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Inherited IRA rules for non-spouse beneficiaries: What you should know

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Many people imagine that inheriting assets from a relative or friend means receiving a check. But it might not be that simple. To disburse the funds, which often are invested in an account like an IRA, you'll likely need to understand inherited IRA rules for non-spouse beneficiaries, which are quite different than how and when you’d receive distributions as a spouse.

Understanding these rules can help you fit this new asset into your overall financial strategy and feel more confident about what to do next.

The SECURE Act & IRA inheritance rules

The SECURE Act of 2019 established several provisions about how Americans can use retirement savings plans. Then the SECURE Act 2.0, passed in 2022, changed these rules.

Traditional IRAs, as well as SEP IRAs and SIMPLE IRAs, have required minimum distributions (RMDs). These require you to withdraw a certain amount of money from the account each year or risk facing penalties. Many IRAs have a time clock after they are inherited, where you need to fully disburse and close out the IRA by a certain date.

Let's look at changes brought by SECURE Act 2.0.

Changes to non-spouse inherited IRA: 10-year rule

In the past, non-spouse beneficiaries were able to take small IRA distributions during their lifetime. Keeping the assets locked safely in an IRA was a way to keep your tax burden lower. But often, that's no longer an option. Now, in most cases, you must disburse all of the IRA's assets within 10 years.

However, spouses—as well as eligible designated beneficiaries (EDBs)—still can take the smaller minimum distributions during their lifetime, sheltering some of those assets from immediate taxability.

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But how does inheriting an IRA from a spouse or parent work?
The rules for inheriting an IRA from a spouse or a parent, specifically, differ a bit from when you inherit the account from a different type of non-spouse. Here's what you should know for each situation.

View nuances of a spouse-inherited IRA.
Explore rules for inheriting an IRA from a parent.
Get an overview of general inherited IRA guidelines.

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Eligible designated beneficiaries (EDBs) vs. designated beneficiaries (DBs)

Beneficiaries who are eligible to take yearly distributions over this longer disbursal timeline are considered EDBs. Under IRS rules, they must fit one of the following:

  • Minor children of the account holder. When the minor turns 21, a 10-year timeline to fully disburse is triggered. 
  • Disabled or chronically ill individuals. 
  • A beneficiary who is no more than 10 years younger than the IRA owner. 

Any non-spouse who doesn’t fall within one of the categories above is simply considered a designated beneficiary (DB). They must assume that the account will need to be fully disbursed within 10 years following the account owner’s death.

Tax strategies for a non-spouse inherited IRA 

Once an asset like an inherited IRA comes into your life, it's important to assess whether accessing these funds quickly is worth the additional tax burden, or if it's wiser to allow the funds to remain in the IRA for as long as the law allows.

Here are some key considerations to potentially help reduce your tax burden, depending on if you're an eligible designated beneficiary (EDB) or a designated beneficiary (DB).
Inheriting a Roth or traditional IRA as a DB
If you are not an EDB, the funds inside the inherited IRA will have to be distributed within 10 years of the initial owner’s death—regardless of which kind of IRA it is.

With any type of non-Roth IRA (think SEP, SIMPLE, traditional), if the account owner had already reached RMD age, you’ll also need to continue taking RMDs during those 10 years.

It’s important to plan for the tax impact of this additional income every year.
Inheriting an IRA as an EDB
If you don't need the funds right away and are an EDB, it may be beneficial to take your distributions across the entire time you're allowed to receive them. That's because taking a larger lump sum could push you into a higher income tax bracket.

Keep in mind, you’ll need to continue taking RMDs if the original owner was required to take them at the time of their death.
Inheriting a Roth IRA as an EDB
With an inherited Roth IRA, your strategy for withdrawals will largely be based on the five-year rule:
  • If the inherited Roth IRA was less than five years old when the plan participant passed away, you may wish to speak with your financial advisor before withdrawing from them, as funds may be subject to income tax. 
  • If the Roth IRA is greater than five years old, you may take distributions income tax-free, based on your own life expectancy.  
Inheriting an IRA as a trust or charity
It's possible to name a trust or a charity as a beneficiary of an IRA. The SECURE Act and SECURE Act 2.0 didn't change the rules for them. If the inherited IRA was already subject to RMDs, that same distribution schedule usually applies for the trust or charity inheriting the IRA. However, if the person passing down the IRA died before they had to take RMDs, the entire account would need to be drained by the trust or charity within five years.

Another option available is to leave an IRA to a charity—and avoid RMDs (as long as the beneficiary is 70 ½)—is a qualified charitable distribution (QCD). This special disbursement from an IRA can go straight to a charity without triggering any income tax. To make sure a QCD is distributed correctly, work with the custodian of the IRA and consult a financial advisor.

Factor in your whole picture with a financial advisor

The non-spousal inherited IRA RMD rules are complex, but they revolve around two factors: the minimum amount you need to withdraw each year and how soon you need to distribute all the funds. A Thrivent financial advisor can add context to your experience of inheriting an IRA, helping you see when it could be worthwhile to take voluntary distributions or when it would be advantageous to simply follow the required minimums to avoid penalties. They also can assist you with where to go next, including choices like IRA transfers and other management tools.

By considering an inherited IRA as part of your wider financial plan, you'll be able to confidently make the most of the legacy that has been left to you.

Distributions of earnings are tax-free as long as your Roth IRA is at least five years old and one of the following requirements is met: (1) you are at least age 59½; (2) you are disabled; (3) you are purchasing your first home ($10,000 lifetime maximum); or (4) the money is being paid to a beneficiary.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.