What Happens When You Inherit an IRA?

What Happens When You Inherit an IRA?- It’s hard enough to deal with the loss of a loved one. Navigating the complexities of inheritance, particularly inherited retirement accounts, can increase stress. A question posted on MSN, “I inherited my mom’s IRA and still need to take $10K in required minimum distributions in 2025, but there’s no cash. What do I liquidate?” poses a problem that is approaching for many people as the great wealth transfer proceeds.

Inherited IRAs can be complex. It may be advisable to consult an experienced estate-planning attorney before taking any action that could be financially disastrous.

Changes to IRA rules eliminated the benefit of stretching an IRA for non-spouse beneficiaries over their lifetimes. Adults who inherit an IRA from a parent in 2020 or later have ten years to empty the account. The clock starts ticking on December 31 of the year after the death of the IRA’s original owner. If a parent died in 2022, the ten-year period begins on December 31, 2023, and the account must be empty by December 31, 2032.

The amount of the required minimum distribution (RMD) depends on several factors, including the type of beneficiary and the account’s prior-year end balance. If the original owner had been taking RMDs before their death, the heir—a non-spouse beneficiary—would have to take RMDs also.

What happens if you miss an RMD? Penalties are pricey. A 25% excise tax could be levied on the shortfall, in addition to the income taxes due on the withdrawal. Remember, distributions from tax-deferred accounts, including traditional IRAs, are taxed as ordinary income. This is why inheriting an IRA can create tax burdens for beneficiaries.

In addition, if there are any assets left in the account after the ten-year period is over, what’s left will be subject to a 50% penalty. Be sure to empty the account before the deadline or lose half to the federal government.

What Happens When You Inherit an IRA?

There are options to consider, depending on the type of beneficiary. Non-spouse beneficiaries may not roll the assets into their own IRAs. However, they may set up an “inherited IRA,” sometimes called a “beneficiary IRA.” This applies to traditional and Roth IRAs.

Even Roth IRAs, which are funded with after-tax dollars, are subject to the ten-year rule. However, withdrawals are tax-free as long as five years have elapsed since the first contribution to the Roth IRA.

It’s also possible to take a lump-sum distribution of an inherited IRA, with no penalty for early withdrawals. However, it’s taxable as regular income, which could bump heirs into a higher tax bracket and lead to a higher income tax bill.

If funds are needed immediately to take the RMD, liquidating some assets to pay taxes is likely the most appropriate solution. If the IRA provider supports in-kind distributions, it may be possible to withdraw stocks, bonds, mutual funds, or ETFs from the account rather than cash. This might be a prudent move for assets that are performing well or if assets in the IRA aren’t liquid, such as real estate.

Talk with an estate planning attorney before making decisions for an inherited IRA. The rules are strict, and an informed choice could make a big difference in the size of your inheritance.

Schedule your phone consultation: THE LAW OFFICES OF CLAUDE S. SMITH, III

What Happens When You Inherit an IRA?

Reference: MSN (Dec. 18, 2025) “I inherited my mom’s IRA and still need to take $10K in required minimum distributions in 2025, but there’s no cash. What do I liquidate?”