What To Do When You Inherit An IRA

By: Jack Strulowitz

Few financial moments in life are as emotionally complex as inheriting a retirement account. It represents a lifetime of discipline and saving, often from a loved one who wanted to ensure your financial security. Yet, for many people, the moment comes with confusion. The rules governing inherited IRAs have shifted several times in recent years, and as of 2025, the temporary exceptions and grace periods have expired. The difference between handling an inherited IRA correctly and making a mistake can mean tens of thousands of dollars in taxes and penalties.

Before 2020, the rules for inherited IRAs were straightforward. Beneficiaries could “stretch” withdrawals over their own life expectancy, allowing the account to keep compounding in a tax-deferred fashion for decades. Then came the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 and its follow-up, SECURE 2.0, passed in late 2022. Together, they eliminated the stretch option for most non-spouse beneficiaries and replaced it with the ten-year rule.

That rule requires most heirs to completely withdraw an inherited IRA within ten years of the original owner’s death. For the past several years, the IRS gave families time to adjust, waiving penalties while it clarified whether annual withdrawals were required along the way. As of 2025, that leniency is over. If the person from whom you inherited the IRA had already begun taking required minimum distributions, or RMDs, you must now take annual RMDs each year and empty the entire account by the end of year ten. Failure to do so can result in a penalty of up to 25% of the amount you should have withdrawn.

The distinction between “spouse” and “non-spouse” beneficiaries matters more than ever. Spouses still have flexibility: they can assume the IRA as their own, delay distributions until reaching RMD age (currently 73, rising to 75 in 2033), or even convert the account to a Roth IRA under certain circumstances. Non-spouse beneficiaries do not have these options.

If you inherited the IRA from someone who already started RMDs, you must now begin their own annual distribution in accordance with the IRS life expectancy table and deplete the account by year ten. Those whose benefactor died before beginning RMDs are not required to take annual withdrawals, but still must withdraw the entire balance within ten years.

This technical distinction may sound small, but it changes everything about tax planning. One poorly timed withdrawal can push a family into a higher tax bracket or increase Medicare premiums for retirees. According to data from the Investment Company Institute, Americans held roughly $17 trillion in IRAs as of 2024 (Investment Company Institute, IRA Ownership Reaches Record Highs). The IRS estimates that nearly 40% of IRA assets will transfer to heirs over the next two decades (Internal Revenue Service, Estate and Gift Tax Statistics, 2024). That means millions of families are now navigating these updated rules at the same time.

Earlier this year, I met with a client who had inherited her father’s traditional IRA in 2021. For several years she believed she could simply wait until 2031 to withdraw the entire balance. When the new guidance came out, we reviewed her situation and discovered that because her father had already begun RMDs, she needed to start taking annual distributions immediately in 2025. Had she done nothing, she would have faced a penalty of roughly $18,000 next year.

We created a schedule of smaller yearly withdrawals that kept her taxable income consistent and allowed the remaining assets to continue compounding for as long as possible. The plan not only met IRS requirements, but also aligned with her long-term goals. For this client, what started as an overwhelming task became an opportunity to be intentional about her inheritance.

These new rules may feel restrictive, but they also create planning possibilities. Spreading withdrawals evenly over a ten-year period can prevent large tax spikes in the final year. Others can coordinate inherited IRA distributions with charitable giving or periods of lower income to lessen the tax impact. For couples, it may make sense for one spouse to handle inherited IRA withdrawals while the other spouse defers their own retirement income to balance taxes over time.

The emotional side matters too. A retirement account is more than an asset. It is the result of years of steady work and thoughtful saving. When handled with care, it can continue to represent stability and purpose for the next generation.

As 2025 comes to a close, anyone who has inherited an IRA should confirm their responsibilities. Determine whether the original owner had begun RMDs, understand when your own withdrawals must start, and coordinate your strategy with your financial and tax advisors. The SECURE 2.0 framework was meant to modernize retirement law, but it also raised the stakes for those inheriting wealth. With careful guidance and proactive planning, an inherited IRA can continue to serve the purpose it was created for: to provide stability across generations, not confusion. n

Jack Strulowitz is a Financial Advisor at Bernath & Rosenberg in Cedarhurst, NY, where he helps high-net-worth individuals and families with retirement, tax, and estate planning.

For questions or to schedule a consultation, contact [email protected] or 847-962-3352.

This material is for general information and educational purposes only and is not intended to provide specific advice or recommendations for any individual. Distributions from inherited retirement accounts are subject to income tax and, in some cases, additional rules under the SECURE Act. Consult your tax or legal advisor before making decisions.

Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC.