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Understanding Your Inherited IRA

If you've inherited an IRA, this guide will help you understand what an Inherited IRA is, how the rules work, what choices you have, and what role American Estate & Trust (AET) plays as the custodian of the account.

Summary

An Inherited IRA is an account created to receive retirement assets from someone who has passed away. Under current federal rules, most non-spouse beneficiaries must fully distribute the account within 10 years. Spouses have more flexibility. No new contributions can be added to an Inherited IRA. AET acts as the custodian: we hold the assets, process the transactions you direct, and issue the required tax forms. Decisions about distributions, transfers, and the underlying investments are yours to make, ideally with the help of a CPA or attorney.

A Note of Condolence

Please accept our sincere condolences on the loss of your loved one. We understand this is a difficult time, and that the responsibilities that follow can feel overwhelming. We are committed to handling the administrative side with care, accuracy, and respect for you and your family during this transition.

 

Recommended Next Steps

  1. Request a complete inventory of the account's holdings and any supporting documentation for private or alternative assets.
  2. Engage a CPA and, where appropriate, an attorney experienced with inherited retirement accounts.
  3. Independently verify the status and value of any private or non-public holdings before relying on stated balances.
  4. Develop a written distribution plan that satisfies the applicable RMD and 10-year requirements.
  5. Update beneficiary designations on the Inherited IRA.
  6. Document the fair market value of the account as of the date of death for your own records.

The rest of this article explains the rules and concepts behind these steps, so you can carry them out with the right context.

 

What an Inherited IRA Is

An Inherited IRA is a separate retirement account created in your name as the beneficiary of someone who has died. It holds the assets you inherit from their IRA. Inherited IRAs follow their own set of federal tax rules, which are different from the rules for a regular IRA in your own name.

The account is titled to identify the original owner and your role as beneficiary, for example:

Jane Doe, deceased [date of death], IRA FBO John Doe, beneficiary

This titling is required by the IRS. If the assets were transferred into a regular IRA in your own name instead of an Inherited IRA, the IRS could treat the entire balance as a taxable distribution to you.

 

Distribution Rules: The 10-Year Rule

Under the SECURE Act (2019) and SECURE 2.0 (2022), if you inherited the IRA from someone who died after December 31, 2019, and you are not the surviving spouse or another "Eligible Designated Beneficiary," you must fully distribute the account within 10 years of the original owner's date of death.

If the original owner had already started taking Required Minimum Distributions, you may also need to take annual distributions during years 1 through 9, with the remaining balance distributed by the end of year 10.

Eligible Designated Beneficiaries

Certain beneficiaries can still stretch distributions over their own life expectancy:

  • Surviving spouses
  • Minor children of the original owner (until they reach the age of majority)
  • Disabled or chronically ill individuals
  • Beneficiaries who are not more than 10 years younger than the deceased

If you are a surviving spouse, you also have the option to treat the IRA as your own by rolling it into your personal IRA. That election is the only way to re-open the account to new contributions.

Example: Spouse Beneficiary

Sarah inherits a Traditional IRA from her late husband John. She elects to treat it as her own and rolls it into her personal IRA. She will not need to take Required Minimum Distributions from the account until she reaches her own RMD age (between 73 and 75, depending on her birth year), and she can resume normal contributions to the account.

Example: Non-Spouse Beneficiary

Mike inherits a Traditional IRA from his aunt Nancy, who died in 2024. Mike is not an Eligible Designated Beneficiary, so the 10-year rule applies. He must fully distribute the account by the end of 2034. He can take the distributions in any amounts and at any times during that window, but the full balance must be out by year 10. If Nancy had already started her RMDs before death, Mike may also need to take annual RMDs during years 1 through 9.

 

Tax Treatment

  • Traditional Inherited IRA — Distributions are taxed as ordinary income.
  • Roth Inherited IRA — Qualified distributions are generally tax-free, provided the original account has been open for at least 5 years. If the 5-year holding period has not been met, the earnings portion of distributions may be taxable, but contributions can be withdrawn tax-free. The 10-year rule still applies for non-spouse beneficiaries.
  • No early-withdrawal penalty — The 10% additional tax for early withdrawal does not apply to Inherited IRA distributions, regardless of your age.
  • No combining — An Inherited IRA cannot be combined with your own IRAs. The only exception is the spousal election to treat the account as your own.

 

No New Contributions

An Inherited IRA is closed to new contributions. The balance can only change through:

  • Investment gains or losses on existing holdings
  • Distributions you take
  • Fees, expenses, and transfers

If you want to continue saving for your own retirement, you'll need to do so through a separate IRA in your own name or an employer plan. A surviving spouse who has elected to treat the Inherited IRA as their own can resume normal contributions in that personal IRA.

 

Moving the Account

You are not required to keep the Inherited IRA at AET. If you want to move it:

  • The transfer must be a direct trustee-to-trustee transfer between custodians.
  • Non-spouse beneficiaries cannot use a 60-day rollover; doing so would trigger a fully taxable distribution.
  • A surviving spouse who has elected to treat the account as their own can use normal IRA rollover rules.

 

Naming Your Own Beneficiaries

You should name your own beneficiaries on the Inherited IRA. If you pass away before the 10-year window is complete, the person who inherits from you (your successor beneficiary) generally has to finish your existing 10-year window. They do not start a new one.

 

Reported Value vs. Actual Value

This caution applies if the account holds anything other than publicly traded securities (for example, private company shares, real estate, promissory notes, private placements, or digital assets).

The value shown on a custodial statement is the most recently reported valuation. It is not necessarily the asset's actual or recoverable value today. A statement balance can stay high long after:

  • A private company has failed or filed for bankruptcy
  • A borrower on a promissory note has defaulted or become insolvent
  • Real estate has accumulated liens or unpaid taxes greater than its value
  • A private placement sponsor has ceased operations
  • A limited partnership interest has become illiquid or worthless
  • Digital assets have been lost or trapped on a defunct exchange

If your inherited account holds private or alternative assets, we strongly recommend engaging qualified professionals to independently verify the status and value of each holding.

 

Self-Directed IRAs and Private Assets

Self-directed retirement accounts can hold private company stock, real estate, private notes, precious metals, partnership interests, and digital assets. If you've inherited a self-directed account, you may encounter:

  • Higher annual custodial fees, often charged per asset
  • Difficulty selling illiquid assets within the 10-year window
  • Required in-kind distributions, where the asset itself is distributed and taxed at fair market value
  • Required independent appraisals for hard-to-value holdings
  • Restrictions on dealings between the account and you or your close relatives

 

The Role of the Custodian

It's important to understand what a custodian does and does not do.

What AET does
  • Holds title to the account's assets on behalf of the IRA
  • Processes transactions at your direction
  • Maintains records of contributions, distributions, and balances
  • Provides required IRS tax reporting, including Form 5498 and Form 1099-R
  • Retitles accounts and processes beneficiary claims
What AET does not do
  • We do not provide investment, tax, legal, or financial advice
  • We do not recommend, endorse, or evaluate the investments held within self-directed accounts
  • We do not perform due diligence on private companies, sponsors, or alternative investments
  • We do not independently verify valuations reported by issuers of private assets
  • We do not confirm the ongoing solvency, existence, or legitimacy of any private investment held
  • We do not audit underlying businesses, funds, or partnerships

Every investment in this account was selected and directed by the original account holder. AET acted as custodian only and did not advise on, recommend, or endorse any of the underlying investments. Where an asset has lost value, that loss typically occurred before the account passed to you. Concerns about fraud, misrepresentation, or misconduct by an investment sponsor are typically directed to the issuer, sponsor, or applicable regulators (such as the SEC, FINRA, state securities regulators, and law enforcement), not to the custodian.

 

Official IRS Resources

The following IRS publications and resources cover Inherited IRA rules in detail and can be useful when working with your tax professional:

  • IRS Publication 590-B — Distributions from Individual Retirement Arrangements (IRAs). Covers Required Minimum Distributions, beneficiary categories, and the 10-year rule.
  • IRS Retirement Topics — Beneficiary — Overview of beneficiary rules across IRA types.
  • SECURE Act (2019) and SECURE 2.0 Act (2022) — The federal laws that established the 10-year rule and the current RMD age thresholds.

 

Important Information

  • Federal rules are complex and changing. The information in this article is general. Rely on your own qualified tax, legal, and financial advisors for advice specific to your situation.
  • AET's role is administrative. We do not provide investment, tax, legal, or financial planning advice.
  • No new contributions can be made to an Inherited IRA. The account balance can only change through investment performance, distributions, fees, or transfers.
  • Distributions are not subject to the 10% early-withdrawal penalty, regardless of your age.
  • Trustee-to-trustee transfers only. Non-spouse beneficiaries cannot use 60-day rollovers.

This article is provided for general informational purposes only. It does not constitute legal, tax, investment, accounting, or financial advice. Federal and state laws governing inherited retirement accounts are complex and subject to change. Consult your own qualified tax, legal, and financial advisors before making decisions concerning an inherited retirement account.