Inherited a Traditional IRA? Key Steps to Manage Distributions and Avoid Mistakes

Over the next 25 years, an unprecedented wave of wealth—trillions of dollars—is expected to move from one generation to the next. Often referred to as “The Great Wealth Transfer,” this shift is already underway, with about $2.5 trillion passed down each year. By 2030, that number is projected to reach $3 trillion annually—and by 2046, $5 trillion a year. Generation X alone is positioned to inherit more than $14 trillion over the next decade, with Millennials and Gen Z close behind.

Whether you’ve started receiving your portion of this or expect to be a beneficiary in the coming years, it’s important to know that receiving a legacy isn’t as simple as an executor handing over a pile of cash. It can be complicated—and if you’re not careful, costly.

Take a Traditional IRA, for example. If you’ve recently inherited one, you already know it’s not a typical windfall. It comes with distribution rules that are often misunderstood.

Why does this matter? Because misunderstanding the rules around inherited IRAs can result in unnecessary penalties or taxes paid.

The good news? With the right guidance and practical tools, like our “How Must I Take Distributions From the Traditional IRA I Inherited?“ cheat sheet, you can navigate this process with clarity and confidence.

In this article, we’ll walk through the basics, explore key considerations, unpack common scenarios, and help you take your next steps with ease.

The Basics of Inheriting a Traditional IRA

Inheriting a Traditional IRA introduces a complex set of distribution rules that depend on your relationship to the original account owner. Every situation is unique, but one of the first and most important steps is determining whether you’re classified as an Eligible Designated Beneficiary (EDB) or a Non-Eligible Designated Beneficiary (NEDB).

Since the passage of the SECURE Act in 2019, most non-spouse beneficiaries must follow the 10-Year Rule, which requires the entire account to be withdrawn within 10 years of the original owner’s death. However, certain beneficiaries, such as spouses, minor children, disabled individuals, and those less than 10 years younger than the deceased, may qualify for more flexible options, like stretching distributions over their own life expectancy.

Even with these rules in place, how heirs handle inherited IRAs can vary widely. Some beneficiaries use the funds to meet immediate needs or pursue lifestyle goals, while others integrate the inheritance into a long-term financial strategy. The key is understanding your options from the outset—whether you’re transferring the account, selecting a distribution method, or planning for taxes.

Key Factors to Consider

Navigating the rules around inherited IRAs can feel overwhelming, especially during an already difficult time. To make things easier, we’ve provided a simple flowchart that walks you through the essential factors to consider. You can access it here. Here are a few key highlights:

1. Determine Your Beneficiary Status

The first step is identifying whether you’re considered an Eligible Designated Beneficiary (EDB) or a Non-Eligible Designated Beneficiary (NEDB). This classification determines what distribution options are available to you.

For example, if you’re the spouse or minor child of the deceased account owner, you’re likely considered an EDB. Other examples include individuals who are disabled, chronically ill, or not more than 10 years younger than the account owner. On the other hand, if you’re an adult child, sibling, or another relative who doesn’t meet those criteria, you’re generally classified as a NEDB.

2. When Did the Owner Pass Away?

Next, determine the timing of the original owner’s death, specifically whether it occurred before or after their Required Beginning Date (RBD). The RBD is typically April 1 of the year following the year the owner turned 73. This date affects your distribution path.

If the owner passed away before their RBD, you may be able to follow the 10-Year Rule without taking annual Required Minimum Distributions (RMDs). If the owner passed away after their RBD, annual RMDs are generally required alongside depleting the account within 10 years.

3. Understanding the 10-Year Rule

Due to the SECURE Act, the 10-Year Rule now applies to most non-spouse beneficiaries. Under this rule, the account must be fully withdrawn by the end of the 10th year following the original owner’s death.

It’s important to think carefully about your withdrawal strategy. While the 10-Year Rule doesn’t require annual distributions, waiting until the final year can trigger a large lump-sum withdrawal—and a bigger tax bill. Spreading distributions over several years can help balance your income more evenly and potentially minimize your overall tax burden. Planning your timeline thoughtfully can make a meaningful difference.

4. Required Minimum Distributions (RMDs)

If you’re an Eligible Designated Beneficiary, you may have the option to take annual RMDs based on your life expectancy instead of following the 10-Year Rule. This approach spreads distributions over a longer period, often resulting in lower yearly tax obligations.

For example, if you’re a 50-year-old spouse who inherits a Traditional IRA, you could calculate your RMDs using the IRS Single Life Expectancy Table, allowing for smaller annual withdrawals and greater flexibility over time.

By walking through these steps, you can better understand your responsibilities and options. Be sure to download the Inherited IRA Flowchart to help you visualize your decision points and stay on track.

Common Scenarios for Inherited IRAs

Inherited IRA rules can seem complex at first, but seeing how they apply in real-life situations can help bring clarity. Here are a few common scenarios:

Surviving spouses generally have the most flexibility. You may choose to treat the IRA as your own, roll it into your existing IRA, or remain a beneficiary and delay taking distributions until the original owner would have turned 73. The best option often depends on factors like your age, income needs, and long-term retirement goals.
Adult children and other non-spouse beneficiaries will typically fall under the 10-Year Rule. That means the entire account must be distributed by the end of the 10th year following the owner’s death. While annual withdrawals aren’t required, waiting to take distributions could lead to a larger tax bill down the road.
If the account owner died prior to their Required Beginning Date (RBD), you may have additional flexibility, especially if you qualify as an Eligible Designated Beneficiary (EDB). In some cases, you might be able to stretch distributions over your own life expectancy instead of following the 10-Year Rule.

Each situation is different, and your options will depend on several factors, including your relationship to the deceased, your age, and the timing of their passing. Understanding these factors is essential for making informed, confident decisions.

Handle Your Inheritance with Clarity and Confidence

Managing an inherited IRA can feel overwhelming—but it doesn’t have to be. Our “How Must I Take Distributions From the Traditional IRA I Inherited?” cheat sheet is designed to walk you through each key decision, helping you understand your options and move forward with confidence.

Whether you’re determining your beneficiary status, figuring out if RMDs apply, or navigating the 10-Year Rule, this simple flowchart makes it easier to find clear, practical answers.

At Lake Road Advisors, we believe financial planning should be approachable, organized, and tailored to support your life—not add to its complexity.

While an inheritance often comes with emotional and financial complexities, it also represents an opportunity to strengthen your financial future and honor a loved one’s legacy with thoughtful planning.

If you’d like help navigating your options or building a tax-smart plan for your inherited IRA, we’re here to support you.

Download our cheat sheet and schedule a conversation with Lake Road Advisors today.

Sources:

Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY, Ithaca, NY and Portland, OR works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER® and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network. They can be reached by phone at the Corning, NY office at (607) 438-2914, Ithaca, NY office at (607) 463-8400, or Vancouver, WA office at (607) 292-2172 or at the firm’s website at https://lakeroadadvisors.com/

The information presented is based on sources believed to be reliable and accurate at the time of publication. This material is for educational purposes only and does not necessarily reflect the views of the author, presenter, or affiliated organizations. It should not be construed as investment, tax, legal, or other professional advice. Always consult a qualified professional regarding your specific situation before making any decisions.