How Does an Inherited IRA Work?
How Does an Inherited IRA Work?
Jason Stolz CLTC, CRPC, DIA, CAA
How Does an Inherited IRA Work — Beneficiary Rules, the 10-Year Rule, Tax Planning, and Turning Inherited Assets Into Retirement Income
An inherited IRA — also called a beneficiary IRA — is not your IRA. That single distinction governs almost everything about how the account must be managed: how it is titled, how distributions are required, when the account must be emptied, and how the distributions interact with the beneficiary’s own income and tax situation. When someone dies with a traditional IRA, Roth IRA, or employer plan balance and you are a named beneficiary, the inherited assets can generally preserve their tax-advantaged status — but only if the transfer is executed correctly, the account is titled in the inherited format rather than rolled into your own accounts (for most non-spouse beneficiaries), and distributions are taken on the schedule the IRS requires. Failing to title the account correctly, missing a required distribution deadline, or moving money through a personal distribution when a direct transfer was required can convert a tax-deferred inherited asset into an immediate taxable event that cannot be reversed. At Diversified Insurance Brokers, Jason Stolz, CLTC, CRPC, DIA, CAA works with beneficiaries building practical inherited IRA distribution plans — designing year-by-year withdrawal schedules that satisfy the rules, manage bracket exposure, and coordinate with the beneficiary’s own retirement income sources including Social Security, existing retirement accounts, and annuity income structures. The death trap — how inherited retirement accounts create large ordinary income events for beneficiaries under current law — establishes the estate planning risk that makes proactive inherited IRA distribution planning so consequential: every dollar of pre-tax balance in an inherited IRA is ordinary income waiting to be recognized, and how and when that recognition happens is the planning lever the beneficiary controls. The complete Roth conversion strategy framework establishes the complementary planning action that account owners can take during their lifetime to reduce the pre-tax inherited IRA burden — the Roth conversions the original owner did not complete are the tax events the beneficiary will face instead.
The Three Factors That Determine Every Inherited IRA’s Rules
Every inherited IRA situation is governed by three variables: the beneficiary’s relationship to the deceased account owner, the type of IRA inherited (traditional or Roth), and whether the original owner had already begun Required Minimum Distributions before death. The relationship variable sorts beneficiaries into categories — surviving spouse, eligible designated beneficiary, and non-designated beneficiary — each with different distribution options and timelines. The account type variable determines the tax treatment of distributions — traditional IRA distributions are fully taxable as ordinary income because contributions were pre-tax; Roth IRA distributions are generally income-tax-free if the account satisfied the five-year holding requirement. The RMD status variable determines whether the 10-year rule requires at least annual distributions during the 10-year period or allows the beneficiary to take nothing until the final year — a distinction with major income smoothing implications. Understanding all three variables for a specific inherited account before making any distribution or transfer decision is the foundation that prevents the most costly inherited IRA errors. IRMAA planning strategies — how inherited IRA distributions affect Medicare Part B and Part D premium surcharges by adding to Modified Adjusted Gross Income — establish the Medicare premium dimension of inherited IRA planning that is particularly relevant for beneficiaries who are themselves Medicare-eligible and whose IRMAA status is sensitive to income changes in any given year.
Ensure you are receiving the absolute top rates
Current Fixed Annuity Rates
Compare today’s best fixed annuity rates from top carriers.
Current Bonus Annuity Rates
See which annuities offer the highest upfront bonus today.
Request an Annuity Quote
Submit our annuity request form to get personalized rate options.
Lifetime Income Calculator
Use our calculator to see how much guaranteed income your annuity can provide.
Beneficiary Categories and Their Distribution Requirements
| Beneficiary Category | Distribution Rules | Key Planning Consideration |
|---|---|---|
| Surviving spouse | May roll the inherited IRA into their own IRA, treating it as their own account with their own RMD schedule beginning at their own applicable RMD age; alternatively may keep it as an inherited IRA, which can be advantageous when the surviving spouse is younger than 59½ and needs distributions without the 10% early withdrawal penalty that applies to their own IRA | The rollover-to-own-IRA election delays RMDs to the surviving spouse’s own RMD age and allows the account to continue tax-deferred accumulation; keeping it as an inherited IRA provides penalty-free early access for younger surviving spouses who need distributions before 59½; the choice is not always obvious and depends on age, income needs, and the complete retirement income picture |
| Eligible designated beneficiary (minor child, disabled or chronically ill individual, beneficiary within 10 years of the owner’s age) | May use the life expectancy method — taking annual RMDs based on the beneficiary’s own life expectancy factor from the IRS single life table — stretching distributions over the beneficiary’s remaining lifetime rather than compressing them into 10 years; minor children of the original owner must switch to the 10-year rule when they reach the age of majority | The life expectancy stretch can dramatically reduce the annual ordinary income recognition compared to the 10-year rule, particularly for younger beneficiaries with long remaining life expectancies; the eligible designated beneficiary status must be confirmed and the correct calculation method established in the first distribution year — errors in the initial year can create compounding compliance issues |
| Non-designated beneficiary (estate, charity, certain trusts) | If the original owner died before RMD age, the account must be distributed within five years; if the original owner had already begun RMDs, distributions must continue at least as rapidly as the original owner’s distribution schedule; no stretch option and no 10-year rule — the distribution timeline depends on when the original owner died relative to their RMD start age | Estate beneficiaries face compressed distribution timelines with no ability to plan distributions around the beneficiary’s tax situation; proper beneficiary designation — naming individuals rather than the estate — is one of the most impactful estate planning decisions the original account owner makes, and the planning consequences of naming the estate rather than individuals are entirely realized by the beneficiaries rather than the owner |
| Non-spouse individual beneficiary (most adult children and other individual beneficiaries) | Subject to the 10-year rule — the account must be fully distributed by the end of the tenth year after the owner’s death; if the original owner had begun RMDs before death, annual distributions are required during the 10-year period (not just by year 10); if the original owner had not yet reached RMD age, no annual distributions are required during the 10 years and the full balance can be taken in year 10 — though this is typically not the most tax-efficient approach | The 10-year rule creates a specific planning window: 10 years to recognize what may be a substantial pre-tax balance as ordinary income; spreading distributions across the 10 years — timed to lower-income years, retirement transitions, or other bracket management opportunities — produces better after-tax outcomes than either doing nothing until year 10 or taking large early distributions that spike income in peak earning years |
The four beneficiary categories cover the majority of inherited IRA situations, and the distribution rules in each category have been significantly shaped by the SECURE Act and subsequent regulatory guidance. Because these rules have evolved and continue to evolve through IRS notices and guidance, confirming the applicable rules with a tax advisor before the first distribution is taken from any inherited account is the essential compliance step that prevents errors from compounding. How annuity death benefits work for beneficiaries — the parallel distribution rules that apply when a beneficiary inherits an annuity contract rather than or in addition to an IRA — establishes the complete inherited asset picture for beneficiaries who may receive both forms of inherited retirement assets and need to understand how the rules for each interact. How annuity beneficiary designation works — why keeping the annuity beneficiary designation current is as legally significant as the IRA beneficiary designation — completes the beneficiary planning picture for account owners who hold both types of retirement assets.
Tax Planning the 10-Year Window — Avoiding Bracket Shock and Managing Income Timing
The 10-year rule creates a defined planning window within which a potentially large pre-tax IRA balance must be recognized as ordinary income. The tax planning objective is to spread that recognition across years where the marginal rate on the additional income is as low as possible — not to delay recognition to the final year, which produces the worst outcome when the entire remaining balance becomes one year’s ordinary income. The ideal distribution schedule maps the beneficiary’s projected income across each of the 10 years — employment income, business income, pension, Social Security, other retirement account distributions — and identifies the years where total income is lower and where inherited IRA distributions can be absorbed at the lowest marginal rate. Retirement transition years — when employment income ends but Social Security has not yet begun and other retirement accounts are not yet fully distributing — often represent the lowest-income years in a beneficiary’s 10-year window and therefore the most tax-efficient years to take larger inherited IRA distributions. Roth conversions coordinated with a fixed indexed annuity — using the annuity income to cover living expenses while simultaneously processing inherited IRA distributions and Roth conversions from the beneficiary’s own accounts during low-income years — is the tax planning strategy that addresses multiple objectives simultaneously: managing the inherited IRA’s ordinary income recognition, reducing the beneficiary’s own future RMD obligation, and building tax-free Roth assets for later retirement years. Maximizing Social Security benefits through optimal claiming strategy — and specifically the interaction between inherited IRA distribution timing and the Social Security benefit taxability calculation — establishes the income planning coordination that prevents inherited IRA distributions from triggering avoidable Social Security income taxation in years when the Social Security benefit was otherwise partially or fully excluded. How Social Security and annuities work together in a complete retirement income architecture provides the framework for beneficiaries who are themselves approaching or in retirement and need to position inherited IRA distributions within the complete income picture rather than treating them as isolated transactions.
Using Inherited IRA Distributions to Fund Retirement Income — Annuity Considerations
For beneficiaries who inherit a substantial IRA balance and are themselves approaching or in retirement, the 10-year distribution window creates a specific opportunity: using the required distributions to fund a structured income plan rather than simply accumulating them in a taxable account after distribution. Distributions taken from an inherited traditional IRA are ordinary income in the year received — they cannot be converted to Roth directly from an inherited IRA, cannot be rolled into the beneficiary’s own IRA (for non-spouse beneficiaries), and cannot be contributed to another qualified retirement account. But they can be invested in non-qualified annuity products after distribution, where they begin accumulating inside a tax-deferred wrapper again with the additional benefit of guaranteed lifetime income or principal protection features that the IRA’s investment options may not have offered. Fixed indexed annuities with income riders — how the combination of principal protection, index-linked growth potential, and guaranteed lifetime withdrawal benefit creates a guaranteed income floor from non-qualified assets — is the product evaluation framework for beneficiaries considering positioning distributed inherited IRA proceeds into a principal-protected income structure. How the guaranteed lifetime withdrawal benefit works — the benefit base, roll-up rate, and payout percentage mechanics — establishes the income calculation that determines how much guaranteed annual income a given amount of distributed inherited IRA proceeds would generate in a GLWB-based annuity product. Guaranteed income at age 65 and guaranteed income at age 70 provide the age-specific income design context for beneficiaries positioning inherited IRA distributions into annuity income structures at the relevant activation ages within the 10-year window. How annuities compare to 401k plans as income distribution vehicles establishes the structural comparison relevant for beneficiaries who hold both an inherited IRA and their own 401k and who are designing an integrated income plan across both asset categories. What to do with an IRA after retirement and what to do with a 401k after retirement address the beneficiary’s own retirement account decisions that run alongside the inherited IRA distribution decisions — the complete retirement income plan coordinates all of these simultaneously rather than treating each in isolation. Whether Medicare covers long-term care — it does not cover custodial care — establishes the care cost planning dimension that inherited IRA distributions can help address: a beneficiary who receives a substantial inherited IRA over 10 years and channels a portion of those distributions into a hybrid annuity-LTC product or a standalone LTC policy builds care cost protection with money that was already required to be distributed, rather than depleting their own retirement savings for premiums. Long-term care planning strategies — the full spectrum of LTC funding approaches from standalone LTC to hybrid life and annuity products — completes the inherited IRA planning picture for beneficiaries whose retirement plan must address care cost risk alongside income design. Whether life insurance is still needed in retirement and life insurance services at Diversified address the legacy dimension for beneficiaries who receive a substantial inherited IRA in their own retirement years and who want to ensure that their own estate plan does not replicate the same ordinary income burden for their beneficiaries — using permanent life insurance funded in part by inherited IRA distributions to provide heirs with tax-free death benefit that offsets the income tax cost of the inherited pre-tax assets.
Build an Inherited IRA Distribution Plan That Manages Taxes and Income
We design year-by-year inherited IRA distribution schedules coordinated with Social Security timing, annuity income activation, Medicare premium management, and your own retirement account picture — so the 10-year window works for your plan rather than against it.
Request a Retirement Income Review
Talk With an Advisor Today
Choose how you’d like to connect—call or message us, then book a time that works for you.
Schedule here:
calendly.com/jason-dibcompanies/diversified-quotes
Licensed in all 50 states • Fiduciary, family-owned since 1980
FAQs: How Does an Inherited IRA Work?
Can I roll an inherited IRA into my own IRA?
Only a surviving spouse can roll an inherited IRA into their own IRA as if it were their own account. This is one of the most significant advantages of the surviving spouse beneficiary status — the rollover to own IRA restarts the RMD clock using the surviving spouse’s own applicable RMD age and removes the annual distribution obligations that an inherited IRA would otherwise impose. For most surviving spouses who are younger than the deceased owner, rolling the inherited IRA into their own IRA delays RMDs to their own applicable age, extending the tax-deferred accumulation period.
Non-spouse beneficiaries — adult children, siblings, parents, and other individuals — cannot roll an inherited IRA into their own IRA. Attempting to do so by taking a distribution and then contributing to your own IRA would create a taxable event on the distributed amount, and the contribution itself would likely not be permitted if you lack earned income or if you have already maxed your own IRA contribution. The inherited IRA must remain titled as an inherited account — typically in the format “Deceased Owner Name IRA for Benefit of Beneficiary Name” — and distributions must follow the applicable beneficiary rules rather than the owner rules. This is one reason why transfer mechanics matter: the money moves institution-to-institution as a trustee-to-trustee transfer without touching your hands, preserving the inherited status and avoiding the disqualifying personal distribution event.
What is the 10-year rule and how does it actually work in practice?
The 10-year rule requires most non-spouse individual beneficiaries to fully distribute an inherited IRA by the end of the tenth calendar year following the year of the original account owner’s death. If the owner died in a given year, the clock starts the following January 1 and runs 10 full calendar years — giving the beneficiary up to 11 tax years (the year of death through year 10) during which to take distributions. Whether annual distributions are required during the 10-year period — or whether the beneficiary can defer everything until year 10 — depends on whether the original owner had already begun Required Minimum Distributions before death.
If the original owner had not yet reached their RMD start age, no annual distributions are required during the 10 years — the beneficiary can take any amount at any time, including nothing until year 10. If the original owner had already begun RMDs, annual distributions are required from the inherited account during the 10-year period based on the beneficiary’s life expectancy, with the full remaining balance due by year 10 regardless. In practice, the most common planning error is treating the no-annual-RMD scenario as permission to take nothing until year 10 — which concentrates the entire inherited balance into a single year’s ordinary income, often at the highest marginal rate the beneficiary will face. The better approach is to map the beneficiary’s income across the full 10-year period and take strategic annual distributions in lower-income years, even when no annual RMD is technically required.
Are distributions from an inherited IRA taxable?
Distributions from an inherited traditional IRA are taxable as ordinary income in the year received, just like distributions from the original owner’s traditional IRA would have been. The entire balance of an inherited traditional IRA is pre-tax money — contributions were made before taxes, and the growth accumulated without annual taxation — so every dollar distributed is ordinary income. There is no step-up in basis for inherited IRA assets, which is the critical distinction from inherited stocks or real estate. A beneficiary who inherits a $500,000 traditional IRA must recognize all $500,000 as ordinary income across their distributions, with no exclusion for the original principal.
Distributions from an inherited Roth IRA are generally income-tax-free if the Roth account has satisfied the five-year holding period that began with the original owner’s first Roth IRA contribution. The five-year clock for the Roth belongs to the original owner, not the beneficiary — so if the owner had held a Roth IRA for more than five years before death, a beneficiary who inherits that Roth IRA can take distributions immediately on an income-tax-free basis. If the five-year period has not been satisfied, the earnings portion of early distributions may be taxable. Even for tax-free Roth distributions, the distribution rules and 10-year timeline still apply — the beneficiary must still empty the account by the end of year 10, they simply do so without an ordinary income tax cost on each distribution.
What happens if I miss the 10-year deadline?
Failing to distribute the inherited IRA by the end of the 10-year period results in an excise tax — historically set at 50% of the amount that should have been distributed but was not, though penalty rates and waiver provisions have been subject to IRS guidance and may reflect current rules at the time of any violation. The 50% excise tax on excess accumulations is one of the harshest penalties in the tax code, making the inherited IRA deadline a firm compliance obligation rather than a planning preference. Any amount still in the inherited IRA at the end of the 10-year period that should have been distributed is potentially subject to this penalty.
The practical protection against missing the deadline is maintaining a distribution schedule from the first year after the owner’s death — mapping the 10-year window, identifying the annual amounts to be distributed in each year based on the tax planning analysis, and setting calendar reminders or working with the custodian to ensure distributions occur on schedule. Waiting until year 9 or 10 to begin addressing the distribution schedule increases the risk of a deadline error, particularly if the account is held at a custodian that does not proactively notify beneficiaries of the deadline or calculate required amounts. The IRS has issued transitional relief for certain situations under the post-SECURE Act guidance, but that relief is specific to defined circumstances and should not be relied upon as a general extension of the 10-year deadline.
Can I use inherited IRA distributions to purchase an annuity?
Yes — once distributed from the inherited IRA, the proceeds are no longer restricted by IRA rules and can be used for any purpose including purchasing a non-qualified annuity. A non-spouse beneficiary who takes distributions from an inherited traditional IRA receives ordinary income in the year of distribution, just as with any other IRA distribution. Those after-tax proceeds — having already been taxed on distribution — can then be invested in a non-qualified annuity where they begin a new tax-deferred accumulation period, now with the additional features of the annuity product (principal protection, guaranteed income riders, death benefit provisions) that the IRA investment options may not have offered.
This approach is used by beneficiaries who want to convert required inherited IRA distributions into structured, predictable income rather than simply depositing them into a taxable account. The annuity’s non-qualified tax treatment — using the exclusion ratio to apportion each payment between tax-free basis recovery and taxable earnings — can produce a more tax-efficient income stream than taking all remaining inherited IRA distributions in a single year. The practical sequence is: take the inherited IRA distribution (ordinary income event), pay the applicable tax, and invest the net after-tax proceeds in a non-qualified fixed or fixed indexed annuity with an income rider. The annuity’s cost basis equals the net after-tax amount invested. This approach does not eliminate the inherited IRA’s ordinary income on distribution — that tax is unavoidable — but it repositions the after-tax proceeds into a tax-advantaged vehicle for the next phase of retirement income planning.
What should the original IRA owner do during their lifetime to make inherited IRA planning easier for beneficiaries?
The most impactful thing an IRA owner can do during their lifetime to reduce the inherited IRA burden for beneficiaries is to reduce the pre-tax IRA balance through Roth conversions during years of lower taxable income — typically the early retirement years between leaving employment and the mandatory start of full Social Security, RMDs, and pension income. Each dollar converted from pre-tax to Roth during the owner’s lifetime is a dollar that the beneficiary will not have to recognize as ordinary income during the 10-year distribution window. This is particularly valuable for IRA owners whose beneficiaries are in high-income years — adult children in peak earning careers, for example — who would face the highest marginal rates on inherited IRA distributions. Converting to Roth at the owner’s lower retirement marginal rate is almost always preferable to having the beneficiary recognize the same income at their higher peak-career rate.
The second most important action is ensuring beneficiary designations are kept current and correctly reflect the owner’s intent. Naming the estate rather than individuals, having outdated designations from prior marriages or family changes, or failing to name contingent beneficiaries when the primary beneficiary has predeceased the owner are the beneficiary designation errors that most commonly produce suboptimal inherited IRA outcomes. The beneficiary designation on the IRA is a legal document that supersedes will provisions — it must be updated independently of will changes and should be reviewed at the same time as any estate plan update or major life event. Naming the most appropriate individual beneficiaries — typically those in lower tax brackets than the IRA owner — and keeping those designations current is the estate planning discipline that allows the 10-year rule to be navigated as favorably as the tax environment permits.
About the Author:
Jason Stolz, CLTC, CRPC, DIA, CAA and Chief Underwriter at Diversified Insurance Brokers (NPN 20471358), is a senior insurance and retirement professional with more than 25 years of real-world experience helping individuals, families, and business owners protect their income, assets, and long-term financial stability. As a long-time partner of the nationally licensed independent agency Diversified Insurance Brokers, Jason provides trusted guidance across multiple specialties—including fixed and indexed annuities, long-term care planning, personal and business disability insurance, life insurance solutions, Group Health, and short-term health coverage. Diversified Insurance Brokers maintains active contracts with over 100 highly rated insurance carriers, ensuring clients have access to a broad and competitive marketplace.
His practical, education-first approach has earned recognition in publications such as VoyageATL, as well as his agency's featured coverage in Kiplinger— highlighting his commitment to financial clarity and client-focused planning. Drawing on deep product knowledge and years of hands-on field experience, Jason helps clients evaluate carriers, compare strategies, and build retirement and protection plans that are both secure and cost-efficient. Visitors who want to explore current annuity rates and compare options across multiple insurers can also use this annuity quote and comparison tool.
Explore More Lifetime Income Options: Browse our complete guide to How Retirement Accounts & Annuities Work — covering how IRAs, 401ks, annuities, pensions, GLWBs & fixed indexed annuities work from 100+ carriers.
Editorial Standards: Diversified Insurance Brokers maintains rigorous editorial standards to ensure accuracy, clarity, and independence in all content. Learn more about our editorial standards and commitment to transparency.
