Inherit an IRA? If you don't follow the latest tax rules, it could cost you thousands — here's how to limit the damage

While planning for and taking required minimum distributions (RMDs) are a part of retirement life, those who haven’t reached retirement age probably aren’t thinking about them beyond their annual meeting with their financial advisor.

But if you’ve inherited an IRA, they could significantly impact your tax bill. Here’s what you need to do this year (and next) to minimize taxes and avoid IRS penalties.

How new tax rules affect inherited IRAs

Some heirs may wrongly assume they can take money out of an inherited IRA whenever they want or delay distributions until later. But under the latest IRS rules, missing required withdrawals can trigger steep tax bills and IRS penalties — exactly what you don’t want as you file your 2026 tax return.

The latest rules from the Internal Revenue Service (IRS) affecting inherited traditional and Roth IRAs came into effect in September 2024 and apply to RMDs for the calendar year beginning Jan. 1, 2025 for accounts inherited after 2020.

The beneficiary of an IRA has the option of taking RMDs according to the rules set out by the IRS, or they can take a lump-sum distribution. However, distributions from IRAs are taxable, and a lump sum could mean portions of that money are taxed at a higher bracket.

The original owner of a traditional IRA is required to take RMDs once they reach age 73. The amount of the distribution is determined by dividing the account balance on Dec. 31 of the previous year by a life expectancy factor published in tables by the IRS. It also depends on whether the owner is single or married and, if married, if there’s an age difference of more than 10 years.

If you inherit an IRA from an account holder who died in 2020 or later, you may be subject to the 10-year rule. This rule stipulates that the beneficiary must “empty the entire account by the end of the 10th year following the year of the account owner’s (or eligible designated beneficiary’s) death.”

If you’re the spouse of the deceased, you can keep the account as an inherited account or you can roll it into your own IRA. If you keep it as an inherited account and the original account holder died before they took RMDs, then you can delay distributions until your late spouse would have reached RMD age or you can take distributions based on your life expectancy (or follow the 10-year rule). Inherited accounts after RMDs started can also take distributions based on your life expectancy.

If you’re an “eligible designated beneficiary” — such as a minor child of the original account holder, a disabled or chronically ill person or someone who isn’t more than 10 years younger than the account holder — you can choose to take distributions based on the life expectancy method or follow the 10-year rule (if the account holder died before they were required to take RMDs).

If you’re a beneficiary who is neither a spouse nor an eligible designated beneficiary — this includes most people who inherit from a parent — then you’re required to follow the 10-year rule.

Even though there are no RMD requirements for normal Roth IRA account holders, the same can’t be said of inherited Roth IRAs. If you’ve inherited a Roth IRA, the rules are similar as if inheriting a traditional IRA pre-RMDs. The big difference is that withdrawals are tax-free (as they would have been for the original account owner) since they’re funded with after-tax dollars — provided the account is at least five years old.

How to avoid a big tax hit

All of this can sound awfully complicated — in fact, it’s probably best to consult a tax expert in this situation to see which distribution option best suits you — but don’t ignore it, because you could face stiff penalties and a higher tax bill.