Inherited IRA: Definition and Tax Rules for Spouses & Non-Spouses

What Is an Inherited IRA?

An inherited IRA is an account that is opened when an individual inherits an IRA or employer-sponsored retirement plan after the original owner dies. The individual inheriting the Individual Retirement Account (IRA) (the beneficiary) may be anyone—a spouse, relative, or unrelated party or entity (estate or trust). Rules on how to handle an inherited IRA differ for spouses and non-spouses, however.

An inherited IRA is also known as a "beneficiary IRA." Many of the top brokers for IRAs provide support in resolving these matters related to the inheritance of IRA assets, taxation issues, and continuation of retirement account status. 

Tax laws surrounding inherited IRAs are quite complicated, and they became even more so with the Setting Every Community Up For Retirement Enhancement (SECURE) Act of 2019, which made some significant changes to the regulations—mainly for heirs other than spouses.

Key Takeaways

  • An inherited IRA, also known as a beneficiary IRA, is an account that is opened when an individual inherits an IRA or employer-sponsored retirement plan after the original owner dies.
  • Additional contributions may not be made to an inherited IRA.
  • Rules vary for spousal and non-spousal beneficiaries of inherited IRAs.
  • The SECURE Act mandated that non-spousal beneficiaries must empty inherited IRAs within a decade.

Understanding the Inherited IRA

A beneficiary may open an inherited IRA using the proceeds from any type of IRA, including traditional, Roth, rollover, SEP, and SIMPLE IRAs. Generally, assets held in the deceased individual’s IRA must be transferred into a new inherited IRA in the beneficiary’s name.

This transfer must be made even if a lump-sum distribution is planned. Additional contributions may not be made to an inherited IRA.

The Internal Revenue Service provides guidelines for inherited IRA beneficiaries. IRS forms 1099-R and 5498 are required for reporting inherited IRAs and their distributions for tax purposes.

Inherited IRAs are treated the same, whether they are traditional IRAs or Roth IRAs. The tax treatment of withdrawals does vary—consistent with the type of IRA (funded with pre-tax dollars, like the traditional type, or post-tax dollars, like the Roth).

Inherited IRAs: Rules for Spouses

Spouses have more flexibility in how to handle an inherited IRA. For one, they can roll over the IRA, or a part of the IRA, into their own existing individual retirement accounts; the big advantage of this is the ability to defer required minimum distributions (RMDs) of the funds until they reach the age of 72.

RMDs previously began at 70½, but the age was raised to 72 following the December 2019 passage of the Setting Every Community Up For Retirement Enhancement (SECURE) Act.

They have 60 days from receiving a distribution to roll it over into their own IRAs as long as the distribution is not a required minimum distribution.

Spousal heirs can also set up a separate inherited IRA account, as described above. How they deal with this IRA depends on the age of the deceased account holder.

If the original owner had already begun receiving RMDs at the time of death, the spousal beneficiary must continue to receive the distributions as calculated or submit a new schedule based on their own life expectancy. If the owner had not yet committed to an RMD schedule or reached their required beginning date (RBD)—the age at which they had to begin RMDs—the beneficiary of the IRA has a five-year window to withdraw the funds, which would then be subject to income taxes.

Inherited IRAs: Rules for Non-Spouses

Non-spouse beneficiaries may not treat an inherited IRA as their own. That is, they may not make additional contributions to the account, nor can they transfer funds into an existing IRA account they have in their own names. Non-spouses may not leave assets in the original IRA. They must set up a new inherited IRA account unless they want to distribute the assets immediately via a lump-sum payment.

It is in the realm of distributions that the SECURE Act most drastically affects non-spouse inheritors of IRAs. Previously, these beneficiaries could handle RMDs pretty much as spousal heirs could; in particular, they could recalculate them based on their own life expectancy—which often significantly decreased the annual amount that had to be withdrawn and the tax due on them (in the case of traditional IRAs).

Those who inherit Roth IRAs are required to take distributions (unlike the original account owners), but the funds remain tax-free and also free of any early-withdrawal penalty, even if the beneficiary is under 59½.

No longer. The SECURE Act dictates that, for accounts inherited after Dec. 31, 2019, non-spouse beneficiaries typically must cash out the account within 10 years of the original owner's death. Some heirs are exempted: those whose age is within a decade of the deceased's, disabled or chronically ill individuals, or minor children. However, these minors must be direct descendants (no grandchildren, in other words), and, once they reach majority age, the 10-year rule kicks in for them too. There's no particular timetable for the withdrawals; they can be taken annually or all at once.

For beneficiaries in these categories and those already in possession of inherited IRAs, the old distribution rules and schedules remain in effect.

Article Sources
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  1. Internal Revenue Service. "Retirement Topics - Beneficiary." Accessed July 11, 2007.

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