Inheriting a retirement account—like an IRA or 401(k)—can come with tax benefits, but also strict rules. If you’re a beneficiary, it’s important to understand how these accounts work so you don’t accidentally trigger unnecessary taxes or penalties.
Whether you’re inheriting from a parent, spouse, or someone else, here’s what you need to know to make smart decisions.
1. Know What Type of Account You Inherited
The most common types of inherited retirement accounts are:
- Traditional IRA
- Roth IRA
- 401(k)
- 403(b)
Each has different tax rules. For example:
- Traditional IRAs and 401(k)s are funded with pre-tax dollars. You’ll likely owe income taxes on withdrawals.
- Roth IRAs are funded with after-tax dollars. Withdrawals are generally tax-free.
2. Your Relationship to the Deceased Matters
The rules differ depending on who you are to the original account holder.
If You’re a Spouse:
You have the most flexibility. You can:
- Roll the account into your own IRA
- Remain as the beneficiary and take distributions under your spouse’s timeline
- Convert it into an inherited IRA
A rollover into your own IRA gives you more control, especially if you’re under age 59½ and want to delay distributions.
If You’re a Non-Spouse (child, sibling, etc.):
Since the SECURE Act of 2019, most non-spouse beneficiaries must:
- Withdraw the full balance within 10 years of the original account holder’s death
- Required minimum distributions (RMDs) may not be needed annually, but the account must be fully emptied by year 10
This can create a tax hit if the account is large, so strategic withdrawals may help reduce your tax burden.
Exceptions to the 10-Year Rule:
Some beneficiaries qualify as “eligible designated beneficiaries” and may stretch distributions over their lifetime:
- Minor children (until they reach majority)
- Chronically ill or disabled individuals
- Beneficiaries not more than 10 years younger than the original account holder
3. Watch the Clock
Timing matters.
- You typically have one year from the date of death to set up an inherited IRA.
- Missed deadlines can limit your options or trigger taxes.
- If RMDs were required but not taken before death, you may need to take the deceased’s final RMD by year-end.
4. Taxes Are Likely (Unless It’s a Roth IRA)
Most inherited retirement accounts come with tax consequences:
- Withdrawals from traditional accounts are treated as ordinary income
- If you’re in your peak earning years, this could push you into a higher tax bracket
- Roth IRAs are tax-free, but only if the account was held for at least 5 years
Work with a tax advisor or estate planning attorney to time your withdrawals in a way that minimizes your liability.
5. Don’t Cash It Out Right Away
Taking a lump-sum distribution might seem easy, but it can be costly. You’ll pay taxes on the full amount—possibly tens of thousands of dollars in income tax in one year.
If you inherited a large account, consider spreading out withdrawals to avoid a tax spike.
6. Coordinate With the Rest of the Estate
If you’re inheriting a retirement account as part of a larger estate, keep in mind:
- The retirement account passes outside of the will or trust—it goes to the named beneficiary
- If no beneficiary is named, the account may become part of the probate estate, triggering delays and possibly higher taxes
Review the beneficiary designation form. This document controls who gets the account—not the will.
How Hurban Law Can Help
At Hurban Law, LLC, we guide heirs through the estate and tax planning process after a loved one passes. Inheriting a retirement account can feel overwhelming, but with the right legal and financial advice, you can avoid costly mistakes.
Whether you’re a spouse, child, or other beneficiary, we’ll help you understand your options and protect what you’ve inherited.
Contact us today to discuss your next steps.
