Inheriting an IRA sets you on a new financial voyage, one that requires careful navigation. You have a few possible routes to move before tax amounts
strategically through the “tax wall”, and the best course depends on your immediate needs and long-term tax strategy.

Some distribution methods help preserve the account’s tax-advantaged status, while others may steer you into unintended consequences. It’s essential to
understand your options, because once you take a distribution, you generally can’t roll it over within 60 days, unless you are the surviving spouse.

Inherited IRA rules can shift like tides. This guide is your compass—designed to help you avoid common pitfalls and sail confidently through the rules.

Is There Tax on the Horizon?

This question often tops the chart for beneficiaries navigating the waters of Inherited IRAs. Your first navigational marker is identifying the type of IRA you’ve
inherited, either a Traditional or Roth, as this sets your course for understanding potential tax obligations.

Generally, when you inherit a Traditional IRA, you will need to pay ordinary income tax on distributions. Remember, the distribution is added to your other ordinary income and could put you in a higher tax bracket, so plan your voyage accordingly. However, if there are after tax amounts, the pro-rata rule applies, meaning a portion of the distribution won’t be taxable. Chart this correctly by determining if the deceased IRA owner filed IRS Form 8606; if so, the amount of after tax will be logged on that form. While most Traditional IRAs contain only before tax amounts, it is wise to review the owner’s tax return to be certain. The waters are often calmer with a Roth IRA. Since Roth IRAs are funded with after tax amounts, only the earnings might be taxed. This is a concern if the Roth IRA was opened less than five years ago. Once you’ve sailed past the five years mark, the distributions would be considered qualified, and you can cruise ahead tax free.

And here’s a bit of good news to steady your course, regardless of your age, you won’t incur the IRS 10% additional tax on early or pre-59½ distributions for any taxable amounts distributed from the IRA you inherited. This is because Inherited IRA distributions are coded as “death” on IRS Form 1099-R, and death is an exception to the 10% additional tax.

Charting the Five-Year Course for Roth IRAs

Let’s say a Roth IRA was first opened and funded in 2023, then you inherited it in 2025. The five-year holding period starts January 1, 2023, and ends December 31, 2027. Once you reach January 1, 2028, distributions are considered qualified, meaning they are tax-free. This five-year clock continues to tick even after the Roth IRA is inherited. Until that five years trip is complete, you will follow the Roth IRA distribution ordering rules to determine if part of your distribution is taxable:

  • First out of the harbor: Contributions, these are always tax-free.
  • Next to set sail: Converted amounts are also tax-free.
  • Last to leave port: Earnings are taxable if the five-year holding period hasn’t been met.

    Once the five-year clock is met, all distributions are qualified, no tax due.

    Sailing with the Right Crew: Know Your Beneficiary Designation

    Before we hoist the anchor and set sail into the rules, let’s chart the map by identifying your beneficiary category. There are three beneficiary categories when the IRA owner dies after 2019: Non-Designated Beneficiary (NDB), Designated Beneficiary (DB) and Eligible Designated Beneficiary (EDB).

    Beneficiary Designation Types

    Non-Designated Beneficiary (NDB)Designated Beneficiary (DB)Eligible Designated Beneficiary (EDB)
    • Charity
    • Estate
    • Non-qualified trust    		• Child of the IRA owner who has surpassed age 21
    • Individuals who are more than
    10 years younger than the IRA owner (based on date of birth)
    • Individuals not chronically ill/disabled
    • Primary beneficiary of a qualified trust (QT) who is not
    the spouse or chronically ill/disabled    		• Child of the IRA owner, or their QT, who has not surpassed age 21
    • Individuals not more than 10 years younger, the same age, or older than the IRA owner
    • Individuals who are chronically ill/disabled
    • Primary beneficiary of a QT who is the surviving spouse or a chronically ill/disabled individual
    • Surviving spouse (S/S)

    Distribution Options: Navigating the Next Coordinates

    Now that you’ve identified your beneficiary category, there are two more critical coordinates to chart before we dive into the distribution options:

    What Is the Required Beginning Date or RBD?

    • The RBD is the date by which the IRA owner must begin taking Required Minimum Distributions (RMDs). This date is generally April 1 following the year the IRA owner reached their RMD Age.

    What is the IRA Owner’s RMD Age?

    This depends on their year of birth:

    • Age 75 (if born in 1960 or later)
    • Age 73 (if born 1951-1959)
    • Age 72 (if born July 1, 1949 – December 31, 1950)
    • Age 70½ (if born before July 1, 1949)

    It’s important to note that Roth IRA owners are always considered to have died before RBD because a Roth IRA owner has no RMDs. This simplifies the course for beneficiaries of Roth IRAs.