IRS Inherited IRA Distribution Rules

Inheriting an IRA provides you with many choices and tax consequences.

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The good news about being named the beneficiary to an inherited IRA is obvious: You came into money. The down side isn’t always so clear, though. But if you don’t mind your p's and q’s and follow the Internal Revenue Service’s rules about distribution from inherited IRAs to the letter, you might trigger unnecessary taxes and penalties that can take a big bite out of your inheritance. But generally, the IRS taxes IRA distributions at your ordinary income tax rate, regardless if you inherited it or not.


The IRS taxes traditional IRA distributions at your marginal tax rate, while ROTH IRA distributions generally made with post-tax contributions are typically tax-free. However, if you inherited an IRA from someone who was older than 70 1/2 when he died and had not taken required minimum distributions, you have to take the distribution for him, but you can report this distribution on his taxes and not yours.

IRS Inherited IRA Rules

Because money that goes into a traditional IRA isn’t taxed, the IRS takes its share on money on the distributions. Generally, any distributions you take from an inherited IRA are treated the same as if you made a qualifying distribution from your own IRA.

However, Roth IRAs are treated differently, since you pay tax on money before putting it into the IRA and generally get any investment income tax free.


Required Minimum Distributions

If the IRA’s original owner was older than 70 1/2 when he died, the IRS required him to start taking required minimum distributions. If he hadn’t taken an RMD in the year he died, you must take it for him, but you can report the distribution on his taxes, rather than yours. After that, you may continue to take distributions based on the schedule determined by the owner’s projected lifespan, or you may develop your own RMD schedule based on your lifespan. Consult the IRS life expectancy table in IRS Publication 590-B for more information; the IRS Publication 590 series has information about IRA mechanics in general.


Choosing Your Distributions



Roth IRA Inheritance Rules

Since money in Roth IRAs is already taxed, the rules for inheriting such an account are a bit different than with a traditional IRA. Generally under IRS Roth IRA withdrawal rules, distributions from Roth IRAs are tax free provided the owner is at least 59 1/2 and has held the account for at least five years.

If you inherit a Roth IRA, you must either take minimum distributions over your lifetime, starting the year after the original owner died, or take all distributions by the end of the year containing the fifth anniversary of the original owner's death. Either way, any distributions taken after the original owner would have had the account open five years are tax free.

Depending on how long the account had been open, this may influence your choice of which distribution rule to use.

Recent Tax Law Changes

The rules around inherited IRAs aren't changing for the 2018 tax year (for taxes filed in 2019), but ordinary income tax rates are generally decreasing and tax brackets are generally getting wider, meaning a wider range of income included in each bracket. This may affect how you choose to take distributions from inherited IRAs.

For instance, for the 2018 and 2019 tax years, ordinary income tax rates range from 10% for the lowest wage earners to 37 percent for the highest, and are based on your income for the year.