You’ve inherited an IRA. Do you have to take required minimum distributions?

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What’s the best way to draw down your loved one’s retirement funds?

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Your family has successfully completed estate planning and has named beneficiaries for life insurance policies and retirement plans. But there are still plenty of questions to consider. What exactly happens when you are the named beneficiary and you eventually receive the proceeds from those policies and plans? Does it matter if you are the spouse of the account holder? What if the retirement account owner was already taking required minimum distributions—how does that affect the account?

This is a complicated topic, so strap yourself in. But note: There are many potential scenarios, so they won’t all apply to you. Let’s look at some common situations to help you navigate the possibilities.

Once proof of the policyholder’s passing (via a death certificate) is provided to the life insurance company, a payout will usually be mailed in a couple of weeks. The IRS has an interactive tax assistant that will help you determine if life insurance proceeds are taxable. Typically, if you received the payable-at-death amount specified in the policy as a lump sum, the proceeds aren’t taxable. You may use the funds as you see fit.

Traditional IRAs are funded with pretax money, so all withdrawals are taxed, even after you inherit an IRA. But you have different options as to how to use the account, depending on whether you inherited the IRA from your spouse or from someone else.

If you inherited the IRA from your spouse and you are the sole beneficiary, you have three choices:

If you treat the IRA as your own, you can make contributions to it, following contribution limits.

If you inherited the IRA from someone other than your spouse:

The 10-year rule was put into place in 2020 with the SECURE Act. It requires that the entire inherited IRA account be emptied by the end of the 10th year following the year of the account owner’s death. For example, if the IRA owner dies in 2023, the entire IRA account must be emptied by December 31, 2033.

This rule is optional for a spouse or other “eligible” designated beneficiaries, unless required minimum distributions (RMDs) had begun prior to the owner’s death (more on this below). It is required for all other beneficiaries, regardless of whether or not RMDs were started before death. Note that if a spouse or other eligible designated beneficiary chooses to use the 10-year rule, RMDs are not required.

A required minimum distribution (RMD) is the amount the government requires you to withdraw each year from certain retirement accounts—such as your 401(k) or IRA—once you reach a certain age. The IRS provides tables for calculating RMDs.

Whether or not you have to take RMDs from an inherited IRA right away depends on (1) whether the account owner was already over age 73 and taking RMDs when they died, and (2) if you are the spouse.

If your spouse was not yet taking RMDs (under age 73):

If your spouse was already taking RMDs (over age 73):

If you are a beneficiary (not a spouse) and the IRA owner had not starting taking RMDs (under age 73):

If you are a beneficiary (not a spouse) and the IRA owner was already taking RMDs (over age 73):

You are an eligible designated beneficiary if any of the following scenarios apply:

If the original IRA owner had already begun taking RMDs, the eligible designated beneficiaries must take RMDs beginning in the year of death over the longer of their own or the original owner’s life expectancy. If the owner had not yet begun taking RMDs at the time of death, the eligible designated beneficiary may choose the 10-year rule instead of taking RMDs. There are special RMD life expectancy rules if the eligible designated beneficiary is a minor child.

Roth IRAs and Roth 401(k)s are funded with after-tax money, so withdrawals—including interest—are tax-free as long as the account is at least five years old. As of 2024, inherited Roth IRAs and inherited Roth 401(k)s do not have required minimum distributions, so you can save or take the money out whenever you want it. (Roth IRAs and 401(k)s inherited before 2024 are subject to RMD rules following the death of the original owner.)

If you inherit money from a life insurance policy, that money is typically not taxable and you can do whatever you want with the funds at any time. If you inherit an IRA or 401(k), you have to follow the required minimum distribution rules and the age requirements, which can get quite complex. It’s often a good idea to involve a professional who can help you comply.

If the amount of the inherited IRA is not large—or if you need the money right away—you may choose to receive a lump sum distribution and pay any required taxes on the amount rather than follow the RMD rules in future years. Because you’ll typically be required to deplete the account within 10 years of inheriting it, it might be simpler to cash it out right away.

This article is intended for educational purposes only and not as an endorsement of a particular financial strategy. Encyclopædia Britannica, Inc., does not provide legal, tax, or investment advice. Please consult your legal or tax advisor before proceeding.