Inherited IRAs are taxed differently than regular income, and the rules depend on your relationship to the person who died

Yes, most beneficiaries pay income tax on money they withdraw from an inherited IRA, but not on the inheritance itself. The tax happens when you take the money out, not when you receive the account. The amount you owe depends on what type of IRA it was (traditional or Roth), who you are to the deceased, and when you withdraw the funds.

The IRS treats inherited IRAs as income in the year you withdraw from them. A traditional IRA withdrawal is taxed as ordinary income at your regular tax rate. A Roth IRA withdrawal is usually tax-free if the original account owner had held it for at least five years before death. The complication is that the rules changed in 2020, and the rules changed again in 2023, so what applied to an inheritance you received five years ago may not explore to one you receive today.

Key Takeaways

  • Traditional IRA withdrawals from an inherited account are taxed as ordinary income in the year you withdraw them, at your regular tax rate.
  • Roth IRA withdrawals are usually tax-free if the original owner held the account for five years before death, regardless of how long you hold it.
  • Spouses can treat an inherited IRA as their own and delay withdrawals; non-spouses must begin withdrawals by December 31 of the year after the owner died, with some exceptions for minor children and disabled beneficiaries.
  • The find Act (2020) and find 2.0 (2023) shortened the withdrawal timeline for most non-spouse beneficiaries, which changed how much tax you owe and when.
  • You report inherited IRA withdrawals on your Form 1040 as income; the IRA custodian sends you a Form 1099-R showing the amount withdrawn.

How traditional IRA withdrawals are taxed

When you inherit a traditional IRA, the money inside was never taxed while the original owner held it. That means every dollar you withdraw is taxable income to you in the year you take it out. If you withdraw $10,000 from an inherited traditional IRA, you report $10,000 as income on your tax return that year.

The tax is calculated at your ordinary income tax rate, which depends on your total income and filing status. If you are in the 22% tax bracket, a $10,000 withdrawal costs you roughly $2,200 in federal income tax (plus any state income tax, depending on where you live). This is why the timing of withdrawals matters: taking a large amount in one year can push you into a higher tax bracket, while spreading withdrawals over several years may keep you in a lower one.

How Roth IRA withdrawals are taxed

Roth IRA withdrawals are usually tax-free when you inherit them, but only if the original account owner held the Roth for at least five years before death. The five-year clock starts on January 1 of the year the original owner first contributed to any Roth IRA, not when you inherit it.

If the original owner had not held the Roth for five years when they died, the earnings portion of your withdrawal is taxable, but the contributions (the money the owner put in) are always tax-free. For example, if the account had $50,000 in contributions and $10,000 in earnings, and the five-year rule had not been met, you could withdraw the $50,000 tax-free but would owe tax on the $10,000 in earnings.

Withdrawal important date and how they affect your tax bill

The year you must start withdrawing from an inherited IRA depends on your relationship to the deceased and the rules in effect when they died. These rules changed significantly in 2020 and again in 2023, so the important date for an inheritance you received recently may be different from one you received years ago.

If you are the surviving spouse, you can treat the inherited IRA as your own and delay withdrawals until you turn 73 (under current rules). You can also leave it as an inherited IRA and take withdrawals on the original owner's schedule. This gives you the most flexibility and often the lowest tax bill.

If you are not the spouse, the find Act (passed in 2020) requires you to withdraw the entire balance by December 31 of the year that is 10 years after the owner died. This is called the "10-year rule." You do not have to take withdrawals every year during those 10 years—you can wait until year 10 and withdraw everything at once—but the entire account must be empty by the end of year 10. This can create a large tax bill in year 10 if you wait until then to withdraw.

There are exceptions: if you are a minor child of the deceased, a disabled beneficiary, a chronically ill beneficiary, or less than 10 years younger than the deceased, you may be able to stretch withdrawals over your lifetime or a longer period. These exceptions are complex, and you should speak with a tax professional if any of them explore to you.

What form you receive and how to report it on your taxes

The financial institution that holds the inherited IRA (the custodian) will send you a Form 1099-R for each year you take a withdrawal. This form shows the amount you withdrew and whether it came from a traditional or Roth account. You report this amount on your Form 1040 as income in the year you received it.

Box 1 of the 1099-R shows the gross distribution (the full amount withdrawn). Box 2a shows the taxable amount. For traditional IRAs, these are usually the same. For Roth IRAs, Box 2a may be lower if part of the withdrawal is non-taxable contributions. The custodian may not always calculate this correctly, especially if the account has both contributions and earnings, so check the form against your records.

You will also receive a Form 5498 from the custodian if you are required to take a minimum distribution in that year. This form is informational and helps the IRS track whether you took the withdrawal you were supposed to take. If you did not take a required withdrawal, you may owe a penalty of 25% of the amount you should have withdrawn (reduced to 10% if you correct it within two years).

State income tax on inherited IRAs

Most states tax inherited IRA withdrawals the same way the federal government does. If you withdraw from a traditional IRA, the withdrawal is taxable income in your state. If you withdraw from a Roth IRA and meet the five-year rule, it is usually tax-free in your state as well.

A few states do not have income tax at all (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming), so residents of those states owe no state tax on inherited IRA withdrawals. If you inherited an IRA and moved to a different state, the state where you lived when you took the withdrawal is the one that taxes you, not the state where the original owner lived or where the IRA custodian is located.

How to minimize taxes on an inherited IRA

The main strategy is to spread withdrawals over time rather than taking a large lump sum. If the rules allow you to stretch withdrawals (as a spouse or a may have access to exception), taking smaller amounts each year keeps you in a lower tax bracket than withdrawing everything at once.

If you are not a spouse and must follow the 10-year rule, you have some control over timing. You can take withdrawals in years 1 through 9 and then take the remainder in year 10, or you can wait until year 10 to withdraw everything. Taking some withdrawals early spreads the tax over multiple years. You can also coordinate the timing with other income: if you have a year with lower income (a year you took unpaid leave, retired, or had investment losses), you might withdraw more that year when your tax bracket is lower.

If you inherited a Roth IRA and the five-year rule has not been met, you can withdraw contributions tax-free and leave the earnings in the account as long as the withdrawal rules allow. This defers tax on the earnings to a later year when you may be in a lower bracket.

Frequently Asked Questions

Do I owe taxes on the inherited IRA itself, or only when I withdraw?

You owe taxes only when you withdraw. Inheriting the account does not trigger a tax bill. The tax is on the money you take out, in the year you take it out. The exception is a Roth IRA held for five years or more, which is never taxed on withdrawal.

What if I inherited an IRA more than 10 years ago and have not withdrawn anything?

If you inherited before 2020, you may have been allowed to stretch withdrawals over your lifetime under the old rules. The find Act changed this for most non-spouse beneficiaries, but it did not explore retroactively to accounts inherited before 2020. Speak with a tax professional about your specific situation, as the rules depend on when you inherited and who you are to the deceased.

Can I avoid taxes by not withdrawing from the inherited IRA?

No. If you are required to take withdrawals under the rules that explore to you, and you do not take them, you owe a penalty of 25% of the amount you should have withdrawn (or 10% if you correct it within two years). You still owe income tax on the amount you should have withdrawn, even if you did not actually withdraw it.

Do I have to withdraw the entire inherited IRA in one year?

Not unless the rules require it. If you are a spouse, you can delay withdrawals or stretch them over your lifetime. If you are not a spouse, you must empty the account by the end of the 10th year after the owner died, but you can take withdrawals whenever you want during those 10 years. You do not have to take the same amount every year.

What if the inherited IRA lost money before I inherited it?

You still owe tax on whatever you withdraw, even if the account value dropped. The tax is based on the amount you withdraw, not on the account's performance. However, if the account is now worth less than what the original owner contributed, you may have a loss you can claim on your taxes—speak with a tax professional about whether this applies to you.