed RMD).

Note that all Roth IRA owners are deemed to have died before their RBD (since Roth IRAs do not have RMDs), meaning the beneficiary must withdraw the entire amount within the 10 years following the original owner’s death.

Potential Tax Implications

The tax implications depend on the type of IRA inherited, the class of beneficiary, and the withdrawal method. Distributions from inherited traditional IRAs are generally taxable as ordinary income. In contrast, distributions from inherited Roth IRAs are generally tax free (since the original owner funded the Roth IRA with after-tax dollars) if the original owner held the account for at least five years.

The Bottom Line

Knowing the available options after inheriting an IRA or qualified retirement account is important. Understanding how and when to take distributions from the account is essential to avoid any tax penalties. It’s critical to consult a tax or legal professional to obtain the best guidance for understanding how an inherited IRA fits into a beneficiary’s overall financial plan, given the specific rules and options for inheriting an IRA.

 Summary

What Is an Inherited IRA? An inherited IRA is an account a beneficiary opens after inheriting an IRA or qualified retirement plan account like a 401(k) or 403(b).

How Do Beneficiaries Take Distributions?

Eligible designated beneficiaries (including a surviving spouse, a chronically ill or disabled individual, any other individual not more than 10 years younger than the original IRA owner, or the original owner’s minor child) may stretch distributions over their life expectancy.

 Most non-spousal beneficiaries must withdraw all funds within 10 years of the original owner’s death. For designated beneficiaries, an RMD may be required in years one through nine when the original owner had already begun taking RMDs.

How Are Distributions Taxed? The tax treatment depends on the type of IRA, the beneficiary, and the withdrawal method. For example, inherited IRA distributions from traditional IRAs are generally taxable as ordinary income, but there is no 10% early withdrawal tax penalty. For Roth IRAs, distributions are usually tax free if the original owner held the account for at least five years.

What are the Benefits? Opening an inherited IRA instead of taking a lump-sum distribution offers several benefits, including:

• Potential for tax-advantaged growth: Assets may continue to have the potential to grow tax deferred or tax free, depending on the type of IRA.  
• Tax management: By spreading distributions over time, beneficiaries can manage their tax liability more effectively.
• Asset preservation: Smaller distributions can help preserve assets for a more extended period.

Is There Anything to Watch Out For? Those holding an inherited IRA should understand the distribution requirements for their particular situation and follow the rules carefully to avoid any tax penalty.

This information is not intended to be a substitute for specific individualized tax or legal advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. If you are seeking investment advice specific to your needs, such advisory services must be obtained on your own separate from this educational material. We suggest that you discuss your specific situation with a qualified tax or legal advisor. 

Copyright © 2025, PGI Partners, Inc., 921 East 86th Street, Suite 100, Indianapolis, Indiana 46240. All rights reserved. This material was prepared by PGI Partners, Inc. on behalf of LPL Financial, LLC.