Inherited a Retirement Account? Here's What You Need to Know

Inheriting a retirement account can bring both opportunity and responsibility. Whether the assets come from a spouse, parent or another loved one, receiving an inheritance often happens during an emotionally difficult time.

Along with the personal challenges of losing someone, beneficiaries may face financial decisions they have never encountered before. What happens to the account? When does the money need to be withdrawn? Will taxes be owed? And how should the inheritance fit into an existing financial plan?

The answers depend on several factors, including the account type, the beneficiary's relationship to the deceased and the rules governing inherited retirement assets.

Understanding your options before making changes can help you make more informed decisions and avoid unnecessary tax consequences.

1. Start by Identifying the Account and Contacting the Administrator

One of the first steps after inheriting retirement savings is confirming where the account is held and who manages it.

The account may be an individual retirement account (IRA) held at a bank or brokerage firm, or it may be part of an employer-sponsored retirement plan, such as a 401(k) or 403(b).

Once you identify the financial institution or plan administrator, contact them directly to confirm your beneficiary status and understand the available options. Retirement plans may have specific rules governing beneficiaries and how inherited assets can be distributed.[1]

You may be asked to provide:

• A copy of the account owner's death certificate
• Account details or identifying information
• Personal identification and beneficiary documentation
• A marriage certificate, if you are the surviving spouse
• Completed beneficiary claim or transfer paperwork

Documentation requirements vary by institution, so it is important to confirm exactly what is needed before initiating a transfer or distribution.

Don't overlook other retirement accounts

It may also be worth checking whether the deceased had additional retirement savings through previous employers.

The U.S. Department of Labor maintains a Retirement Savings Lost and Found Database designed to help individuals and beneficiaries locate retirement benefits associated with former employers.[3]

An estate executor, financial advisor or family member familiar with the deceased's finances may also be able to help identify accounts that were not included in the initial estate documentation.

2. Understand How Your Relationship to the Account Owner Affects Your Options

Not all beneficiaries are treated the same under federal retirement account rules.

The IRS distinguishes between surviving spouses, other designated beneficiaries and certain individuals who qualify as eligible designated beneficiaries. These classifications affect how and when retirement assets must be distributed.[1]

If you inherit a retirement account from your spouse

Surviving spouses generally have more options when inheriting retirement assets.

For an inherited IRA, a surviving spouse who is the sole beneficiary may be able to:

Treat the IRA as their own. Depending on the circumstances, a surviving spouse may transfer or roll eligible inherited IRA assets into an IRA in their own name. This allows the account to be managed under the surviving spouse's applicable IRA rules.[2]

Maintain an inherited IRA. A surviving spouse may instead keep the account as an inherited IRA and take distributions according to the applicable beneficiary requirements.[1][2]

Choose a distribution strategy. Depending on when the original owner died and whether required distributions had begun, a spouse may have flexibility to delay or spread withdrawals over time.[1][2]

The choice can have important consequences.

For example, a surviving spouse younger than age 59½ who anticipates needing money from the account may want to consider maintaining inherited IRA status. Distributions from an inherited IRA made because of the original owner's death generally are not subject to the 10% additional tax on early withdrawals. However, that additional tax may apply to early withdrawals after the spouse elects to treat the IRA as their own.[2][4]

If you inherit an account from someone other than your spouse

Nonspouse beneficiaries generally have fewer options.

For example, if you inherit a traditional IRA from a parent or another individual who was not your spouse, you generally cannot treat that IRA as your own or combine it with an existing personal IRA.[2]

However, a properly structured trustee-to-trustee transfer may allow the inherited assets to move between financial institutions while maintaining their inherited status.[2]

Different rules apply when transferring inherited assets from an employer-sponsored retirement plan. An eligible nonspouse beneficiary may be able to arrange a direct transfer from the plan to an inherited IRA, provided the applicable requirements are met.[5]

Before moving assets, confirm the correct process with the account administrator. An improperly handled transaction could create an unintended taxable distribution.

3. Know the Rules for Required Withdrawals

One of the most important considerations when inheriting retirement savings is understanding required minimum distributions, or RMDs.

RMDs are the minimum amounts that must be withdrawn from certain retirement accounts under federal tax rules.

The SECURE Act changed distribution requirements for many beneficiaries of account owners who died after 2019. As a result, many inherited accounts are now subject to a 10-year distribution requirement.[1][6]

How the 10-year rule works

For most non-spouse designated beneficiaries who do not qualify for a special exception, the entire inherited account must be distributed by December 31 of the tenth year following the original owner's death.[2]

For example, if someone inherits an IRA from a parent who dies in 2026, the beneficiary generally must fully distribute the account by December 31, 2036, assuming the 10-year rule applies.

However, the timing of withdrawals within that period matters.

If the original account owner died before their required beginning date for RMDs, a beneficiary subject to the 10-year rule generally is not required to take annual withdrawals before the tenth year.[2]

If the original owner died on or after their required beginning date, annual minimum distributions generally must continue during the 10-year period, with the account fully distributed by the end of year ten.

The IRS final regulations governing these distribution requirements apply beginning with the 2025 distribution year.

If the original account owner had an RMD obligation for the year of death that was not fully satisfied, the beneficiary may also be responsible for completing that year's required withdrawal.[1]

Exceptions to the 10-year rule

Certain beneficiaries may qualify for different distribution options under the IRS's eligible designated beneficiary rules.

These include:

• A surviving spouse
• A minor child of the original account owner
• An individual who is disabled or chronically ill under applicable rules
• An individual who is not more than 10 years younger than the original account owner[1]

Some eligible designated beneficiaries may take distributions based on life expectancy rather than following the standard 10-year schedule.[1]

Special rules apply when a minor child reaches the applicable age of majority or when an eligible designated beneficiary dies.[2]

Because the requirements can become complicated, particularly when multiple beneficiaries or trusts are involved, it is important to confirm the applicable deadlines with a tax professional.

4. Understand the Potential Tax Consequences

The type of retirement account inherited can make a significant difference in how distributions are taxed.

Inherited traditional IRAs and retirement plans

Withdrawals from inherited traditional IRAs are generally subject to ordinary income taxes to the extent the distributions consist of previously untaxed amounts.[2]

This means a large withdrawal could increase taxable income for the year and potentially move the beneficiary into a higher income tax bracket.

For example, an individual who inherits a traditional IRA while still working may already have substantial employment income. Taking a large distribution in the same year could result in more income being taxed at higher marginal rates.

However, inherited IRA distributions made because of the original owner's death generally are not subject to the additional 10% early withdrawal tax, even when the beneficiary is younger than age 59½.[4]

Inherited Roth IRAs

Inherited Roth IRAs may offer different tax advantages.

The IRS states that distributions of contributions from inherited Roth IRAs are tax-free, and most withdrawals of earnings are also tax-free. However, earnings may be taxable if the account has not satisfied the applicable five-year requirement.[1][2]

Even when distributions are tax-free, inherited Roth accounts are generally subject to beneficiary distribution requirements, including the 10-year rule for many nonspouse beneficiaries.[1]

Why withdrawal timing matters

When an inherited traditional retirement account must be emptied within a defined period, the beneficiary may have some flexibility in deciding how much to withdraw each year, subject to any annual RMD requirements.

Spreading taxable withdrawals across multiple years may help manage tax exposure compared with taking the entire balance in a single year.

For example, a beneficiary could coordinate withdrawals with anticipated changes in income, retirement timing or other financial events.

The appropriate strategy depends on the beneficiary's tax situation, liquidity needs and applicable distribution deadlines.

5. Consider How the Inheritance Fits Into Your Financial Plan

Inheriting retirement savings can create an opportunity to revisit your broader financial picture.

Rather than immediately withdrawing or moving the assets, consider how the inheritance may support both short-term needs and long-term goals.

Managing debt and immediate expenses

Some beneficiaries may benefit from using a portion of inherited retirement assets to address high-interest debt, unexpected expenses or other financial obligations.

However, withdrawing money from a traditional inherited retirement account can create taxable income.[2]

Before taking a large distribution, consider whether the potential interest savings or immediate financial benefit outweighs the tax cost.

Supporting retirement goals

If the inherited funds are not needed for immediate expenses, maintaining the assets in an inherited retirement account until distributions are required may allow the remaining balance to stay invested, subject to market risk.

This may be particularly relevant for beneficiaries who are still building their own retirement savings.

Building financial flexibility

An inheritance may also create opportunities to strengthen emergency savings, support education goals, manage upcoming expenses or reduce financial uncertainty.

The important consideration is how those choices fit together.

For example, using an inheritance to eliminate high-interest debt could free up monthly cash flow that can then be directed toward retirement savings or other priorities.

A financial advisor can help evaluate those tradeoffs in the context of your overall financial situation.

6. Avoid Common Inherited Retirement Account Mistakes

Inherited retirement accounts have specific rules, and mistakes can be costly.

One common issue is missing a required distribution.

The IRS generally imposes a 25% excise tax on amounts that should have been distributed but were not withdrawn as required. This may be reduced to 10% if the shortfall is corrected within the applicable correction period, and a waiver may be available in certain circumstances.[2]

Other potential mistakes include:

• Missing the deadline to fully distribute an inherited account
• Taking a large taxable withdrawal without considering the impact on annual income
• Combining inherited IRA assets with a personal IRA when the rules do not permit it
• Assuming all beneficiaries have the same distribution options
• Overlooking an RMD that remained outstanding in the year of the account owner's death
• Moving assets without confirming the proper transfer requirements

For inherited IRAs, reviewing the beneficiary designation, account agreement and distribution rules with the custodian can help identify applicable requirements before taking action.[1][2]

7. Review Your Own Beneficiary Designations

Receiving an inheritance can also be a helpful reminder to review your own financial and estate planning documents.

Retirement accounts generally transfer according to the beneficiary designation established under the plan or account procedures.[1]

That makes it important to review listed beneficiaries after major life events, including marriage, divorce, the birth of a child or the death of a family member.

Consider checking beneficiary designations for:

• Traditional and Roth IRAs
• 401(k) and 403(b) plans
• Other employer-sponsored retirement accounts
• Life insurance policies
• Other financial accounts with designated beneficiaries

You may also want to make sure your spouse, executor or another trusted individual knows where your retirement accounts are held and whom to contact when needed.

A little organization today can make managing financial matters easier for loved ones in the future.

Final Thoughts

Inheriting a retirement account often means making important financial decisions during an already difficult time.

The right next step depends on several factors, including the type of account, your relationship to the original owner, applicable withdrawal requirements and your personal financial circumstances.

Understanding these rules before taking distributions or transferring assets can help you avoid unnecessary tax consequences, meet important deadlines and make thoughtful decisions about how the inheritance supports your future.

Whether the goal is managing immediate expenses, strengthening retirement savings or preserving assets for the next generation, a coordinated approach can help bring clarity to an unfamiliar process.

Working with a financial advisor and qualified tax professional can help you evaluate your options and develop a strategy that aligns with your broader financial goals.

 

 

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Sources

[1] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary

[2] https://www.irs.gov/publications/p590b

[3] https://lostandfound.dol.gov/

[4] https://www.irs.gov/taxtopics/tc557

[5] https://www.irs.gov/publications/p575

[6] https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

Investment advisory services offered through OneDigital Investment Advisors LLC (“ODIA”). ODIA and their associates are not tax nor estate planners and cannot provide tax or legal advice.  Consult your estate-planning attorney or qualified tax advisor for specific advice regarding your situation.

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