What Happens to Your Retirement Accounts When You Inherit Them?
What Happens to Your Retirement Accounts When You Inherit Them?
If you're set to inherit — or have already inherited — a traditional IRA or 401(k), the rules for what happens next changed dramatically in the last few years, and the IRS only finished enforcing them starting with the 2025 tax year. Get this wrong and you could face a 25% penalty on money you didn't even know you were required to withdraw.
The Stretch IRA Is Gone for Most Heirs
Before 2020, most people who inherited an IRA could "stretch" withdrawals over their own life expectancy, sometimes drawing the account down slowly over 40 or 50 years. The SECURE Act eliminated that option for most non-spouse beneficiaries. In its place: a hard 10-year deadline to fully empty the account, no matter how large the balance is.
The 10-Year Rule, Explained
If you inherited a traditional IRA, SEP IRA, or 401(k) from someone who died in 2020 or later, and you're not an "eligible designated beneficiary" (more on that below), the account must be completely emptied by December 31 of the 10th year after the original owner's death. Within that window, you can generally withdraw however much you want, whenever you want — but there's a catch that trips up a lot of people.
Do You Have to Take Annual Withdrawals, or Can You Wait?
This is the part that confused everyone for years, and the IRS finally settled it: it depends on whether the person you inherited from had already started their own Required Minimum Distributions (RMDs) before they died.
| Situation | What You Must Do |
|---|---|
| Owner died before their Required Beginning Date (before RMDs started) | No annual withdrawals required — withdraw at any pace, just empty the account by year 10 |
| Owner died on or after their Required Beginning Date (already taking RMDs) | You must take annual RMDs in years 1–9, and empty the account by year 10 |
| Inherited Roth IRA | Still a 10-year deadline to empty the account, but no annual RMDs required in the meantime, and withdrawals are generally tax-free |
The penalty for missing a required annual withdrawal is steep — 25% of the amount you should have taken, reduced to 10% if you correct it within two years. The IRS waived penalties for 2021–2024 while these rules were being finalized, but that grace period is over. Starting with 2025, the rules are fully enforced.
Who Skips the 10-Year Rule Entirely?
A small group of beneficiaries — called "eligible designated beneficiaries" — can still stretch withdrawals over their own life expectancy instead of following the 10-year rule:
- A surviving spouse
- A minor child of the original owner (until they reach adulthood, at which point the 10-year clock starts)
- Someone who is disabled or chronically ill
- A beneficiary who is not more than 10 years younger than the original owner
Everyone else — most adult children, siblings, friends, and non-spouse partners — falls under the standard 10-year rule.
The Tax Mistake That Costs People the Most
The single biggest decision you control is when within that 10-year window you take the money out — and it's easy to get wrong. Dumping a large inherited IRA balance into your income in one or two years can push you into a much higher tax bracket than spreading it evenly across all 10 years would. A $400,000 inherited IRA withdrawn all at once could mean paying tax on a big chunk of it at your top marginal rate, when spacing it out might have kept most of it taxed at a much lower rate.
A more effective approach for many people: take larger withdrawals in years when your other income is lower, and smaller withdrawals in high-income years — rather than withdrawing the same amount every year by default.
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Surviving spouses have an option no one else gets: rolling the inherited IRA into their own IRA, as if it had always been theirs. This resets the RMD rules to be based on the spouse's own age and Required Beginning Date, and often works out best when the surviving spouse is younger than the person who died — it can delay withdrawals for years compared to any other option.
Bottom Line
If you've inherited — or expect to inherit — a retirement account, the two questions that matter most are: was the original owner already taking RMDs when they died, and which bracket-year strategy will keep you from handing over more to the IRS than necessary. Both are worth sorting out well before year 10 sneaks up on you.
Related reading: What Are Required Minimum Distributions (RMDs) and How Do You Avoid the Penalties? · What Order Should You Withdraw From Your Retirement Accounts? · What Is a Roth Conversion and When Does It Actually Make Sense?
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