Inheriting an IRA from a Parent? Here’s What You Need to Know in 2025

So your parent passed away and left you their IRA. First, I’m sorry for your loss. Second, you’re probably wondering what the heck to do with this inherited account. The rules can be confusing (believe me, I’ve been there!), and one wrong move could cost you thousands in unnecessary taxes.

In this guide, I’ll walk you through everything you need to know about inheriting an IRA from a parent in 2025, including the latest rules, smart strategies to minimize taxes, and common mistakes to avoid.

The 10-Year Rule: The Big Change You Need to Know About

If you inherited an IRA from your parent after December 31 2019 you’re subject to the SECURE Act rules, which dramatically changed how inherited IRAs work. The biggest change? The death of the “stretch IRA.”

Previously you could stretch distributions from an inherited IRA throughout your lifetime taking only small required minimum distributions (RMDs) each year based on your life expectancy. This was awesome for tax planning!

But now? As a non-spouse beneficiary (that’s you as the child of the original account owner) you must empty the entire account within 10 years after your parent’s death. The 10-year clock starts ticking the year after they pass away.

For example:

• If your parent died on September 1, 2024
• Your 10-year period begins in 2025
• You must completely empty the account by December 31, 2034

Sounds simple enough, but there’s a catch (isn’t there always?).

Do You Need to Take Annual RMDs During the 10-Year Period?

Here’s where things get tricky. Whether you need to take annual distributions during the 10-year period depends on whether your parent had already started taking RMDs:

If your parent was younger than 73 (the RMD age in 2024) when they died:

• You don’t need to take annual RMDs during the 10-year period
• You can take distributions however you want over the 10 years
• Or wait and take the entire amount in year 10 (though this could create a massive tax hit)

If your parent was already 73 or older when they died:

• You must take annual RMDs based on your own life expectancy
• AND you must still empty the account entirely by the end of the 10-year period

This second scenario is particularly important to understand. Let me walk through an example:

John inherits an IRA worth $100,000 from his parent who had already started taking RMDs. John is 62 in 2025. He must:

1. Take his deceased parent’s 2024 RMD if it wasn’t already taken
2. Calculate his own RMD for 2025 (approximately $3,937 based on his life expectancy factor of 25.4)
3. Continue taking annual RMDs through 2034, with the factor decreasing by 1 each year
4. Empty the entire account by December 31, 2034

The Tax Impact of Inheriting an IRA

The type of IRA you inherited also matters:

Traditional IRA

• Distributions are taxed as ordinary income
• This could push you into a higher tax bracket if you take large distributions
• No 10% early withdrawal penalty applies to inherited IRAs, even if you’re under 59½

Roth IRA

• Generally tax-free if the account was open for at least 5 years before your parent died
• Still subject to the 10-year rule, but with much less tax concern
• No annual RMDs during the 10-year period, regardless of your parent’s age at death

Three Smart Strategies to Minimize Taxes When You Inherit an IRA

Strategy #1: Maximize Your Own Retirement Contributions

If you’re still working, contribute the max to your own 401(k) or IRA and use the inherited IRA for living expenses. This effectively moves money from the inherited IRA (with its 10-year limit) to your own retirement accounts that have longer tax-deferred growth potential.

For 2025, contribution limits are pretty generous:

• $23,500 to 401(k)s plus catch-up contributions
• If you’re age 60-63, there’s an enhanced catch-up contribution of $11,250

A married couple could potentially contribute up to $69,500 to their workplace plans in 2025!

Strategy #2: Be Strategic About Investment Allocation

If your portfolio has both growth and income investments, consider keeping the slower-growing assets in the inherited IRA.

For example, if your overall investment strategy is 70% stocks and 30% bonds, keep more of the bonds in the inherited IRA and more stocks in your personal accounts that don’t have the 10-year distribution requirement.

This way, the higher-growth assets aren’t forced to be distributed (and taxed) within the 10-year window.

Strategy #3: Take Larger Distributions in Lower-Income Years

One of the best strategies is to look at your projected income over the next 10 years and take larger distributions from the inherited IRA in years when your other income is lower.

This might mean:

• Taking larger distributions during a sabbatical or gap in employment
• Increasing distributions if your business has a down year
• Considering early retirement to spread distributions across years with lower tax brackets
• Taking smaller distributions in years with bonuses or other income spikes

What NOT to Do When You Inherit an IRA

Don’t Procrastinate Until Year 10

Waiting until the last year to empty the account can result in a massive tax bill. For example, a $500,000 inherited IRA growing at 7% annually would be worth nearly $1,000,000 after 10 years. Taking this as a single distribution could push you into the highest tax brackets, potentially losing 50% or more to taxes!

Don’t Ignore the Rules About Annual RMDs

If your parent was already taking RMDs, you must continue taking them during the 10-year period. Failing to take RMDs can result in a penalty of 25% of the amount not distributed.

Don’t Put the IRA in Your Name

Unlike a spouse, you can’t roll an inherited IRA into your own IRA. You must keep it as an inherited IRA in your name as beneficiary of your deceased parent.

Other Options You Should Know About

Option #1: Disclaim the Inheritance

If you don’t need the money and want to avoid the tax hit, you can “disclaim” the inherited IRA, which means refusing to accept it. In this case, the assets would go to the contingent beneficiary (if one was named) or to your parent’s estate.

Important: You must disclaim within 9 months of your parent’s death and before taking any distributions.

Option #2: Take a Lump Sum Distribution

You can take all the money at once without the 10% early withdrawal penalty (even if you’re under 59½). However, for a traditional IRA, this will likely create a massive tax hit in the year you take the distribution.

Special Circumstances: When Different Rules Apply

The “eligible designated beneficiary” rules apply to:

• Spouses (who have the most options)
• Disabled individuals
• Chronically ill individuals
• Individuals not more than 10 years younger than the deceased
• Minor children of the account owner (but only until they reach age 21)

If you fall into one of these categories, you may have different options, including the ability to stretch distributions over your lifetime.

Where to Get Help With Your Inherited IRA

The complexity of inherited IRA rules means it’s often worth getting professional help. Consider consulting:

• The IRA custodian (the financial institution holding the account)
• A tax professional or CPA
• A financial advisor who specializes in inherited IRAs

Their expertise can help you avoid costly mistakes and develop a personalized strategy that minimizes taxes while meeting your financial needs.

Inheriting an IRA from a parent gives you opportunities but also responsibilities. With the 10-year distribution rule now in effect, it’s more important than ever to develop a thoughtful strategy.

Don’t leave this until the last minute! Start planning now, consider your options, and get professional advice if needed. A little planning today can save you thousands in taxes tomorrow.

Have you inherited an IRA recently? What questions do you have? Drop them in the comments below and I’ll try to help!

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Disclaimer: This information is for educational purposes only and is not tax or legal advice. Please consult with qualified tax and legal professionals regarding your specific situation.

When inheriting an IRA from a parent, as an adult non-spouse beneficiary, you must fully withdraw the funds within 10 years of the original owner’s death. Your primary options are to: (1) disclaim the account, (2) take a lump-sum distribution, or (3) open an inherited IRA and take distributions over the next 10 years.

Yes, children generally pay taxes on an inherited traditional IRA when they take distributions, as these are taxed as ordinary income. However, distributions from an inherited Roth IRA are typically tax-free.

When you inherit an IRA, you receive an Inherited IRA and must generally withdraw all the funds within 10 years of the original owner’s death, as stipulated by the SECURE Act of 2019, while incurring taxes on withdrawals from a traditional IRA. While you can’t make further contributions to the account, the funds can remain tax-deferred, and you can withdraw them in a lump sum or in installments. It’s crucial to open an inherited IRA in the proper name and consult a tax advisor to avoid penalties, as there are exceptions for eligible beneficiaries, such as spouses.