You Just Inherited an IRA. Now What?

You inherited an IRA. Now there are forms to complete, withdrawal deadlines to sort out, and many unanswered tax questions. All of these decisions can be overwhelming.

The first step is to understand the withdrawal deadlines that apply to your inherited IRA. Then look at how the money fits into your life before deciding how much to withdraw.

For many adult children, the account must be emptied within ten years. Those years may overlap with your highest earnings, a job change, or retirement. When you withdraw the money can affect how much tax you pay.

What is an inherited IRA?

An inherited IRA holds retirement assets you receive after the original owner dies.

If you inherit from someone other than your spouse, you generally cannot combine the account with your own IRA or make new contributions. The account must retain its inherited status, with a title identifying the deceased owner and you as beneficiary.

You can move it to another financial institution through a properly arranged trustee-to-trustee transfer. That means the institutions transfer the assets directly. A non-spouse beneficiary generally cannot take a distribution personally and use a 60-day rollover to put it back. IRS: Inherited IRA rules.

If you inherit a parent's 401(k) or another employer retirement plan, a direct transfer to an inherited IRA may also be available. Confirm the plan's terms before initiating a transfer.

Which beneficiary rules apply to you?

Most adult children named as beneficiaries of a parent's IRA are subject to the 10-year rule when the parent died in 2020 or later.

Certain beneficiaries may have other options, including withdrawals based on life expectancy. The IRS calls these eligible designated beneficiaries:

• A surviving spouse
• The account owner's minor child
• Individuals who meet the tax-law definitions of disabled or chronically ill
• Someone who is no more than ten years younger than the owner, including someone older

A spouse may also be able to treat the IRA as their own. The exception for minor children applies to the owner's children, and its treatment changes when they reach age 21. IRS: IRA beneficiary distribution rules.

This article focuses on adult children subject to the 10-year rule. Earlier inheritances, trusts, and estates can follow different rules. Confirm your category before choosing a withdrawal schedule.

What does the 10-year rule require?

The inherited IRA generally must be fully distributed by December 31 of the tenth year after the owner's death. If your parent died in 2026, that deadline would generally be December 31, 2036.

You do not have to withdraw exactly one-tenth each year. Annual minimum withdrawals may apply, but you may have flexibility to take more in some years than others. IRS: Required minimum distribution FAQs.

Waiting until the final year could leave a substantial taxable balance to withdraw all at once.

Do you have to take money out every year?

For a traditional IRA subject to the 10-year rule, the answer depends on whether the owner died before or after their required beginning date, the deadline for starting required minimum distributions, or RMDs.

• Before that date: Generally, no annual withdrawal is required in years 1 through 9. The account must still be emptied by the end of year 10.
• On or after that date: Annual RMDs generally apply beginning in the year after death, and the remaining balance must be distributed by the end of year 10.

Also check whether the owner completed any RMD required for the year they died. An unpaid portion generally still needs to be distributed. IRS: Publication 590-B.

Ask the custodian and your tax professional to confirm the applicable dates and amounts. Whether your parent had already taken withdrawals voluntarily does not, by itself, answer which rule applies.

What happens if you miss an RMD?

A missed or insufficient RMD may trigger an excise tax of 25% of the shortfall. That may fall to 10% if corrected within the applicable correction window and other requirements are met. The IRS can also waive the tax for reasonable error when appropriate corrective steps are taken. IRS: RMD penalties and waivers.

If you discover a missed withdrawal, address it promptly with your tax professional. Taking the missing amount and handling the associated tax paperwork are separate steps.

How are inherited IRA withdrawals taxed?

The taxable portion of a traditional inherited IRA withdrawal generally counts as ordinary income in the year you receive it. It adds to income such as salary, bonuses, and taxable stock compensation.

Withdrawals made because of the owner's death generally avoid the usual 10% additional tax for distributions before age 59½. Regular income tax can still apply. IRS: IRA FAQs.

If the owner made nondeductible contributions, some withdrawals may be partly tax-free. Ask about records of those contributions, often reported on Form 8606, so your tax professional can determine the taxable portion. IRS: Inherited IRAs with basis.

Before requesting a substantial withdrawal, estimate its tax effect. Any withholding should be considered alongside the total tax you may owe.

Should you take the money all at once?

You generally can take a lump sum. Estimate the tax cost before deciding.

Suppose you inherit a $600,000 traditional IRA during your highest-earning years. If the entire balance is taxable, withdrawing it at once adds $600,000 to that year's ordinary income. Spreading withdrawals over several years could produce a different tax result.

Taking the same amount each year may not fit your income. Your income may fall after retirement or rise sharply when stock compensation becomes taxable. A fixed schedule can miss those changes.

Compare withdrawal amounts against your expected income and spending needs. There may be a good reason to take a larger amount now, but understand the tax cost before the money leaves the account.

How should working executives plan around the ten years?

Begin with a year-by-year estimate of household income. Include salary, expected bonuses, stock compensation, and any deferred compensation payments. Then add the inherited IRA's required withdrawals.

Estimate how additional withdrawals would affect your taxes each year.

Imagine inheriting an IRA at 55 and expecting to retire at 60. You might consider taking required minimums during high-income working years and larger withdrawals after retirement. That approach needs to be compared with other schedules, including the possibility that retirement is delayed or income stays higher than expected.

Your income may stay high after retirement. A final bonus, stock vesting, or deferred compensation payout may keep income elevated after your salary ends. Include your spouse's income too.

Look closely at these decisions:

Stock compensation and bonuses. Update the withdrawal plan when compensation changes. A large vesting event or unexpected bonus may affect how much additional IRA income makes sense that year, while required distributions still need to be met.

Retirement and other account withdrawals. Compare inherited IRA distributions with withdrawals from your own retirement accounts and any planned Roth conversions of your own retirement assets. These decisions can compete for the same lower-income years. The projections should include enough cash to pay the resulting taxes.

Medicare costs. Taxable withdrawals can increase the income used to determine Medicare surcharges. Medicare generally looks at tax information from two years earlier, so a distribution before enrollment can affect later premiums. Social Security: Medicare premiums.

Charitable giving. If giving is already part of your plan, discuss the timing and assets to use with your advisor and tax professional. Beneficiaries age 70½ or older may be eligible to make qualified charitable distributions directly from an inherited IRA, subject to applicable requirements and limits. The beneficiary's age matters. IRS: Qualified charitable distributions.

Revisit the projections each year. Tax rules, income, and account values can change. Taking only the required minimum may leave a large balance for later, especially if investments grow. Taking more now also means paying any associated tax sooner and having less money invested inside the IRA.

What if you inherited a Roth IRA?

A typical adult child subject to the 10-year rule generally must empty an inherited Roth IRA by the end of year 10, but usually has no annual withdrawal requirement in years 1 through 9.

Withdrawals are generally tax-free once the original owner's five-year Roth holding requirement has been met. Before then, earnings may be taxable. Inheriting the account does not restart that clock. Confirm the owner's Roth history before assuming every withdrawal is tax-free. IRS: Roth IRA distributions after death.

Leaving assets invested longer may allow additional tax-free growth, but investment risk and your need for the money still matter. Put the final distribution deadline on the calendar even if you plan no earlier withdrawals.

What if siblings share the inheritance?

Each sibling may be able to establish a separate inherited IRA for their share. Ask the custodian about this early: the timing and handling of separate accounts can affect distribution rules. The end of the year following death is an important deadline for certain separate-account treatment. IRS: Multiple beneficiaries and separate accounts.

Separate accounts can also make it easier for siblings with different incomes and retirement plans to manage their own withdrawals.

Check the account's beneficiary designation. It generally controls who receives the IRA; instructions in a will should not be assumed to override it.

What mistakes are worth avoiding?

Before moving or withdrawing money, check for these common mistakes:

• Cashing out before estimating taxes. A large withdrawal can create taxable income you cannot easily reverse.
• Assuming ten years means no annual obligations. Confirm both beneficiary RMDs and any unfinished year-of-death RMD.
• Receiving money personally when you intended a transfer. Have the institutions arrange the appropriate direct transfer before assets move.
• Using the same schedule regardless of income. Review withdrawals when compensation or retirement plans change.

What should you do first?

Gather the account statements, beneficiary paperwork, and date-of-death information. Find out whether the IRA is traditional or Roth and whether the owner's final RMD was completed.

Then confirm the account setup and withdrawal deadlines with the custodian and your tax professional. A financial advisor can help compare withdrawal schedules with your income, investments, and retirement plans, coordinating the tax estimates with your CPA.

You can build the longer-term plan from there. Having the deadlines settled gives you room to consider the choices without rushing a distribution.

Have questions about an inherited IRA?

If you've inherited an IRA and have questions about withdrawal deadlines or when to take the money, schedule a call with Daner Wealth Management.

Daner Wealth Management is a Registered Investment Adviser. Investing involves risk, including possible loss of principal. This material is for general informational and educational purposes only and is not individualized investment, tax, legal, or accounting advice. Tax laws and retirement-plan rules can change and may apply differently depending on your circumstances. Consult qualified professionals regarding your specific situation.