What Is An Inherited Ira? Benefits, Rules & Restrictions

Retirement planning is an important part of financial security for individuals and families. To ensure that their retirement goals are met, many people make use of various accounts such as Traditional IRAs or Roth IRAs to save money and benefit from tax advantages. One additional option available to individuals with inherited funds is the Inherited IRA. This article will discuss what an Inherited IRA is, its benefits, rules, and restrictions.

An Inherited IRA allows beneficiaries to receive assets from a deceased person’s retirement account without incurring certain taxes associated with other distributions methods. Generally speaking, it can be used only by named beneficiaries and cannot be rolled over into another plan. It also has different regulations regarding payouts which impact how long the recipient can keep the savings in the account before they must begin taking required minimum distributions (RMDs).

In addition to understanding the specifics of an Inherited IRA, those considering this type of account should become familiar with potential taxation issues related to these types of accounts as well as any other relevant laws governing inheritance process. By becoming informed about all aspects of this account including its benefits, rules, and restrictions, individuals can maximize their ability to take full advantage of all opportunities available through Inherited IRAs when creating a successful retirement plan.



An inherited IRA is an individual retirement account that passes to a beneficiary after the owner’s death. The funds are held in trust for the benefit of the heir and must be managed according to specific rules and regulations set forth by the IRS. In order to establish an inherited IRA, the original owner must name one or more beneficiaries on their account documents prior to death.

The transfer of ownership from the deceased person’s estate occurs when all required paperwork has been completed and filed with the custodian bank or other financial institution where the IRA was opened. Once established, withdrawals can be made at any time as long as they comply with applicable tax laws. Withdrawals may also need to meet certain distribution requirements depending on who inherits the account.


Types Of Beneficiaries

An Inherited IRA offers a variety of benefits to those who are named as beneficiaries. Beneficiaries can be individuals or trusts, and they may also include charities, estates and non-profits. Depending on the type of beneficiary chosen, different rules and restrictions will apply.

Individuals have the option to receive their inherited IRA as either a lump sum payment or as annual payments over time. Trusts must generally distribute all funds within five years following the death of the original account holder, unless certain conditions are met in order for them to qualify for longer payout periods. Charities have no limit on when distributions from an inherited IRA need to occur; however, contributions made directly to charity through an inherited IRA are not tax deductible. Estates do not incur any taxes on an inherited IRA but must pay required minimum distributions based upon life expectancy tables established by the Internal Revenue Service (IRS). Non-profit organizations can stretch out payments from an inherited IRA over their own lifespans if certain IRS regulations are followed.


Tax Implications

Inherited IRAs are subject to a variety of taxation rules. The tax rate for distributions from an inherited IRA depends on the type of distribution and whether it is taken as a lump sum or over time. Distributions made within five years of the account holder’s death are generally taxed at ordinary income rates, while any remaining funds in the account after that period will be taxed at capital gains rates. There may also be estate taxes associated with the inheritance depending on state law. Beneficiaries must make minimum required distributions (MRDs) each year based upon their age and life expectancy. MRDs are taxable in most cases, unless they come out of Roth accounts which were funded with post-tax dollars. Furthermore, beneficiaries cannot contribute additional money into the inherited IRA nor can they use it as collateral for a loan.


Withdrawal Requirements

Retirees who own an Inherited IRA must meet the withdrawal requirements of the account. Beneficiaries must begin taking Required Minimum Distributions (RMDs) from their inherited IRA by December 31st of the year following the death of the original owner. The amount that needs to be withdrawn is determined by various factors, including age and life expectancy. In some cases, a beneficiary may choose to withdraw more than what is required from the account; however, any excess withdrawals are subject to income tax at the beneficiary’s marginal rate as well as early withdrawal penalties if they have not yet reached retirement age.

If there are multiple beneficiaries on an account it should be divided into separate accounts that each carry its own RMD requirement. This allows for greater flexibility in terms of distribution amounts so that each beneficiary can take out only what they need when they need it without having to worry about paying taxes or penalty fees on money they did not withdraw themselves. It also prevents one beneficiary from withdrawing more funds than another which would create an uneven distribution among them.


Eligible Assets

Inherited IRAs provide an opportunity for individuals to receive distributions from a deceased person’s retirement savings. The assets held in these accounts may include stocks, bonds, mutual funds and exchange traded funds (ETFs). Additionally, many custodians allow alternative investments like real estate investment trusts (REITs) and gold bullion as well.

The rules regarding what constitutes an eligible asset differ depending on the IRA custodian. Generally speaking, whole life insurance policies are not permitted in inherited IRAs while annuities can be accepted under certain conditions. Here is a list of some common assets that can generally be found within inherited IRAs:

  • Stocks
  • Bonds
  • Mutual Funds
  • Exchange Traded Funds

Any additional investments should be discussed with the account custodian prior to investing them into the inherited IRA. It is important to note that any income generated by these investments will still be subject to taxation at ordinary income tax rates when withdrawn from the account.


Prohibited Transactions

An Inherited IRA is a retirement account that is passed on to the beneficiary upon the death of the original account holder. When this occurs, certain rules and restrictions apply in order for it to remain an inherited IRA. Prohibited Transactions are those transactions which the IRS does not allow with an inherited IRA as they can lead to adverse tax consequences for the beneficiary.

Examples of these prohibited transactions include: withdrawals prior to age 59½; contributing additional money into the account; borrowing from or lending against funds within the account; providing personal services for payment; engaging in any form of self-dealing by buying/selling property between yourself and your own IRA; and using trust assets as security for a loan. Beneficiaries should be aware that if they engage in such activities, their accounts may become disqualified, resulting in immediate taxation of all income earned since date of inheritance plus applicable penalties. Furthermore, even if deemed permissible under some circumstances, it’s important to note that entering into these types of activities could have long-term financial implications impacting potential benefits later on down the road. It’s best practice to consult with a financial advisor before making any decisions regarding one’s inherited IRA.



An inherited IRA is a retirement account that has been passed from one person to another. There are various types of beneficiaries who can inherit such accounts, which will have tax implications depending on the type of beneficiary. Withdrawal requirements for these accounts are typically more restrictive than those associated with traditional IRAs and only certain eligible assets may be held in an inherited IRA. Prohibited transactions must also be avoided when managing an inherited IRA so as to not incur any additional taxes or penalties. As there are many rules and regulations governing such accounts, it is important for individuals to do their research before deciding how they wish to handle an inherited IRA.

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