When Do I Have to Withdraw an Inherited IRA?

The statute names five classes, determined as of the owner's date of death: the surviving spouse; a child of the owner who has not reached majority, which the regulation sets at the 21st birthday; a disabled individual; a chronically ill individual; and an individual not more than 10 years younger than the owner. An eligible designated beneficiary may take annual life expectancy payments instead of emptying the account within a fixed period. A child who qualifies only by age stops being eligible on reaching 21, and the remaining balance must be distributed within 10 years after that date.

The Internal Revenue Code imposes a tax of 25% of the amount that should have been withdrawn but was not, paid by the beneficiary. The rate drops to 10% when two conditions are both met inside the correction window: the missed amount is withdrawn from the same plan (for an IRA, from any IRA that could have satisfied the requirement), and a return reflecting the tax is filed. The window ends at the earliest of a notice of deficiency, an assessment, or the last day of the second taxable year after the year the tax applies to. The IRS may waive the tax where the shortfall was due to reasonable error and reasonable steps are being taken to remedy it; the request is made on Form 5329. The regulation also waives the tax automatically in two cases, including a year-of-death withdrawal the beneficiary takes by the later of the beneficiary's filing deadline or the end of the following year.

An IRA acquired by the surviving spouse by reason of the owner's death is not an "inherited" IRA under the Code, so the rollover rules are not denied to the spouse. The regulation lets the spouse elect to treat the account as the spouse's own if the spouse is the sole beneficiary and has an unlimited right to withdraw; a trust named as beneficiary does not qualify even if the spouse is its sole beneficiary. The election is made by redesignating the account in the spouse's name as owner, and it is deemed made if the spouse misses a required beneficiary withdrawal for a year after the year of death or makes a contribution to the account.

A Roth IRA has no required distributions during the owner's life, and after death the regulation applies the rules as though the owner died before the required beginning date. An employer plan may specify that the 10-year rule applies to eligible designated beneficiaries instead of life expectancy payments, or may let the beneficiary elect between the two, so the plan document decides. A beneficiary who is not the surviving spouse cannot roll over a plan distribution; the Code provides a direct trustee-to-trustee transfer to an inherited IRA instead. The rules by account type: traditional IRA, Roth IRA, and 401(k). Whether the inherited assets are taxed when sold is a separate question covered by the step-up in basis calculator.