Inherited IRA rules for non-spouse beneficiaries: What you should know

Many people imagine that inheriting assets from a relative or friend means receiving a check. But it might not be that simple. To disburse the funds, which often are invested in an account like an IRA, you'll likely need to understand inherited IRA rules for non-spouse beneficiaries, which are quite different than how and when you’d receive distributions as a spouse.

Understanding these rules can help you fit this new asset into your overall financial strategy and feel more confident about what to do next.

The SECURE Act of 2019 established several provisions about how Americans can use retirement savings plans. Then the SECURE Act 2.0, passed in 2022, changed these rules.

Traditional IRAs, as well as SEP IRAs and SIMPLE IRAs, have required minimum distributions (RMDs). These require you to withdraw a certain amount of money from the account each year or risk facing penalties. Many IRAs have a time clock after they are inherited, where you need to fully disburse and close out the IRA by a certain date.

Let's look at changes brought by SECURE Act 2.0.

In the past, non-spouse beneficiaries were able to take small IRA distributions during their lifetime. Keeping the assets locked safely in an IRA was a way to keep your tax burden lower. But often, that's no longer an option. Now, in most cases, you must disburse all of the IRA's assets within 10 years.

However, spouses—as well as eligible designated beneficiaries (EDBs)—still can take the smaller minimum distributions during their lifetime, sheltering some of those assets from immediate taxability.

But how does inheriting an IRA from a spouse or parent work?

The rules for inheriting an IRA from a spouse or a parent, specifically, differ a bit from when you inherit the account from a different type of non-spouse. Here's what you should know for each situation.

View nuances of a spouse-inherited IRA.
Explore rules for inheriting an IRA from a parent.
Get an overview of general inherited IRA guidelines.

Beneficiaries who are eligible to take yearly distributions over this longer disbursal timeline are considered EDBs. Under IRS rules, they must fit one of the following:

• Minor children of the account holder. When the minor turns 21, a 10-year timeline to fully disburse is triggered. 
• Disabled or chronically ill individuals. 
• A beneficiary who is no more than 10 years younger than the IRA owner. 

Any non-spouse who doesn’t fall within one of the categories above is simply considered a designated beneficiary (DB). They must assume that the account will need to be fully disbursed within 10 years following the account owner’s death.

The non-spousal inherited IRA RMD rules are complex, but they revolve around two factors: the minimum amount you need to withdraw each year and how soon you need to distribute all the funds. A Thrivent financial advisor can add context to your experience of inheriting an IRA, helping you see when it could be worthwhile to take voluntary distributions or when it would be advantageous to simply follow the required minimums to avoid penalties. They also can assist you with where to go next, including choices like IRA transfers and other management tools.

By considering an inherited IRA as part of your wider financial plan, you'll be able to confidently make the most of the legacy that has been left to you.