Inheriting a parent's IRA: A complete guide to rules, distribution options & tax planning

Losing a parent is never easy, and navigating their financial legacy can feel overwhelming in the midst of grief. But it's also a powerful reflection of the care and intention they've put into supporting you.

If you've inherited an individual retirement account (IRA) from a parent, it's important to understand the rules and what steps you may want to take next.

From tax implications to required withdrawals, the decisions you make now could impact your financial picture for years to come. Knowing how inherited IRAs work and your options can help you make the choices that best align with your needs.

If you've been named as the beneficiary of a parent's IRA, the custodian (which might be a bank, brokerage firm or insurer) will typically reach out with instructions. But it's your responsibility to take action. You'll need to understand the type of IRA you've inherited, your beneficiary status and what timeline you're working under.

In most cases, adult children will need to:

• Open a new inherited IRA. The IRA you've inherited is in your parent's name, so you'll typically need to open your own inherited IRA, also called a beneficiary IRA. Inherited IRAs follow different tax rules and withdrawal timelines, so this also will help you avoid any tax penalties.
• Begin withdrawing funds on a deadline. Different timelines apply depending on your relationship to the original account holder. Even if you don't need the money now, the IRS may require you to take distributions or charge you a penalty.

Understanding inherited IRA rules upfront can help you avoid unexpected taxes and make the most of your inheritance.

As a non-spouse beneficiary inheriting from a parent, you can't treat the inherited IRA as your own. This means you can't roll the funds into an IRA you already have, make additional contributions to the inherited account or delay distributions until age 73 like the original owner could.

Inherited IRA rules depend on the timing of your parent's passing and your classification as a beneficiary.

Most adult children are considered designated beneficiaries. Under current IRS guidelines, these individuals must withdraw the full balance of the inherited IRA within 10 years of the original owner's death.

Beginning in 2025, if your parent already had reached their required beginning date for required minimum distributions (RMDs), then you also must take annual RMDs in years one through nine and empty the account by year 10. (As of 2025, the required beginning date is April 1 the year after you turn 73.) This means you don't have the full flexibility to wait until the final year to take all distributions. However, if the original owner passed before reaching their required beginning date, you have the flexibility to time your withdrawals within the 10-year window.

Available distribution methods for designated beneficiaries include:

• A lump sum gives you immediate access to the full balance, but it may come with a large tax bill, especially if the account is a traditional IRA.
• For example, someone earning $70,000 a year who withdraws $100,000 from an inherited IRA could see their taxable income increase to $170,000 that year. This could push them from the 22% tax bracket into the 24% bracket, meaning they'd owe additional federal taxes on that portion alone, plus potentially higher state taxes.
• A lump sum may make sense if you need the funds right away to pay off high-interest debt, cover major expenses or support a life transition. However, you may lose the option to spread your tax liability or keep the money invested for longer-term growth.

Another option is to transfer the funds directly into an inherited IRA. This lets you take distributions gradually and potentially manage taxes more efficiently.

• The main advantage of establishing an inherited IRA is keeping the money invested while meeting your distribution timeline, whether that's flexible withdrawals over 10 years or an annual RMD plus the 10-year deadline.
• To do this, you'll need to open a new inherited IRA and request a direct transfer from your parent's original IRA account. This means transferring the funds from your parent's account to a new inherited IRA that you control. The new account must be titled to show it's inherited, such as "[Parent's Name], deceased, IRA for the benefit of [Your Name]." Indirect rollovers aren't allowed.
• This allows you to move the money from the original custodian (who may have high fees or limited investment options) into an account you control while maintaining the inherited status and tax advantages.

Establishing an inherited IRA can be more work upfront, but it may offer more control over taxes and help keep the money invested longer, unlike a lump sum withdrawal. This option may fit beneficiaries who don't need immediate access to the full balance.

If you inherit an IRA from a parent, you’re generally considered a designated beneficiary. However, if any of the following apply, you’re considered an eligible designated beneficiary:

• A minor child of the original owner
• Chronically ill
• Permanently disabled
• Less than 10 years younger than the original owner

Eligible designated beneficiaries can choose the same distribution methods as designated beneficiaries (lump sum or inherited IRA transfer), but they have the additional option of taking RMDs based on life expectancy instead of the 10-year rule. This means they can spread out withdrawals, potentially reducing their tax burden.

If a minor child inherits the account, they will be considered an eligible designated beneficiary until they reach the age of majority. Then, this exception ends, and the 10-year rule applies.

If an IRA is left to a non-individual entity, like a trust, estate or charity, different rules apply than if a person inherited it.

In many cases, the 5-year rule applies, meaning the entity must empty the account within 5 years of the original owner's death. This shorter timeline can increase the entity's tax burden compared to the 10-year rule for individuals.

Some trusts may qualify for a longer withdrawal period, but only if they meet specific IRS criteria. When in doubt, consult with a financial professional to avoid potentially costly mistakes.

Inherited IRAs are subject to different tax rules depending on whether the account was a traditional or Roth IRA.

• Roth IRA. Qualified distributions from an inherited Roth IRA are tax-free. However, the five-year rule still applies: If less than 5 years have passed since the first Roth contribution was made, any withdrawn earnings may be subject to income tax; once 5 years have passed, earnings are not taxable. Contributions always can be withdrawn tax-free, regardless of the 5-year rule.
• Traditional IRA. Distributions from an inherited traditional IRA generally are included in your income and taxed accordingly. The total amount withdrawn will be included in your taxable income for that year. However, if the account has after-tax contributions, those aren't taxed when withdrawn. There is no early withdrawal penalty, no matter your age.

Something else to remember is that inherited IRAs aren't subject to the 10% early withdrawal penalty regardless of age. However, withdrawals may increase your taxable income, potentially pushing you into a higher tax bracket.

Inherited IRAs typically follow the same general distribution timeline under the 10-year rule. Even though Roth IRAs aren't subject to RMDs during the original owner's lifetime, beneficiaries must empty the account within 10 years of the original account holder's death unless they qualify as eligible designated beneficiaries.

No, inherited IRAs can't be rolled over using a 60-day rollover window that is allowed for other retirement accounts. If you withdraw the funds and try to move them later, the IRS could consider it a full distribution and tax the entire amount.

The only way to move the funds without triggering taxes is through a direct transfer between financial institutions.

If the inherited IRA is set up incorrectly or the transfer is handled the wrong way, you could lose the ability to spread out withdrawals and face an unexpected tax bill.

Even with the best intentions, it's easy to make errors when dealing with an inherited IRA, especially during an emotional time. Beware of these common mistakes:

• Missing the 10-year deadline. The most serious error is not withdrawing the full balance within the required timeframe. If you miss the deadline, the IRS may impose penalties of up to 25% on the amount that should have been withdrawn.
• Missing annual RMDs. If your parent had reached their required beginning date (April 1 the year after turning 73) before passing, you must take annual RMDs over a 10-year period or face a penalty.
• Taking an indirect rollover. Unlike your own IRA, inherited IRAs can't be moved using a 60-day rollover. If you withdraw the money intending to deposit it elsewhere, the full amount can become immediately taxable, and there is no way to reverse it.
• Not verifying your beneficiary status. Eligible designated beneficiaries have more favorable distribution options than most adult children. Not confirming your classification could mean missing out on planning opportunities or following unnecessarily restrictive rules.
• Skipping professional guidance. Inherited IRA rules involve complex tax and timing considerations. A financial advisor can help you navigate the process and avoid missteps, especially with larger accounts or those involving after-tax contributions.

Inheriting a retirement savings account from a parent can be difficult to navigate as you prepare to move forward without them. However, a good first step is to learn your options and the rules to follow when your deceased parent passes on an IRA to you.

Consider connecting with a local Thrivent financial advisor to better understand the ins and outs of inheriting IRAs from a parent. An advisor can help you determine which option will work best for your situation and help you take the right actions to create a strong financial future.