How Does an Inherited IRA Work?
Jason Stolz CLTC, CRPC
Understanding how an Inherited IRA works is essential for anyone who receives a retirement account after the original owner’s death. The rules vary depending on your relationship to the deceased and whether the account was traditional or Roth. Making the right decisions can help you preserve tax-deferred growth, avoid penalties, and secure lifetime income options. The governing tax guidelines are currently the Secure Act 2.0
At Diversified Insurance Brokers, we help beneficiaries evaluate rollover and income options—including transferring inherited balances into annuities that continue to grow tax-deferred while providing guaranteed income streams.
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What Is an Inherited IRA?
An Inherited IRA—also known as a Beneficiary IRA—is an account opened when you inherit a retirement plan such as a traditional IRA, Roth IRA, 401(k), or 403(b) from someone who has passed away. The account allows you to continue the tax-advantaged growth while adhering to specific withdrawal rules set by the IRS.
Beneficiaries are categorized as either spousal or non-spousal, and each category has unique options for rollovers, distributions, and tax treatment.
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Spousal vs. Non-Spousal Beneficiary Rules
The IRS differentiates between spouses and other beneficiaries when determining distribution timelines and rollover options:
- Spousal Beneficiary: May roll the account into their own IRA or continue the decedent’s IRA, deferring Required Minimum Distributions (RMDs) until age 73.
- Non-Spousal Beneficiary: Generally must deplete the account within 10 years of the original owner’s death (per the SECURE 2.0 Act).
If the deceased had already begun RMDs, non-spouse beneficiaries may need to continue distributions annually during the 10-year period.
Tax Implications and Withdrawal Strategies
Withdrawals from an Inherited Traditional IRA are taxed as ordinary income. Roth Inherited IRAs, on the other hand, provide tax-free withdrawals if the account was open for at least five years prior to the original owner’s death.
To manage taxes effectively, many beneficiaries use a laddered withdrawal plan—combining annual distributions with annuities for stable income and deferred taxation. For example, transferring inherited funds into an annuity can help meet RMD requirements while maintaining growth potential.
How to Transfer an Inherited IRA to an Annuity
You can perform a trustee-to-trustee transfer (also called a direct rollover) to move inherited IRA funds into an annuity designed to meet distribution rules while providing guaranteed income. This method avoids triggering taxable events and preserves your deferral benefits.
At the time of publication, many fixed and indexed annuities allow inherited IRA rollovers that comply with 10-year payout rules, helping beneficiaries retain control over income timing.
Inherited IRA vs. Regular IRA
| Feature | Inherited IRA | Traditional IRA |
|---|---|---|
| Ownership | Belongs to beneficiary | Belongs to account owner |
| Contributions | No new contributions allowed | Ongoing contributions allowed |
| RMD Rules | Must follow 10-year or lifetime payout rule | Starts at age 73 |
| Tax Treatment | Based on decedent’s IRA type | Tax-deferred until withdrawal |
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Inherited IRA FAQs
What is an Inherited IRA?
An Inherited IRA is an account established for beneficiaries after the death of an IRA owner, allowing continued tax-deferred growth under specific withdrawal rules.
How long do I have to withdraw funds from an Inherited IRA?
Most non-spouse beneficiaries must withdraw the entire balance within 10 years of the original owner’s death under the SECURE 2.0 Act.
Can I roll an Inherited IRA into an annuity?
Yes. You can transfer the balance via a trustee-to-trustee rollover into a qualified annuity to comply with withdrawal rules while maintaining tax deferral.
Do I pay taxes on Inherited IRA withdrawals?
Traditional Inherited IRAs are taxed as ordinary income upon withdrawal, while Roth Inherited IRAs can provide tax-free withdrawals if held long enough.
What happens if I miss my RMD deadline?
Failing to take required distributions can result in a 25% IRS penalty on the amount that should have been withdrawn.
