The rules governing inherited IRAs changed more in the past five years than in the previous three decades combined.
Many beneficiaries still assume they can stretch withdrawals over a lifetime, the way heirs could before 2020. Under SECURE 2.0, the excise tax on missed required distributions is 25%, dropping to 10% if the shortfall is corrected within a two-year window.
The IRS waived annual RMDs for certain 10-year-rule beneficiaries through 2024, meaning those distributions are first required for the 2025 tax year.
Fidelity’s Learning Center guide on inherited IRA rules broke down the categories of beneficiaries, the distribution timelines each one faces, and the key differences between traditional and Roth inherited accounts.
The tax outcome depends almost entirely on which type of heir someone is and whether the original owner had already started requiring minimum distributions before death.
The 10-year rule forces most non-spouse heirs to deplete inherited IRAs faster
The SECURE Act of 2019 eliminated the so-called stretch IRA for most non-spouse beneficiaries, replacing lifetime distributions with a 10-year depletion window, David Peterson, head of wealth planning at Fidelity, explained.
Adult children, grandchildren, siblings, and friends who inherit an IRA from someone who died after 2019 must now withdraw the entire account balance by the end of the 10th year following the owner’s death.
The critical detail that many heirs missed during the first several years of the new rules involves annual required minimum distributions within that 10-year window.
Mark Steber, chief tax information officer at Jackson Hewitt, warned that inherited IRA beneficiaries should expect a tax bill on those assets, YahooFinance reported.
There are many things people should know if they inherit an IRA…Arguably the most important? Understand that you may owe taxes sooner or later on the money inherited
The IRS finalized regulations in July 2024 confirming that beneficiaries who inherited from someone who had already begun RMDs must take annual distributions during each of the first nine years, in addition to emptying the account entirely by year 10.
Fidelity highlights the spousal exception that other heirs do not receive
Surviving spouses retain the most flexibility of any beneficiary category, and Peterson emphasized that the distinction between spouse and non-spouse heirs is the most consequential divide in the inherited IRA rules.
A surviving spouse can elect to roll the inherited IRA into their own existing account, or treat the inherited account as their own, Fidelity explained.
Once a spouse completes either election, the inherited account functions as if the surviving spouse had always owned it, meaning no RMDs are required until the spouse reaches their own required beginning date, age 73 for those born between 1951 and 1959, and age 75 for those born in 1960 or later
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The spouse can also name new beneficiaries and convert the account to a Roth IRA if they choose, Peterson noted.
A surviving spouse who needs access to funds before age 59½ may benefit from keeping the account in inherited IRA status to avoid the 10% early withdrawal penalty, Fidelity indicated.
That option preserves the ability to switch to a spousal rollover later, though reversing the decision and going back to inherited status is not permitted.
The Roth IRA distinction that saves heirs from a major tax event
The same distribution timelines apply to inherited Roth IRAs as to traditional accounts, but the tax treatment differs in ways that make the Roth version a substantially more favorable inheritance, Peterson confirmed.
Because Roth contributions are made with after-tax dollars, beneficiaries do not owe income tax on qualified withdrawals from the inherited account.
For the tax-free treatment to apply to earnings and appreciation within the Roth, the original account must have been open for at least five years before the owner’s death, Fidelity noted.
If that threshold has been met, the entire distribution, including all growth that occurred over the owner’s lifetime, comes out free of federal income tax.
Non-spouse heirs of Roth IRAs also face a more favorable annual distribution schedule. Because the original Roth owner was not subject to RMDs during their lifetime, the heir has no annual RMD obligation during the 10-year window regardless of when the owner died, the IRS regulations confirmed.
The account must still be fully distributed by the end of year 10, but the beneficiary can time those withdrawals to maximize tax-free compounding.
The checks heirs face before the next tax deadline
The 25% penalty for missed distributions is no longer theoretical. The IRS grace period ended after the 2024 tax year, and beneficiaries who inherited an IRA from someone who died after 2019 are now on the clock.
Fidelity’s guide points out that the distribution timeline and tax treatment for an inherited IRA follow directly from the beneficiary’s classification, so identifying that category is where heirs typically begin.
Spousal heirs have options that non-spouse beneficiaries do not, and Roth accounts have advantages that traditional accounts cannot match.
Fidelity and Jackson Hewitt both note that heirs of accounts inherited in 2020 or 2021 face immediate RMD obligations for the 2025 tax year, making professional tax guidance especially relevant before year-end.
The penalty for getting the timing wrong is steep, and the window to correct it without compounding the cost is narrowing.
Related: Americans using Roth IRA rule are leaving thousands on the table
