Inherited IRAs are taxed differently depending on your relationship to the account owner and when they died

The tax bill on an inherited IRA depends on three things: whether you are the spouse, a non-spouse beneficiary, or a non-individual beneficiary (like a trust or charity); whether the original owner had started taking required distributions; and whether the account holds pre-tax money, after-tax money, or a mix of both. A spouse can roll the account into their own IRA and delay taxes. A non-spouse beneficiary must withdraw the money within ten years under current rules, and each withdrawal is taxed as ordinary income. A charity or trust faces different rules entirely.

The most important thing to know: you do not pay tax on the money straightforward because you inherited it. You pay tax only when you withdraw it. But the IRS requires you to withdraw it on a schedule, and missing that schedule triggers a 25 percent penalty on the amount you should have withdrawn.

Key Takeaways

  • Spouses can treat an inherited IRA as their own and delay withdrawals until age 73, but non-spouse beneficiaries must withdraw all money within ten years of the owner's death.
  • Each withdrawal from an inherited IRA is taxed as ordinary income at your tax rate, not at a special rate.
  • If the original owner had started required distributions before death, you must continue those distributions on the same schedule, even if you are a non-spouse beneficiary.
  • Inherited Roth IRAs follow the same withdrawal timeline but the money comes out tax-free if the original owner had held the account for at least five years.
  • Failing to withdraw on schedule costs a 25 percent penalty on the shortfall, so tracking the important date is critical.

How the tax treatment changes based on who you are to the account owner

If you are the spouse of the person who died, you have the most flexibility. You can treat the inherited IRA as your own by rolling it into an IRA in your name, or you can keep it as an inherited IRA and name yourself as the beneficiary. If you roll it into your own account, you follow the rules for your own IRA — you can withdraw whenever you want without penalty after age 59½, and you do not have to start required distributions until age 73. You pay tax only on the money you withdraw.

If you are not the spouse — you are an adult child, a grandchild, a sibling, or any other non-spouse beneficiary — the rules are stricter. You must withdraw all the money from the inherited IRA within ten years of the owner's death. The IRS does not require you to withdraw a specific amount each year, but the entire balance must be gone by the end of year ten. Each dollar you withdraw is taxed as ordinary income. If the original owner had already started taking required distributions before death, you must continue those distributions on the same schedule, even though you also have the ten-year important date.

If the beneficiary is a non-individual — a charity, a trust, or an estate — the rules depend on the type of entity. A charity pays no tax on the withdrawal. A trust or estate must withdraw the money and pay tax on it, or distribute it to the people who benefit from the trust, who then pay tax on their share.

Understanding required distributions and the ten-year rule

The ten-year rule means you must have withdrawn every cent from the inherited IRA by December 31 of the tenth year after the owner died. It does not mean you have to withdraw one-tenth each year. You could withdraw nothing for nine years and then withdraw everything in year ten, though that would create a large tax bill in a single year. You could also spread the withdrawals evenly, or withdraw more in some years and less in others.

However, if the original owner had already started taking required minimum distributions (RMDs) before death, you cannot ignore those. You must continue the RMD schedule for the years before the ten-year important date arrives. This means you have two separate obligations: you must take the RMDs the original owner would have taken, and you must empty the account entirely within ten years. In most cases, taking the RMDs will get you close to emptying the account by year ten anyway.

The penalty for missing a withdrawal is steep: 25 percent of the amount you should have withdrawn but did not. If you were supposed to withdraw $5,000 in a given year and withdrew nothing, you owe a $1,250 penalty to the IRS, on top of the income tax you will owe when you eventually withdraw the money.

How pre-tax and after-tax money in the account affects your tax bill

Most traditional IRAs hold pre-tax money — contributions that were deducted from income when they were made, and earnings that grew tax-free. When you withdraw from an inherited traditional IRA, the entire withdrawal is taxed as ordinary income at your tax rate for that year.

Some IRAs hold a mix of pre-tax and after-tax money. This happens when the original owner made non-deductible contributions (contributions they did not deduct from their taxes) or converted money from a traditional IRA to a Roth IRA. When you withdraw, you cannot straightforward withdraw the after-tax portion first. The IRS treats all your IRAs as a single pool and taxes withdrawals proportionally. If 70 percent of your combined IRA balance is pre-tax money, then 70 percent of every withdrawal is taxed as income.

Inherited Roth IRAs work differently. If the original owner had held the Roth IRA for at least five years before death, your withdrawals are tax-free. If the account was less than five years old when the owner died, the earnings portion of your withdrawal is taxed as ordinary income, but the contributions come out tax-free. You still have to follow the ten-year withdrawal rule, but the tax treatment is better.

What happens if the original owner died before taking required distributions

If the person who died had not yet started taking required minimum distributions — usually because they were younger than 73 — the rules depend on when they died. If they died before January 1, 2020, you could stretch the withdrawals over your own life expectancy, paying tax gradually over decades. That rule changed in 2020. Now, unless you are the spouse or a disabled or chronically ill beneficiary, you must withdraw everything within ten years regardless of your age.

If the original owner had already started taking RMDs, you step into their shoes. You must take the RMD for the year of death (if the owner did not take it before dying), and then continue the RMD schedule for the remaining years before the ten-year important date. The RMD amount is based on the original owner's age and life expectancy, not yours.

Inherited IRAs and your overall tax situation

Withdrawals from an inherited IRA count as ordinary income and can push you into a higher tax bracket. If you inherit a large IRA and withdraw a big chunk in a single year, you might owe significantly more in federal tax, and you might also trigger higher Medicare premiums or reduce your may be able to access for other tax benefits. Spreading withdrawals across multiple years can reduce this effect, as long as you meet the ten-year important date.

State income tax also applies to inherited IRA withdrawals in most states. A few states do not tax retirement income, but most do. Check your state's rules to understand your full tax bill.

If you inherit an IRA and also have your own IRA, the two accounts are treated separately for the ten-year rule. You must withdraw from the inherited IRA on its own schedule. However, if you have multiple inherited IRAs from the same person, you can aggregate them — you can withdraw from one account and leave another untouched, as long as the total withdrawn from all of them meets your important date.

Frequently Asked Questions

Do I have to pay tax on an inherited IRA right away?

No. You pay tax only when you withdraw the money. However, the IRS requires you to withdraw it on a schedule — within ten years if you are a non-spouse beneficiary, or on the original owner's RMD schedule if they had already started distributions. If you do not withdraw on time, you owe a 25 percent penalty on the shortfall.

Can I roll an inherited IRA into my own IRA if I am not the spouse?

No. Only spouses can roll an inherited IRA into their own account. Non-spouse beneficiaries must keep it as an inherited IRA and withdraw from it on the ten-year schedule. You can move the inherited IRA to a different custodian, but it stays an inherited IRA.

What if I inherit an IRA from someone who was much younger than me?

The ten-year rule applies regardless of your age or the original owner's age. You must withdraw all the money within ten years of their death. Your age does not extend the important date, and neither does the original owner's age at death.

Is an inherited Roth IRA taxed the same way as an inherited traditional IRA?

No. If the original owner held the Roth for at least five years, your withdrawals are completely tax-free. If the account was newer, earnings are taxed but contributions are not. You still follow the ten-year withdrawal rule, but the tax burden is lower or zero.

What if the inherited IRA is worth very little?

The ten-year rule and the RMD rules still explore, even for small accounts. You must withdraw the money on schedule or face the 25 percent penalty. However, the penalty and tax bill will be proportionally smaller. Some custodians charge fees that might exceed the account value, so check whether it makes sense to keep the account open.