What Happens to an Inherited IRA?

Clients often contact us when they inherit an IRA and ask, what should I do? The first step is simple: do nothing, until you have obtained all the relevant information and met with an advisor to evaluate the options available. The next steps are more complicated because there are many factors to consider and many IRS rules to follow.

Identifying the designated beneficiary (and alternate designated beneficiary) is critical because it determines who inherits and whether the IRA can be “stretched-out,” meaning the distributions from the IRA can be made over a period of time that is longer than the original IRA owner’s life expectancy. The ability to stretch-out inherited IRA distributions, rather than having to take them within five years of the original owner’s death, is an enormous tax benefit because it can allow for decades of tax-deferred growth.

Spousal Beneficiary

The rules about who can stretch-out an inherited IRA and for how long depend on whether the designated beneficiary is a spouse or a non-spouse individual. A spousal beneficiary has two primary options: she can either rollover the inherited IRA into a spousal IRA or she can keep it in the inherited IRA. If she chooses to take advantage of the spousal-rollover, the IRA will be treated as if it is her own.  She is not required to take distributions until she reaches age 70 ½, and would be subject to the 10% early-withdrawal penalty if withdrawn before age 59 ½. If there is a potential the surviving spouse would need access to some or all of the money before she turns 59 ½, she can wait to execute the spousal-rollover until she is no longer subject to the penalty.

If the surviving spouse chooses not to rollover the inherited IRA, or waits to execute the rollover, she would be treated as the beneficiary, not the owner, of the IRA and may be required to take minimum yearly distributions. For a spousal beneficiary, required minimum distributions (RMDs) are not required until the original owner would have turned 70 ½ years old.

It is worth noting that there is a third variation of the above options, in which the surviving spouse does not rollover the IRA, but treats the inherited IRA as if it is her own anyway. That is, she makes contributions as if to her own IRA. In this instance, the rules mentioned above related to the spousal-rollover would also apply.

Non-spousal Individual Beneficiary

The timing of distributions from inherited IRAs hinge upon whether the owner died before or after his Required Beginning Date (RBD). The RBD is April 1 of the year following the year in which the owner reached age 70 ½. If death occurred on or after the RBD, the beneficiary must base minimum distributions on the longer of the beneficiary’s single life expectancy or the life expectancy that the owner was following before death. If the owner was younger than the designated beneficiary, it may be beneficial to take the required minimum distribution over the owner’s life span.

If the owner died before his RBD, distributions may be stretched-out over the life expectancy of the beneficiary if distributions begin by December 31 of the year following the original owner’s date of death. For example, if the original owner died on September 2, 2014, the beneficiary’s first distribution must be made by December 31, 2015. If that distribution date is not met then the 5-year rule applies, which requires an IRA beneficiary to withdraw 100% of the IRA by December 31st of the fifth year following the original owner’s death (by December 31, 2019 in the above example).

Note that if the original owner was 70 ½ or older and did not take his mandatory yearly RMD before he died, the distribution must be taken by the beneficiary before the end of the year. This rule applies separately from and in addition to the rule described above, requiring distributions based on the beneficiary’s life expectancy to be taken within a certain timeframe. Even when the spouse is the designated beneficiary, the owner’s required minimum distribution in the year of death must come out of the IRA before it is rolled over.

No Designated Beneficiary and Non Individual Designated Beneficiaries

When there is no specified designated beneficiary, the IRA custodian’s default policy applies. Policies at certain institutions allow an IRA to go first to a surviving spouse and then to the estate, some custodial policies send the IRA directly to the estate, and few policies will allow the IRA to pass to surviving children without a completed beneficiary form on file. IRAs that pass to the estate, either because the estate is the designated beneficiary or the default beneficiary, are subject to the 5-year rule.

It is also possible for a trust to be named as the designated beneficiary. If this is the case, we would strongly encourage you to seek professional tax advice as the rules surrounding trusts as designated beneficiaries are even more complex, and mistakes in their administration are not uncommon.


It is important to develop an understanding of the various tax consequences before making a decision about what to do with an inherited IRA, and there are myriad different options depending on the situation. Always look at the IRA plan documents and consult with the IRA custodian, your financial advisor, and your tax advisor before taking a distribution, rolling over, or especially before liquidating an inherited IRA. It is not clear whether the stretch-out option will be around forever. A recent White House budget proposal included a provision that would require withdrawals within the default five years for any beneficiary other than a spouse. For now, if cash flow needs and other circumstances allow, the best approach is to stretch-out an inherited IRA for as long as possible, as this provides the greatest tax benefit.

If you have any questions, please contact Jean McDevitt, or your BNN tax advisor at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.