Inheriting an IRA? Spending vs. Investing

If you've inherited an IRA from someone other than your spouse, you can benefit from keeping the assets in a tax-deferred account.

By naming you as a beneficiary of an IRA, the original account owner has given you the opportunity to enhance your own financial security, should you choose to take advantage.

Note that inheriting an IRA from a spouse has a different set of rules; for information about inheriting an IRA from a spouse, see If you are the surviving spouse of an IRA owner in Fidelity Viewpoints®.

With an Inherited IRA, you can stretch your IRA assets by taking advantage of tax-deferred growth and annual required minimum distributions (RMDs). If you withdraw all the money, you'll lose the retirement savings advantages and face a large tax bill. You can always take out more than the RMD amount if you need to; however, it's usually advisable to leave the assets you don't immediately need in the Inherited IRA, to take advantage of as much tax-deferred growth as possible.

RMDs on an Inherited IRA require careful attention, as they often must begin by the year after the year of the original owner's death. If you miss taking RMDs, you may be subject to an IRS penalty. For more details, see Required Minimum Distribution (RMD) Rules for Inherited IRAs.

Even if you have short-term financial obligations, you may want to avoid taking all of your IRA inheritance in cash, for two reasons:

  • Short-term tax drain—If you cash out an IRA inheritance, you'll lose a significant portion of those assets to income taxes. Any withdrawals from non-Roth Inherited IRAs will likely be taxable as income in the year they're taken.
  • Long-term loss of earnings potential—The more money you withdraw from an Inherited IRA now, the less you have to build on for the future. Given that these assets have the potential to grow tax-deferred as long as they remain in the account, the cost of this lost opportunity can be quite substantial.

Stretch your Inherited IRA assets

Although you must withdraw at least a minimum amount from your Inherited IRA assets each year, RMDs are generally based on your age rather than the age of the original IRA owner.

If you are younger than the original IRA owner, basing RMDs on your own age may minimize the taxable amount that must be withdrawn each year.

Next steps

Learn more about inheriting an IRA
Depending on your relationship to the deceased, you may have several options.

Choosing investments for your IRA
Get help choosing from Fidelity’s wide range of investments.