How does an Inherited IRA work? It usually begins with a straightforward event—someone passes away and leaves you a retirement account—but the rules that follow can quickly get complicated. Your options and deadlines depend on (1) your relationship to the original account owner, (2) whether the inherited account is traditional or Roth, and (3) whether the original owner had already started Required Minimum Distributions (RMDs).

The most important point is this: an inherited IRA is not “your IRA.” Inherited accounts follow beneficiary rules that control how the account must be titled, how distributions are handled, and how quickly the account must be emptied under current SECURE Act frameworks (often discussed alongside SECURE 2.0 updates). If you want the broader context on how RMD rules have evolved, start here: RMDs after SECURE 2.0.

At Diversified Insurance Brokers, we help beneficiaries build practical distribution plans that satisfy the rules, reduce the chance of “tax spikes,” and create a clearer cash-flow timeline. In many situations, beneficiaries also explore annuities within retirement-income planning to turn a portion of inherited assets into predictable income while keeping a qualified structure where appropriate.

What Is an Inherited IRA?

An Inherited IRA (also called a Beneficiary IRA) is the account structure used when you inherit a retirement plan—most commonly a traditional IRA or Roth IRA, but sometimes an employer plan like a 401(k) that is ultimately moved into a beneficiary IRA framework. The important detail is that inherited money typically keeps retirement-account tax advantages, so the IRS attaches a defined set of beneficiary rules to ensure the account is handled correctly and distributed on schedule.

For most beneficiaries, the inherited IRA is less about long-term “accumulation” and more about intentional distribution. If withdrawals happen too quickly, taxable income can spike. If withdrawals are delayed or mishandled, timelines can be violated and the account can become messy, expensive, or both. The planning win is creating a year-by-year approach that satisfies the rules while keeping taxes and cash flow predictable.

If the account you inherited came from an employer plan, it can help to understand how those accounts operate because the paperwork and rollover mechanics often matter. Here’s one common reference point many beneficiaries run into when employer plans are involved: How does a 403(b) work?

The Two Mistakes That Cause Most Inherited IRA Problems

Mistake #1: Treating an inherited IRA like your own IRA. Many people assume they can “just leave it there” indefinitely the way they might with their own retirement account. Under today’s rules, many non-spouse beneficiaries are working inside a 10-year timeline. Doing nothing can create a forced final-year distribution that produces a large tax bill and unnecessary stress.

Mistake #2: Moving money the wrong way. Inherited IRA assets typically need to be transferred using the correct inherited titling and the correct transfer method. If funds are distributed to you personally when a transfer should have occurred institution-to-institution, the distribution can become taxable immediately—and in many cases, it cannot be “put back.” This is why beneficiary paperwork and clean, trustee-handled transfers matter when repositioning inherited assets.

Spousal vs. Non-Spousal Beneficiary Rules

Inherited IRA rules begin with one major fork in the road: spouse versus non-spouse. Spouses often have more flexibility because the rules allow retirement assets to be integrated into the surviving spouse’s long-term retirement plan. Non-spouse beneficiaries generally have a more rigid schedule because the inherited account is meant to distribute rather than become a multi-decade “new IRA” for the beneficiary.

Spousal beneficiaries may be able to treat the IRA as their own (which can change RMD timing) or keep it as an inherited IRA in certain situations when that structure is more favorable. The best choice typically depends on your age, whether you need income soon, and whether delaying distributions improves your longer-term tax outcome.

Non-spousal beneficiaries are frequently navigating a 10-year depletion rule, meaning the account must be emptied by the end of the tenth year after the original owner’s death. The details can change based on whether the original owner had already started RMDs and on beneficiary category rules, which is why it’s smart to plan distributions intentionally instead of guessing. For the broader RMD and SECURE framework, keep this page handy: RMDs after SECURE 2.0.

Traditional vs. Roth Inherited IRAs (Why Taxes Feel So Different)

An inherited Traditional IRA is typically taxed the way people expect: distributions are generally taxed as ordinary income because the original contributions were usually made pre-tax. That means every distribution adds to your taxable income in the year you take it. This is why inherited IRA planning often revolves around avoiding one-year “income compression” that pushes you into higher brackets.

An inherited Roth IRA is often more favorable because qualified withdrawals are typically tax-free, but distribution rules and timelines can still apply. Even when taxes are not the main issue, many beneficiaries still want a distribution plan so the final year does not become a rushed, last-minute liquidation that creates avoidable complications.

Withdrawal Timelines: The “10-Year Rule” and How People Actually Use It

The phrase “10-year rule” sounds simple: empty the inherited IRA by the end of year 10. In real life, the planning question is how to distribute across that decade. Some beneficiaries use a “levelized” approach and take roughly similar withdrawals each year to smooth taxable income. Others intentionally take smaller withdrawals early and larger ones later if they expect income to drop in future years (retirement timing, business sale timing, a spouse leaving the workforce, and so on).

For higher-income households, the best plan is often the one that avoids stacking inherited IRA distributions on top of peak earnings years. That may mean taking more in lower-income years, or using the inherited IRA to fund specific goals in a structured way instead of letting the account drift until the deadline forces an unwanted distribution schedule.

Many beneficiaries also want to turn a portion of the inherited balance into more “paycheck-like” income. That’s where annuities can become relevant as an income-structuring tool. If you want a framework for how annuities are used in retirement planning, start here: annuities. If your goal is specifically moving IRA funds into an annuity structure correctly, this page connects the mechanics: How to transfer an IRA to an annuity.

Some beneficiaries also keep a rates reference point nearby so they can compare whether a given strategy is competitive in the market: current annuity rates.

Tax Implications and How to Avoid “Bracket Shock”

The most common inherited IRA tax pain isn’t caused by one distribution—it’s caused by unplanned clustering. Waiting until late in the timeline and then taking large withdrawals can compress multiple years of taxable income into a single tax year. That can push you into a higher bracket and create ripple effects across your financial plan.

One practical approach is to map expected income across the next decade—salary, business income, rental income, pensions, and other withdrawals—then layer inherited IRA distributions into years that are naturally “lighter.” That helps you pay tax intentionally instead of accidentally. Another approach is using a blended plan: annual withdrawals plus repositioning part of the inherited assets toward predictable income.

If you’re evaluating how guaranteed income planning fits into this type of timeline, this page frames the concept clearly: guaranteed income from annuities.

How to Transfer an Inherited IRA (The “Clean” Way)

If you decide to move inherited IRA assets—whether to a new custodian, to a different investment approach, or to an annuity structure—the cleanest method is typically a trustee-to-trustee transfer where the money moves institution-to-institution under correct inherited account titling. The key is that the funds should not be paid to you personally during the transfer process.

When inherited assets originate in an employer plan, you’ll often hear “direct rollover” language. The mechanics matter because the wrong method can create unnecessary taxes and paperwork headaches. If you want the operational definition and why it matters, here is the anchor reference: what is a direct rollover.

If the end goal is a retirement-income structure, this is the most practical “how-to” bridge for IRA assets: how to transfer an IRA to an annuity. At the time of publication, many fixed and indexed annuities can be used in qualified planning for inherited IRA assets when the structure is set up correctly and the distribution plan respects the applicable timeline. The right fit depends on whether your priority is income, liquidity, protection, or a blend.

Inherited IRA vs. Regular IRA

A simple way to anchor the difference is this: a regular IRA is designed for building retirement assets, while an inherited IRA is designed for distributing retirement assets to a beneficiary under IRS beneficiary rules. That’s why inherited IRAs typically do not allow new contributions and why timing requirements play such a large role in planning.