Physician Retirement Planning

You Just Inherited An IRA. What Do You Do Now?

The individual retirement account (IRA) is the cornerstone for many people’s retirement savings. They are easy to set up – you can open one through nearly all investment companies on-line in a matter of minutes. They are available to anyone with an income – you can contribute pre-tax dollars if you earn a low or middle income and post-tax dollars if you earn a high income. They are convertible – you can can move funds from your traditional IRA into a Roth IRA and you can (usually) move funds from other tax-deferred investments, such as a defined benefit pension, 401(k), 403(b), or 457 into a traditional IRA. And they give you almost limitless choices – you can invest your IRA into stocks, bonds, mutual funds, annuities, and even real estate. For these reasons, it is easy to understand the popularity of IRAs – 42% of American households have one and they account for one-third of all U.S. retirement assets. They are even more common among retirees – a whopping 52% of households headed by someone over age 65 own an IRA.

Make sure that any required minimum distributions are paid up from the IRA for the year the decedent dies.

Be sure that you take annual required minimum distributions from the inherited IRA if required by the decedent’s age at death.

Know your withdrawal options depending on whether you are a spouse, eligible designated beneficiary, designated beneficiary, or non-designated beneficiary.

Make withdrawals strategically in order to minimize income taxes.

Choose investments for the inherited IRA based on your specific circumstances


Because of they are so popular for retirees, it is common for Americans to inherit an IRA from a spouse, parent, grandparent, or some other relative when they die. The rules for inherited IRAs are a bit complicated and when you inherit an IRA you have many choices. These choices fall into two categories: (1) what you legally have to do with the money in the IRA and (2) what you strategically should do from an investment standpoint. The IRS rules regarding inherited IRAs are detailed in publication 590-B. For the purposes of this post, we will be looking at inherited traditional IRAs – inherited Roth IRAs are handled similarly but with some additional nuances.

What you legally have to do

The first branch in the decision-making tree regarding inherited IRAs is based on who you are in relation to the deceased owner of the IRA and can be divided into four groups: (1) spouses, (2) “eligible designated” beneficiaries, (3) “designated” beneficiaries, and (4) “non-designated” beneficiaries. The IRS has different rules for each of these categories so let’s start by taking a look at the withdrawal requirements for each of these groups.

  1. Spouses. If you inherit an IRA from your deceased spouse, you have the greatest flexibility and you can choose from four options to withdraw money from the inherited IRA:
    1. Transfer it to your own IRA. This is usually the best option for most people as long as they are the sole beneficiary of the IRA. In this situation, you simply move money from your deceased spouse’s IRA into your own IRA and then it becomes subject to the withdrawal rules that apply to your IRA. The downside is that you cannot withdrawn the funds before age 59 1/2 without incurring an early withdrawal penalty But the upside is that you would not have to start withdrawing the funds until your own required minimum distribution clock starts at age 73.
    2. Open an inherited IRA using the life expectancy method. In this situation, you would open an inherited IRA (“beneficiary IRA”) in your name that is separate from your own IRA. However, regardless of your age, you will have to begin taking required minimum distributions (RMDs) from the inherited IRA at the later of either (1) December 31st the year after your spouse’s death if your spouse was 72 years old or older or (2) the year your spouse would have turned 73 years old. The amount of those required minimum distributions are based on life expectancy – the IRS publishes tables of your life expectancy and the percentage amounts of required minimum distributions for every age (IRS publication 590-B, appendix B, tables I, II, & III). The required minimum distributions are based on either your life expectancy or your spouses, whichever is longer.
    3. Open an inherited IRA using the 10-year withdrawal method. With this option, you open an inherited IRA (“beneficiary IRA”) in your name and then you have until December 31st of the 10th year after your spouse’s death to withdraw the funds from the inherited IRA. If the decedent died before their age of required minimum distributions, then you can take as much or as little out each year as long as all of the funds are withdrawn by the end of the 10th year. If the decedent died after their age of required minimum distributions, then you have to take at least the RMD amount each year and all funds must be withdrawn by the 10th year. For most people, this option gives less flexibility than either transferring the spouse’s IRA into your own IRA or into an inherited IRA and using the life expectancy method.
    4. Take a lump sum withdrawal. On the surface, this may seem like the simplest option but it has huge tax implications that can cost you dearly. The IRS treats withdrawals from a traditional IRA as ordinary income – the more you withdraw, the higher your income for that particular year. And the higher your income, the higher your income tax rate. A common misconception among Americans is that income only affects tax rates when that income crosses into a higher tax bracket. The reality is that with our marginal income tax system, your income tax rate goes up by a small percentage for every additional dollar of income that you have. So, regardless of your tax “bracket”, you will pay a higher tax rate if you take a lump sum withdrawal and this could result in a huge tax bill that year.
  2. Eligible designated beneficiaries. These are beneficiaries who are not the spouse and fall into one of four groups: (1) minor children of the decedent, (2) chronically ill individuals, (3) permanently disabled individuals, and (4) those who are no more than 10 years younger than the decedent. “Chronically ill” is defined by IRS Code Section 7702B(c)(2)(A). Eligible designated beneficiaries have three options for withdrawing the funds:
    1. Open an inherited IRA using the life expectancy method. This works essentially the same as it does for spouses above. However, if the beneficiary is a minor child, then the life expectancy method automatically changes to the 10-year withdrawal method when that beneficiary becomes 21-years-old.
    2. Open an inherited IRA using the 10-year withdrawal method. This works essentially the same as it does for spouses above. Annual required minimum distributions will apply if the decedent reached the age of required minimum distributions at the time of death.
    3. Take a lump sum withdrawal. This works essentially the same as it does for spouses above.
  3. Designated beneficiaries. This is a more common situation than “eligible designated beneficiaries” and includes adult children, other relatives, and friends as long as they are not chronically ill, disabled, or close to the decedent’s age at death. A person who is listed as a beneficiary on the original IRA documentation is known as a “designated beneficiary”. Designated beneficiaries move the funds into an inherited IRA and must withdraw all of the funds from that inherited IRA within 10 years of the decedent’s death. In addition, if the decedent was old enough to have to take required minimum distributions from their IRA, then you will have to take RMDs every year during that 10-year withdrawal period. In other words, if the decedent was 73 years old at the time of death, then you cannot just sit on the inherited IRA for 9 years and then take a lump sum withdrawal on year 10.
  4. Non-designated beneficiaries. If the decedent did not list any beneficiaries on their IRA documents and that IRA becomes part of the overall estate to be distributed based on the decedent’s will, then the people who inherit that IRA as part of the estate are non-designated beneficiaries (as opposed to “designated beneficiaries” above). In this situation, a 5-year rule applies, meaning that all of the funds from the inherited IRA must be withdrawn by 5 years after the decedent’s death. If you own an IRA, you should always designate beneficiaries on the IRA documentation – otherwise, the IRA can be subject to probate, can be tied up if someone contests the will, and whoever ends up with the IRA will be bound by the 5-year rule (as opposed to the 10-year rule).

Importantly, when you open an inherited IRA (“beneficiary IRA”), it is essential that this be done by a trustee-to-trustee transfer of the funds. This means that whatever investment company holds the money in the decedent’s IRA transfers the money into whatever investment company you use to create your inherited IRA and you do not touch the money. If, on the other hand, you have the investment company holding the decedent’s IRA write you a check and then you cash the check and try to deposit the money into your inherited IRA, you won’t be able to. That is because if you receive that check directly, the IRS considers it a lump sum distribution and so you will have to pay an enormous amount of taxes on all of that money for the year you received the check.

You can take money out of an inherited IRA but you cannot put your own money into an inherited IRA. This means that you cannot make additional contributions to the inherited IRA from your own funds. The only exception to this is if you inherit an IRA from your spouse and then transfer that IRA into your own traditional IRA, in which case you can continue to contribute to the account since it is now your own traditional IRA. If you are not a spouse and you inherit an IRA, then you would need to open up a separate traditional IRA in your own name and then you can make contributions to that second IRA.

The pesky RMDs and basis

There are two kinds of required minimum distributions (RMDs) in an inherited IRA: the amount that the decedent has to pay and the amount that you have to pay. If the decedent was at required minimum distribution age, then the year that the decedent dies, there must be a withdrawal from the decedent’s IRA of at least the RMD based on the decedent’s age. The current required minimum distribution age is 73 but it has progressively increased from 2019 when the RMD age was 70 1/2. The specific RMD age for each year since 2019 is listed here on the IRS website. The RMD amount is calculated by dividing the amount of the IRA by the “life expectancy factor”. The older a person gets, the lower the life expectancy factor. So, for example, if you inherit a $100,000 IRA from your uncle who was 80 years old when he died on March 1, 2024, then the Internal Revenue Service life tables indicate that the life expectancy factor for an 80-year-old is 20.2. By dividing $100,000 by 20.2, the RMD for 2024 is $5,155. If your uncle already withdrew at least $5,155 from his IRA in 2024 before he died, then you do not need to make an RMD from the inherited IRA in 2024. However, if your uncle did not make any withdrawals in 2024 before he died, then you must withdraw at least $5,155 from your inherited IRA in 2024 to satisfy your uncle’s RMD obligation for 2024. Therefore, it is essential that you obtain records of the IRA account activity for the year of the decedent’s death so that you know whether or not you have to withdraw an RMD for the year you inherit the IRA. This can be particularly challenging if the decedent dies in December because you may not have time to get the decedent’s IRA transferred into your inherited IRA before the December 31st deadline to take an RMD withdrawal. If this is the case then either direct the executor or the trustee of the decedent’s IRA to make the RMD withdrawal to the decedent’s checking account or you can request a waiver from the IRS.

The other complicating factor is basis. Most people’s traditional IRA is derived from pre-tax dollars that they contributed to that traditional IRA as a tax-deferred retirement account. However, if your income is too high, you cannot contribute pre-income tax money into the IRA but you can contribute post-income tax money into the IRA. The total amount of any post-income tax contributions that you make to the traditional IRA over your lifetime is the basis of that IRA. When you withdraw money from that traditional IRA in retirement, you do not have to pay income tax on the amount of the post-income tax contributions but you do have to pay income tax on the return on investment of those contributions. For example, say your income in 2010 was too high to make a pre-tax contribution to your traditional IRA so you instead contributed $1,000 from your checking account after paying all of your 2010 income taxes. By 2024, that initial $1,000 has grown to $2,900. If you withdraw all of the money in that traditional IRA, you will have to pay income tax on $1,900 ($2,900 minus $1,000). Things get complicated when you have both pre-income tax contributions and post-income tax contributions to your traditional IRA over your lifetime. It is essential that you track all of your post-tax contributions so that you know what the basis of your IRA is; otherwise, you will end up paying income tax on the entire withdrawal – in essence being taxed twice.

It gets even more complicated if the decedent has more than one kind of IRA – the basis is determined by the sum of all of a person’s traditional IRAs, SEP IRAs, and Simple IRAs. As an example, I have a traditional IRA that is composed of both pre-income tax contributions and post-income tax contributions. In addition, I have an SEP IRA that is composed entirely of pre-tax contributions. Because the basis is determined by by the sum of these IRAs, I have both taxable and tax-free components to both my SEP and traditional IRA withdrawals in retirement, even though all of the original contributions to the SEP were made with pre-tax dollars. It can make your mind spin when doing your income taxes every spring.

When you inherit a traditional IRA, you need to track down any post-tax contributions that the decedent made to that IRA so you can determine the basis of the IRA. If you don’t, then you risk paying a lot more in income taxes than you have to. This is normally done on IRS form 8606 which serves as a historical cumulative record of the IRA basis.

The good news is that the basis in your own regular traditional IRA is not used in determining taxes owed on your inherited IRA withdrawals and vice versa. Your regular IRA(s) and your inherited IRAs are treated like completely separate accounts, each with their own basis used to calculate income tax on withdrawals. But this means that you will have to file two IRS 8606 forms with your income taxes each year – one for the inherited IRA and one for all of your regular IRAs.

What the wise investor should do

Once you have figured out whether or not you need to take an RMD for the year you inherit an IRA and once you figure out what the basis of the inherited IRA is, you then have to decide how you are going to invest the money in the inherited IRA and how you want to strategically withdraw money from that inherited IRA. Let’s take withdrawal strategies first.

You are going pay federal and state income tax on the withdrawals from the inherited IRA for each year that you take a withdrawal. Because those withdrawals are included in your gross taxable income for any given year, the more you withdraw, the higher your income tax rate will be for that year. Your goal is to keep your income tax rate as low as possible every year. Therefore, in years that your income is lower, you should make larger withdrawals from the inherited IRA and in years that your income is higher, you should make smaller (or no) withdrawals from the inherited IRA. It is not always possible to know in advance what your income for any given future year will be but here are some situations that could factor in:

  • You are 66-years-old and want to delay starting to take Social Security in order to maximize the amount of your Social Security payments. By taking withdrawals from your inherited IRA in the years prior to taking Social Security, you can avoid a high income (and a high income tax rate) once you start taking Social Security.
  • You plan to work part-time for a few years. Maybe you are going back to get an MBA in your 40’s or maybe you want to cut back on work for a couple of years after having a child. These are good years to take withdrawals from your inherited IRA to even out your taxable income and your income tax rates over future years.
  • You get a big bonus. Maybe you changed jobs and got a signing bonus this year or maybe your company went public with an IPO and you cashed in your stock options. If you have a windfall in income one year, then skip taking withdrawals from the inherited IRA that year.
  • You anticipate moving to a different state. If you currently live in a state like Florida where there is no income tax but in the future you plan to move to California where the income tax rate can be as high as 12.3%, then taking withdrawals from the inherited IRA when you are a resident of Florida can save you money.
  • If your federal tax rates are going up in the future. We are currently living in an era of historically low income tax rates but these current rates are set to expire at the end of 2025. If rates do increase in 2026 as Congress originally planned, then it is wise to take larger withdrawals in 2024 and 2025 before income tax rates go up.

After deciding when to withdraw the money from an inherited IRA, you have to decide how you are going to invest the money in the inherited IRA. What you invest the money in depends on your individual circumstances:

If your plan is to spend the withdrawal money. Most designated beneficiaries will have to withdraw all of the funds from the inherited IRA over a 10-year period. If your intention is to spend that money when you withdraw it, then you should invest the inherited IRA in a low-risk investment. For example, new 5-year U.S. Treasury Notes are currently being sold with annual interest rates of 4.6%. Bond mutual funds have recently taken a beating as the yields on component bonds have increased to match interest being paid on newly issued Treasury Notes and Bonds. Consequently, now is a great time to invest in bond funds while they are cheap. For money that will be withdrawn from an inherited IRA over the next 2-3 years, even a money market can be a great option (currently paying about 5.25% annual interest).

If your plan is to invest the withdrawal money. Let’s say you are mid-career and working and then you inherit an IRA and you want to use that money as a component of your overall retirement investment portfolio. You still have to withdraw all of the funds over 10 years and pay the income taxes. In order to minimize taxes, determine the proper mix of stocks:bonds in your overall retirement portfolio based on your investment horizon (your age) and your personal willingness to accept risk. Then put the inherited IRA in low risk investments (such as bonds) and move an equal amount of your other tax-deferred investments (from your regular traditional IRA, 401k, 403b, or 457) into higher risk investments, such as stocks. This strategy allows you to maintain your overall stock:bond ratio while minimizing the risk of increasing your income tax rates over the upcoming 10 years.

If you inherit an IRA from your spouse. Normally, you cannot convert an inherited IRA into a Roth IRA. The one exception is if you inherit a traditional IRA from a spouse. In this case, you can make the inherited IRA your regular traditional IRA in your name and then convert some or all that traditional IRA into a Roth IRA. This can be a particular good strategy if your spouse dies and leaves both an IRA as well as cash and regular taxable investments. If you are able to live off of that inherited cash and the taxable investments for a few years, then your taxable income rate will be relatively low. This is a great time to do a Roth IRA conversion because with a low income tax rate, you won’t have to pay as much in income taxes when doing the conversion.

If you plan a big purchase in the near future. Maybe you plan to buy a house in 3 years and will need cash for a down payment. Maybe you are planning an expensive wedding in 2 years. Maybe your child will be starting college in a year. If you will need a large lump sum withdrawal in the near future then invest the inherited IRA in a very low risk investment such as a CD or a money market. Just be sure that the maturity date of the CD is sooner than the date you need the money. In this situation, your primary goal is not minimizing income taxes, instead your goal is to ensure that your investment hasn’t lost money when you need to take it out, such as if the stock market nose-dives.

If you want to donate to charity. If you are younger than age 70 1/2, the only way to donate money in an inherited IRA to charity is to take a withdrawal, pay income taxes on that withdrawal, and then donate whatever is left after taxes to the charity. But if you are older than age 70 1/2, then you can donate to a charity directly from the inherited IRA, without paying any income tax by making a qualified charitable distribution. This means that the donations do not add to your taxable income and thus do not increase your effective income tax rate. The donations can count toward your required minimum distributions for that year. Also, because the money donated to charity is not taxed, the amount that the charity gets is greater. There are some rules, however.

  • The charity must be recognized by the IRS as a qualified charitable organization. This is generally a 501(c)(3) organization.
  • The donation cannot go to a donor-advised fund.
  • The total amount of all qualified charitable distributions allowed is $105,000 per person per year in 2024.
  • The donation must be reported as a death distribution from the inherited IRA.
  • The donation is not included in your Schedule A itemized deductions.
  • The donation must be made from the inherited IRA directly to the charity (“trustee-to-charity”), otherwise you would have to declare the money as income and pay taxes on it.
  • Two additional caveats: (1) make sure you get a receipt from the charity for documentation purposes and (2) each state has different rules regarding state income tax and qualified charitable distributions so check your specific state’s tax laws.

Inherited IRAs can be complicated

The rules regarding inherited IRAs are incredibly complicated – if there was ever a justification for simplifying the U.S. tax code, look no further than publication 590-B. Use this post for general guidance but read the sections of publication 590-B that pertain to your specific circumstances before making final decisions about managing your inherited IRA. If in doubt, get professional help from an attorney, accountant, or financial advisor with expertise in inherited IRAs.

May 6, 2024

By James Allen, MD

I am a Professor Emeritus of Internal Medicine at the Ohio State University and former Medical Director of Ohio State University East Hospital