Beneficiary 101: What You Need to Know About Inheriting an IRA
Inheriting an IRA, whether from a spouse, parent, or other loved one—can be both a financial gift and a complex responsibility. These accounts, often referred to as beneficiary IRAs, follow specific rules that vary depending on who you are and how you’re related to the original account holder. If you’re not careful, costly mistakes could eat into your inheritance.
Let’s break down the key rules, strategies, and potential pitfalls you should understand when it comes to inherited IRAs.
What Happens When You Inherit an IRA?
When the original account owner passes away, the IRA transfers into an inherited IRA in the beneficiary’s name. While you can’t contribute new money to it, the account does maintain tax-deferred growth, which can be valuable for long-term planning.
But here’s the catch: the rules are very different for spouses versus non-spouses.
The SECURE Act and the 10-Year Rule
The SECURE Act of 2019 dramatically changed the landscape for inherited IRAs. If you inherit an IRA after December 31, 2019 and you’re not the spouse, you must fully withdraw the account within 10 years.
That means if you wait until year ten, you could be looking at a massive tax bill. Every withdrawal counts as ordinary income, so smart planning is essential.
Exceptions exist, including:
If you’re within 10 years of the original owner’s age
If you’re disabled or chronically ill
If you’re a minor child of the deceased (until you reach adulthood)
In these cases, you may still be able to “stretch” withdrawals over your lifetime.
Special Rules for Spouses
Spouses have the most flexibility when it comes to inherited IRAs. In fact, they’re the only beneficiaries who can treat the IRA as their own. Options include:
Spousal Transfer – Take ownership of the account, with RMDs based on your age.
Inherited IRA – Roll the assets into an inherited IRA, with RMDs based on life expectancy but subject to the 10-year rule.
Lump-Sum Withdrawal – Cash out the account, though this can trigger significant taxes.
Which choice makes sense depends on factors like your age, income needs, and long-term retirement strategy.
Non-Spouse Inherited IRA Options
If you’re not a spouse and don’t qualify for an exception, your options are narrower:
Inherited IRA – The account is transferred into your name, and you must withdraw it fully within 10 years.
Lump-Sum Withdrawal – Cashing it all out is possible, but often results in a large, avoidable tax bill.
Roth IRA Inheritance: What You Need to Know
Roth IRAs have some unique and powerful advantages when it comes to inheritance, but the rules still depend on whether you’re the spouse or non-spouse beneficiary.
Spouse Beneficiaries
If you inherit a Roth IRA from your spouse, the rules are much more favorable:
Option 1: Treat It as Your Own
You can transfer the Roth IRA into your own name and simply let it continue growing tax-free.
You won’t have to take any required minimum distributions (RMDs) during your lifetime.
This option can be especially powerful if you don’t need the funds right away, you can allow the money to keep compounding tax-free for years.
Option 2: Open an Inherited Roth IRA
You can also choose to keep the account as an inherited Roth IRA.
In this case, the account is subject to the 10-year withdrawal rule. This option may make sense if you’re under age 59½ and anticipate needing to withdraw funds sooner, because withdrawals from an inherited Roth IRA are not subject to the 10% early withdrawal penalty.
Option 3: Take a Lump Sum
You can withdraw the entire balance at once, tax-free (again, assuming the account met the five-year rule).
While it sounds attractive, this strategy eliminates future tax-free growth, so it’s rarely the best long-term choice.
Non-Spouse Beneficiaries
If you inherit a Roth IRA and you’re not the spouse, here’s what you need to know:
Tax-Free Withdrawals: The biggest advantage of an inherited Roth IRA is that withdrawals are generally tax-free, as long as the account was open for at least five years. That means no income taxes on distributions, unlike a traditional IRA.
The 10-Year Rule: Thanks to the SECURE Act, non-spouse beneficiaries must empty the account within 10 years of the original owner’s death. The good news is you’re not required to take annual withdrawals (unless the original account owner had already started required minimum distributions before death). You can choose when and how much to withdraw during that 10-year period, giving you flexibility in planning.
Growth Advantage: Even though you must eventually withdraw the money, letting it continue growing tax-free for several years before taking withdrawals can be a smart strategy.
Why This Matters
The ability for spouses to treat the Roth IRA as their own means they can preserve decades of tax-free growth. Non-spouses, on the other hand, must plan carefully to balance the required 10-year withdrawal timeline with their own financial needs.
The takeaway? Roth IRAs are one of the most powerful inheritance tools available, but the rules are complex and the right decision depends on your relationship to the original owner, your age, and your financial goals.
Smart Withdrawal Strategies
One of the most effective strategies for inherited IRAs is timing your withdrawals. Instead of taking one large lump sum, spreading distributions over several years can help minimize your tax burden.
Flexibility is built into these accounts, and with the right plan, you can take advantage of it—making the most of your inheritance while avoiding unnecessary tax surprises.
Investment Considerations
Another common mistake? Keeping the inherited account invested exactly the way your loved one had it. Their risk tolerance, goals, and timeline were different from yours. Instead, consider how this money fits into your own long-term strategy.
Think of it not as their account, but as your financial tool for building the next chapter of your life.
The Bottom Line
Inheriting an IRA comes with both opportunity and responsibility. Whether it’s a traditional or Roth account, and whether you’re a spouse or non-spouse, the rules can be tricky—and mistakes can be costly.
That’s why it’s important to work with a financial professional who understands the details and can help you avoid unnecessary tax bills, maximize flexibility, and align the account with your financial goals.
👉 Ready to create a smart plan for your inheritance or your own retirement strategy?
Visit www.OBWMLLC.com or call (405) 993-6296 today to schedule a consultation. Let’s make sure your wealth is working for you and your future.
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Disclosures:
All content discussed in this article is for informational and educational purposes only and does not constitute financial, legal, tax, or investment advice. Opinions expressed are solely those of Olive Branch Wealth Management, LLC and its staff. The information presented is believed to be from reliable sources; however, Olive Branch Wealth Management, LLC makes no representations as to its accuracy or completeness. This article shall not be construed as an offer to sell or a solicitation to purchase any insurance product in any jurisdiction in which the agent is not licensed. Topics should be discussed with a licensed insurance agent, tax professional, or financial adviser before implementation. Olive Branch Wealth Management, LLC is not affiliated with or endorsed by the Social Security Administration or any government agency.
