Inheriting IRAs from someone other than your spouse

Understand the new distribution rules for inherited IRAs.

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Key takeaways

  • The Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the rules for distributing assets from an inherited IRA upon the death of an IRA owner.
  • Many nonspouse beneficiaries who inherit IRA assets on or after January 1, 2020 will be required to withdraw the full balance of their inherited IRA or 401(k) within 10 years.
  • In some cases, it may make sense to disclaim inherited IRA assets because they could increase the total amount of your estate and exceed estate tax exemption limits.

If you are the child, grandchild, sibling, distant family member, or even close friend of an IRA owner who has named you as their beneficiary, it's critical that you—and the owner of the IRA—understand the rules that govern IRA inheritances.

"Some of the rules for inheriting and distributing assets upon the death of an IRA owner changed with the passage of the SECURE Act in December 2019," says Ken Hevert, senior vice president of retirement products at Fidelity. "If IRA owners and their beneficiaries are not careful, they could end up paying higher taxes or penalties and forfeiting the opportunity for future tax-advantaged growth."

Here is what you need to know about inheriting IRA assets as a nonspouse beneficiary. There are a lot of rules that apply to inherited IRA accounts. Your relationship to the original owner, the original owner's age, when they passed, if they were already taking distributions, and the type of account you inherited are just a few of the details you need to take into account when considering your options. Whatever your situation, a discussion in advance with your attorney or tax professional may help you avoid any unintended consequences.

The IRS generally requires nonspouse inherited IRA owners to start taking required minimum distributions (RMDs) no later than December 31 in the year following the death of the original account owner.

With the passage of the SECURE Act, most non-spouse beneficiaries are required to distribute the full balance of their account within 10 years. The IRS published regulations on Feb 24, 2022, which requires beneficiaries using the 10-year withdrawal schedule to take annual RMD withdrawals in years 1-9 and fully deplete their account by December 31 of year 10, provided they inherited the account from an owner who was already taking RMDs.

Previously, if you inherited an IRA or 401(k), you could potentially "stretch" your distributions and tax payments out over your single life expectancy. The SECURE Act has eliminated this so-called "stretch" provision for most nonspouse beneficiaries.

As a nonspouse beneficiary, you do not have the option of transferring inherited IRA assets into your own IRA. If you inherit IRA assets from someone other than your spouse, you have several options:

1. Transfer the assets to an inherited IRA and take RMDs

As a nonspouse beneficiary, if you decide to transfer inherited IRA assets from the original owner's IRA to an inherited IRA in your name, the assets do not get to stay in your inherited IRA account forever. You have to follow the IRS required minimum distribution (RMD) rules to establish a withdrawal schedule for your account. The SECURE act created new RMD rules that apply when the original IRA owner passes away on or after January 1, 2020.

If the original IRA owner died on or before December 31, 2019, and

  • Died before reaching age 70½, you can start taking RMDs no later than December 31 of the year following the death of the original account owner. You also have the option of distributing your inherited IRA under the 5-year rule. This allows you to take distributions however you like without penalty by December 31 of the 5th year following the original IRA owner’s death. The 5-year rule is an accelerated withdrawal schedule, so it is important to discuss the potential tax implications with your tax professional.
  • Died after reaching age 70½, you must start taking RMDs by December 31 of the year following the year of the original owner's death. You may elect to calculate your RMD using your age or by using the age of the original owner in the year of death. Calculating using the original owner's age may be advantageous if they were younger than you.

If the original IRA owner left a percentage of their IRA account to more than one beneficiary, it's important to separate your portion of the decedent's IRA in your name and then complete your first RMD by December 31 of the year following the original IRA owner's death. If you don't meet this deadline, your RMD calculation will be based on the oldest beneficiary's life expectancy. If that person is older than you are, you will need to take a larger distribution.


If the original IRA owner died on or after January 1, 2020

  • The SECURE Act and subsequent IRS-proposed regulations made significant changes to the RMD rules for inherited IRA accounts. Most nonspouse beneficiaries are required to distribute the full balance of their account by December 31 of the 10th year following the original IRA owner's death. Eligible designated beneficiaries (a surviving spouse, a minor child of the account owner, someone who is disabled or chronically ill, or a beneficiary who is not more than 10 years younger than the original IRA owner) have the opportunity to take RMD withdrawals based on their age (or the age of the original account owner, if the account owner was already taking RMD prior to death). It is important to work with your tax professional to make sure you are following the proper withdrawal schedule and discuss the potential tax implications of the withdrawals from your account. Exceptions to the 10-year rule include payments made to an eligible designated beneficiary (a surviving spouse, a minor child of the account owner, a disabled or chronically ill beneficiary, and a beneficiary who is not more than 10 years younger than the original IRA owner or 401(k) participant). These beneficiaries can "stretch" payments over their life expectancy. Discuss the potential tax implications and distribution options of this accelerated withdrawal schedule with your tax professional.

What to do with the money? If you don’t have an immediate need for the money, leaving the assets in the inherited IRA may be the wisest move over the long term. This is because the longer you keep the money there, the longer you will enjoy potential tax-deferred growth, or, in the case of an inherited Roth IRA, potential tax-free growth. On the other hand, when you take money out of an inherited IRA, it will generally be taxed as ordinary income, and the size of the distribution may put you into a higher tax bracket. The more you withdraw from an inherited IRA now, the less you will have to build on for the future.

2. Disclaim (decline to inherit) all or part of the assets

If you decline to accept all or part of the IRA assets you are entitled to, they will pass to the other eligible beneficiaries. If no other beneficiaries exist, the assets will pass in accordance with the IRA provider's custodial agreement. For example, with a Fidelity IRA, the assets will pass to the original IRA owner's surviving spouse and, if none, to the owner's estate. A decision to disclaim IRA assets must be made within 9 months of the original IRA owner's death and before you take possession of the assets. This is an irrevocable decision. Therefore, as with any tax-related or estate planning matter, it's critical that you consult a tax professional or attorney before disclaiming IRA assets.

Other key points to remember

Determine whether you are listed as someone's beneficiary. While it may be a sensitive topic to broach with loved ones, knowing in advance that you are listed as a beneficiary can be helpful. As life events such as marriage, divorce, and death occur, it's in your best interest (and the IRA owner's) to confirm that beneficiary designations are up to date. Remember that IRA beneficiary designations supersede a will.

Request a trustee-to-trustee transfer. Make sure that inherited IRA/Roth IRA assets transfer directly from one account to another or from one IRA custodian as a transfer of assets. There is no option for a 60-day rollover when a nonspouse beneficiary is inheriting IRA assets. If you receive a check, the money will generally be taxed as ordinary income, and is ineligible to be deposited into an inherited IRA you may own at another firm, or back into the inherited IRA that it was withdrawn from to begin with.

Distributions from an inherited IRA can be invested in other accounts. Consider all your options when taking RMDs and other distributions from an inherited IRA. Generally, your distribution is included in your gross income and will be subject to ordinary state and federal income taxes. Once funds are distributed from an inherited account, the money will have to be included in income.

Commingling of inherited IRAs. If you inherit IRAs from different owners, you cannot combine them into a single inherited IRA. As for commingling IRAs of the same account type, the answer differs when they were inherited from the same original owner, which is allowed. Consult a tax professional regarding your situation. Distribution rules will vary for entities such as trusts, estates, and charities.

Nonspouse beneficiaries do not have bankruptcy protection with inherited IRAs. In 2005, the US Supreme Court ruled that an inherited IRA held by a nonspouse beneficiary is not exempt from attachment by creditors under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. While some states have laws that still may protect inherited IRAs, for a nonspouse beneficiary living in a state without such laws, the inherited IRA is effectively now treated as any other account owned by the beneficiary for bankruptcy purposes, and may not be protected under bankruptcy from claims by creditors. It is not clear whether and how this decision affects an inherited IRA held by a spousal beneficiary. Beneficiaries should be reminded to speak with their attorney or tax professional before taking any distribution from a retirement account or if they have specific questions regarding protection from creditors.

Next steps to consider

Take advantage of potential tax-deferred or tax-free growth.

Find out if you're contributing enough to your retirement savings.

If you own a Traditional IRA, learn about withdrawals you're required to take.

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