You are the Beneficiary of an Inherited IRA - Now What?

​By Associate Attorney Nicole M. Perozzi

If you’ve recently inherited a tax-deferred retirement account, such as a traditional IRA, you’ve also inherited a deadline.  The rules for liquidating an inherited IRA have significantly changed since 2020 with the enactment of the SECURE Act.

Prior to 2020, a beneficiary could “stretch” withdrawals from an inherited IRA over their entire lifetime, allowing tax-deferred assets to potentially grow for decades.  The SECURE Act ended that option for most beneficiaries.  If you do not meet one of the exceptions (such as being a surviving spouse), you likely will need to liquidate the entire IRA within 10 years of the deceased owner’s death.  The IRS further clarified in 2024 that if the deceased owner had already started taking their own required minimum distributions (“RMDs”) before death, the beneficiary must also take annual withdrawals in years one through nine of that 10-year period. Missing one of those withdrawals can trigger a steep penalty.

The rules that apply also depend on who it is that inherits the account-- whether you are the named beneficiary, the deceased owner’s Estate is the beneficiary, or deceased owner’s Trust is the beneficiary.

If you are directly named as the beneficiary, the standard “10-Year Rule” usually applies. However, if you are a surviving spouse, a minor child, or a disabled or chronically ill beneficiary, you may be able to stretch withdrawals over a longer period of time.

If the deceased owner’s Estate is the beneficiary, the Estate is not treated the same as an individual, and the same 10-Year Rule does not apply.  The rules are stricter, and how strict depends on whether the owner had already begun their own RMDs before death.  If not, the IRA typically must be liquidated within five years.  Plus, higher tax rates on withdrawals could apply.

If the deceased owner’s Trust (or subtrust) is the beneficiary, the Trust may be able to qualify for the 10-Year Rule, but this requires very careful drafting.  A Trust prepared before the SECURE Act may not work as intended.  If the Trust fails to qualify, it will be treated like an Estate and lose the more favorable rules.

Naming the wrong beneficiary on your IRA can carry significant tax consequences upon your death.  If you've recently inherited an IRA, or you're unsure how to name the beneficiaries on your own personal IRA, contact us today at Jesson & Rains to discuss your options!