An inherited IRA is not inherently a traditional IRA-it's a custodial account established to hold funds from a deceased person's retirement account, which may have been a traditional IRA, Roth IRA, or 401(k). The original account type determines the inherited account's treatment under IRS rules.
The term "traditional IRA" refers to a specific type of retirement account with pre-tax contributions and taxable withdrawals in retirement. An inherited IRA inherits the characteristics of the original account. If the decedent's account was a traditional IRA, the inherited version follows traditional IRA rules, including income tax on withdrawals and required minimum distributions (RMDs).
For example, if someone dies at age 78 and left a traditional IRA worth $600,000, the beneficiary who inherits it must follow the same distribution rules as the original owner would have. This includes taking RMDs based on life expectancy tables, unless the beneficiary is a spouse, who may roll the funds into their own IRA.
An inherited IRA is created when a beneficiary receives assets from a deceased individual's retirement account. The IRS requires the account to be titled with the deceased owner's name followed by "deceased" and the beneficiary's name. For example: "John Smith, Deceased, Beneficiary: Jane Doe."
Unlike a standard traditional IRA, an inherited IRA cannot accept new contributions. Its sole purpose is to distribute the remaining balance according to IRS guidelines. The account remains subject to federal income tax on withdrawals, regardless of whether the original account was traditional or Roth.
Beneficiaries must begin taking distributions within one year of the original owner's death, except for spouses. Spouses have the option to treat the inherited IRA as their own, delaying RMDs until they reach age 73 (as of 2024). Non-spouse beneficiaries must start withdrawals by December 31 of the year following the death.
Inherited IRAs fall into two categories based on the beneficiary's relationship to the deceased:
| Beneficiary Type | Account Treatment | RMD Start Date | Life Expectancy Use |
|---|---|---|---|
| Spouse | Can roll funds into own IRA | Age 73 (if account opened before 2020) | No-uses own life expectancy |
| Non-spouse (child, sibling, friend) | Must set up inherited IRA | End of year following death | Yes-uses IRS Single Life Expectancy Table |
| Minor child (under 18) | Must be funded into a custodial account | Until age 21 or death of parent | Yes-based on child's age at death |
When the original account was a traditional IRA, the inherited version inherits the pre-tax nature of the funds. Withdrawals are taxed as ordinary income. If the original account was a Roth IRA, distributions are generally tax-free, assuming the five-year rule and age requirements were met.
A common mistake is assuming all inherited accounts follow the same rules. The IRS distinguishes between designated beneficiaries (who must take RMDs) and non-designated beneficiaries (who must withdraw all funds within five years). The latter applies only if the original owner died before required beginning date for RMDs.
While both inherited IRAs and traditional IRAs allow tax-deferred growth, they differ in critical ways. A traditional IRA allows ongoing contributions up to annual limits. An inherited IRA does not. Contributions are prohibited, and the account exists solely to distribute assets.
Another major difference lies in withdrawal timing. With a traditional IRA, you can delay withdrawals until age 73 (as of 2024), but with an inherited IRA, you must begin distributions within one year of the original owner's death. Failure to do so results in a 50% penalty on the amount not withdrawn.
For example, if a 65-year-old dies and leaves a traditional IRA worth $400,000 to a daughter aged 40, she must calculate her first RMD using the IRS Uniform Lifetime Table. Her life expectancy factor is 25.6 years. Dividing $400,000 by 25.6 gives a first-year RMD of $15,625. She must withdraw this amount by December 31 of the year following the death.
Many assume that inheriting an IRA means automatic access to the funds. That's false. The account must be formally established with a financial institution. Without proper documentation, the funds remain frozen until the estate is settled.
Another misconception is that inherited IRAs are always traditional IRAs. They are not. If the deceased had a Roth IRA, the inherited account is a Roth IRA. Tax treatment depends on the original account type, not the inheritance itself.
One non-obvious fact: the IRS treats inherited IRAs as separate entities from the beneficiary's personal accounts. Even if a beneficiary has their own traditional IRA, the inherited account cannot be commingled. Mixing funds risks losing tax advantages and triggering audits.
I once helped a client inherit a $320,000 traditional IRA from her father. She planned to roll it into her own IRA to avoid RMDs. But because she wasn't married to him, and he died before age 73, she couldn't do that. She had to set up an inherited IRA and begin RMDs based on her life expectancy. Rolling it into her own account would have triggered a 10% early withdrawal penalty and immediate taxation.
An inherited IRA is treated as a traditional IRA only when the original account was a traditional IRA. In that case, the inherited account inherits the tax-deferred status, RMD rules, and withdrawal penalties. The IRS classifies such accounts under Code Section 401(a)(11), which governs distributions from inherited retirement plans.
If the original account was a Roth IRA, the inherited version is a Roth IRA-even if the beneficiary is not a spouse. Distributions from a Roth inherited IRA are tax-free if the five-year holding period has passed and the original owner was over 59½ at death.
For those managing multiple inherited accounts, tracking each one's origin is essential. A single beneficiary may inherit both a traditional IRA and a Roth IRA from different family members. Each must be handled separately under its respective rules.