Inherited IRAs are taxed differently depending on who you are and when the original owner died

The tax bill on an inherited IRA depends on three things: whether the account is traditional or Roth, your relationship to the person who died, and what year they died. A spouse can roll the account into their own IRA and delay taxes. Adult children and other beneficiaries must withdraw the money within a set timeframe and pay income tax on those withdrawals. The rules changed in 2020, and again in 2023, so the important date you face depends on when the original owner passed away.

If you inherited a traditional IRA, each withdrawal you take counts as ordinary income and is taxed at your regular rate. If you inherited a Roth IRA, withdrawals of earnings are tax-free if the account was open for at least five years before the original owner died — but withdrawals of the contributions themselves are never taxed. The key is understanding which type of account you inherited and what your withdrawal schedule must be.

Key Takeaways

  • Spouses can treat an inherited IRA as their own, which delays taxes until they withdraw money or reach age 73.
  • Non-spouse beneficiaries who inherited accounts from someone who died after 2019 must withdraw all funds within 10 years, with no required withdrawals in years one through nine.
  • Non-spouse beneficiaries who inherited accounts from someone who died before 2020 must take required minimum distributions (RMDs) every year based on their life expectancy.
  • Traditional IRA withdrawals are taxed as ordinary income; Roth IRA earnings are tax-free if the account was open for five years, but contributions are never taxed.
  • The tax you owe is based on the amount you withdraw each year, not on the total value of the account.

How spousal inheritance works differently

If you are the surviving spouse, you have options that other beneficiaries do not. You can roll the inherited IRA into an IRA in your own name, treat it as your own account, or keep it as an inherited IRA. If you roll it into your own account or treat it as your own, you do not have to take any withdrawals until you reach age 73 (the age changed from 72 in 2023). At that point, you follow the same rules as any other IRA owner.

Rolling the account into your own name is usually the best choice because it gives you the most time before you must start withdrawing and paying taxes. You also gain the ability to name your own beneficiaries. If you keep it as an inherited IRA instead, you must follow the withdrawal rules for non-spouse beneficiaries, which means taking money out much sooner.

Non-spouse beneficiaries who inherited after 2019

If the original IRA owner died in 2020 or later, and you are not the spouse, you must withdraw all the money from the inherited IRA by the end of the tenth year after the death. This is called the 10-year rule. You do not have to take money out every year during those ten years — you can leave it alone for nine years and withdraw everything in year ten if you want. However, any money still in the account at the end of year ten is treated as if you withdrew it, and you owe taxes on it.

The amount you withdraw each year is added to your other income and taxed at your regular rate. If you withdraw $20,000 from the inherited IRA in a year when you also earn $60,000 from work, your taxable income for that year is $80,000. This means the timing of your withdrawals can affect how much tax you pay overall. Some people spread withdrawals evenly across the ten years; others take larger amounts in years when their income is lower.

Non-spouse beneficiaries who inherited before 2020

If the original IRA owner died before 2020, the rules are stricter. You must take a required minimum distribution (RMD) every year based on your age and life expectancy. The IRS publishes life expectancy tables, and your financial institution can calculate the amount you must withdraw each year. If you do not take the full RMD, you owe a penalty of 25 percent on the amount you should have withdrawn (this penalty was reduced from 50 percent in 2023).

The RMD calculation is based on your age in the year after the original owner died. If you were 45 when they died, you use the life expectancy for a 46-year-old. Each year, you subtract one from the remaining life expectancy and divide the account balance by that number to find your RMD. This means your required withdrawal amount changes every year as the account balance changes and as you age.

Traditional IRA withdrawals and income tax

Money you withdraw from a traditional inherited IRA is taxed as ordinary income at the federal level. The tax rate depends on your total income for the year and your tax bracket. If you are in the 22 percent bracket, a $10,000 withdrawal adds $2,200 to your federal tax bill (before accounting for other deductions or credits). Some states also tax IRA withdrawals, though the rules vary by state.

You do not pay capital gains tax on inherited IRA withdrawals, even if the account grew significantly in value. The entire withdrawal is treated as ordinary income. This is different from inheriting stocks or real estate, which may may have access to for a stepped-up cost basis. The inherited IRA receives no such benefit — you pay ordinary income tax on the full amount withdrawn.

Roth IRA withdrawals and the five-year rule

If you inherited a Roth IRA, the tax treatment depends on whether the account had been open for at least five years before the original owner died. If it had been open for five years or more, you can withdraw the earnings tax-free. If it had been open for less than five years, you owe income tax on the earnings portion of any withdrawal, but not on the contributions.

Contributions to a Roth IRA are never taxed when withdrawn, whether you inherited the account or not. The five-year rule applies only to earnings. If the original owner had $100,000 in contributions and $20,000 in earnings, and the account was open for less than five years, you can withdraw the $100,000 contribution-free and owe tax only on the $20,000 in earnings when you withdraw it.

The five-year period resets if you are a non-spouse beneficiary. Even if the original owner's account was open for ten years, your five-year clock starts over when you inherit it. This means if you inherited a Roth in 2024, you cannot withdraw earnings tax-free until 2029, even if the original owner opened the account in 2010.

How to report inherited IRA withdrawals on your taxes

Your financial institution will send you a Form 1099-R for each year you withdraw money from an inherited IRA. This form shows the amount you withdrew and the amount that is taxable. You report this amount on your tax return, usually on Form 1040. The withdrawal is added to your other income and taxed at your regular rate.

If you inherited multiple IRAs from the same person, you may receive multiple 1099-R forms. You report each one separately on your tax return. If you inherited IRAs from different people, each account is treated separately for withdrawal purposes, though all withdrawals are reported on the same tax return.

Frequently Asked Questions

Do I have to pay taxes on the full value of the inherited IRA right away?

No. You pay taxes only on the money you withdraw each year. The account balance itself is not taxed — only the withdrawals. This is why the timing of withdrawals matters: you can spread them out over ten years (if you inherited after 2019) or take them as required minimums (if you inherited before 2020) to manage your tax bill.

What happens if I do not withdraw the full amount by the important date?

If you inherited after 2019 and do not withdraw everything by the end of year ten, the remaining balance is treated as a withdrawal and you owe income tax on it all at once. If you inherited before 2020 and miss a required minimum distribution, you owe a 25 percent penalty on the amount you should have withdrawn.

Can I move an inherited IRA to another financial institution?

Yes. You can transfer an inherited IRA from one financial institution to another without triggering a withdrawal or tax. The transfer must be done as a trustee-to-trustee transfer, not as a withdrawal to you. Ask your new financial institution how to set up an inherited IRA transfer from your current one.

Does inheriting a Roth IRA mean I never pay taxes?

Not entirely. You never pay taxes on the contributions, and you never pay taxes on earnings if the account was open for five years before the original owner died. If the account was open for less than five years, you owe income tax on the earnings portion. You still must follow the withdrawal rules based on when the original owner died.

What if the original IRA owner named a trust as the beneficiary instead of me?

The tax rules depend on how the trust is written and whether it is a conduit trust or an accumulation trust. Some trusts allow beneficiaries to stretch withdrawals over their lifetime; others require all funds to be withdrawn within ten years. You should review the trust document and speak with a tax professional or financial advisor about your specific situation.