When you inherit a 401(k), IRA, or other retirement account, the rules governing withdrawals depend
on several factors, including whether the account is a Roth or non-Roth, your relationship to the original
account holder, and recent legislative changes like the SECURE Act of 2019. Understanding these rules is
essential to avoid penalties and optimize tax efficiency.
The 10-Year Rule for Most Non-Spouse Beneficiaries
Under the SECURE Act of 2019, most non-spouse beneficiaries must withdraw the entire balance of an
inherited retirement account within 10 years of the original owner’s death.
- Annual RMDs for Non-Roth Accounts: If the original account owner had already begun taking Required Minimum Distributions (RMDs), the beneficiary must continue taking RMDs during the 10-year period.
- Lump-Sum Withdrawals: Beneficiaries can choose to withdraw funds gradually or all at once within the 10-year window.
- Tax Implications:
- Traditional IRA/401(k): Withdrawals are taxed as ordinary income.
- Roth IRA/401(k): Withdrawals are tax-free, provided the account has been open for at least five years.
Exceptions to the 10-Year Rule
Some beneficiaries qualify for an exception, allowing them to stretch distributions over their lifetime:
- Spouses (see next section)
- Minor children of the original account holder (10-year rule starts at age 21)
- Disabled or chronically ill beneficiaries
- Beneficiaries less than 10 years younger than the deceased
Special Rules for Spouse Beneficiaries
A spouse who inherits a retirement account has more flexible options:
- Roll It Over: The spouse can roll the account into their own IRA and delay RMDs until they reach their own required minimum distribution (RMD) age.
- Treat It as an Inherited IRA: The spouse can keep the account as an inherited IRA and take distributions based on their life expectancy.
- 10-Year Rule Option: Spouses can also choose to withdraw all assets within 10 years.
Roth vs. Non-Roth Inherited Accounts
Roth IRAs and Roth 401(k)s
- No RMDs for Spouse Beneficiaries: Spouses inheriting a Roth IRA do not need to take required minimum distributions if they choose to treat the inherited account as their own by taking ownership of the account or transferring it to their own Roth IRA.
- 10-Year Rule for Non-Spouse Beneficiaries: Non-spouse beneficiaries must withdraw the entire balance within 10 years, but withdrawals remain tax-free as long as the account was held for at least five years before the original owner’s death.
Traditional IRAs and 401(k)s
- Taxable Distributions: Withdrawals from traditional retirement accounts are taxed as ordinary income.
- RMDs Apply: If the deceased had already started taking RMDs, the beneficiary must continue them annually until the account is depleted.
Planning Strategies for Inherited Retirement Accounts
✅ Spread Distributions Over 10 Years (or Life Expectancy for Spousal Beneficiaries): Avoid a large tax hit by withdrawing smaller amounts each year instead of taking a lump sum.
✅ Convert to a Roth Before Inheritance: If the original account holder is still alive, consider a Roth conversion to reduce future tax burdens on heirs.
✅ Use a Trust for Asset Protection: If inheritance protection is a concern, a trust can help control distributions while minimizing tax consequences.
Final Thoughts
Understanding the withdrawal rules for inherited retirement accounts is crucial for avoiding penalties
and minimizing taxes. Whether you’re inheriting a Roth or non-Roth account, planning ahead can help
you make the most of your inheritance.
Would you like help navigating the complexities of inherited retirement account withdrawals? Mathews
Law can guide you through tax-efficient strategies tailored to your financial goals. When you’re ready, we’re ready. Schedule a time to chat to get started.