Inherited IRAs: Why Spouse Status Changes Everything

Same asset, completely different rules. Whether you inherited an IRA from a spouse or parent determines whether you can stretch distributions over decades or must empty the account within 10 years. This distinction could mean the difference between financial flexibility and a devastating tax bill. Let’s walk through the differences and the options you have.

The Basics

When Congress passed the SECURE Act in 2019, it eliminated the “stretch” provision for most inherited IRAs. Non-spouse beneficiaries lost the ability to take distributions based on their life expectancy. Instead, they face the “10-year rule”—a requirement to empty the inherited account within a decade.

But surviving spouses? They retained powerful options that others simply don’t have.

This creates a dramatic planning divide. Two people inheriting identical $1 million IRAs will face completely different tax consequences based solely on their relationship to the deceased.

Spouse Beneficiaries: Three Powerful Options

When you inherit an IRA from your spouse, you’re not stuck with the restrictive 10-year rule. Instead, you have three strategic options:

Option 1: Treat It as Your Own

This is often the most powerful choice. You can roll the inherited IRA into your existing retirement account and follow your own required minimum distribution (RMD) schedule. If you’re younger than the deceased spouse, this can delay RMDs for years—even decades.

Option 2: Remain as Beneficiary

Instead of rolling the account into your own IRA, you can keep it as an inherited IRA. This allows penalty-free withdrawals at any age and can be advantageous if you need access before 59½ or if the deceased spouse was older and already taking RMDs. You’ll take RMDs based on either your life expectancy or the deceased spouse’s remaining schedule—whichever produces a smaller required withdrawal and better fits your tax strategy.

Option 3: Disclaim the Inheritance

For wealthy spouses who don’t need the money, disclaiming allows the inheritance to pass to contingent beneficiaries (often children or grandchildren). This strategy requires careful planning but can be powerful for multi-generational wealth transfer.

The Strategic Decision Framework

The right choice depends on several factors:

• Your age relative to the deceased spouse (If you’re significantly younger, treating as your own IRA extends the tax-deferral period)
• Your current and projected income needs (If you need immediate access, remaining as beneficiary allows penalty-free withdrawals)
• Your tax bracket now versus retirement
• Whether the IRA is traditional or Roth (Different strategies apply for each type)

The key insight: These decisions are irrevocable. Once you choose to treat an inherited IRA as your own, you can’t change your mind.

Non-Spouse Beneficiaries: The 10-Year Rule

If you inherit an IRA from anyone other than a spouse, you face the 10-year rule. This means the entire account must be emptied by December 31st of the 10th year following the original owner’s death.

Critical point: There’s no annual distribution requirement for most inherited Roth IRAs during the 10-year period. Traditional IRAs may require annual RMDs if the original owner had already started taking them.

Strategic Withdrawal Planning

Smart non-spouse beneficiaries don’t wait until year 10. Instead, they:

1. Map their 10-year tax landscape to identify low-income years
2. Coordinate with other financial events like stock sales/bonuses
3. Consider Roth conversion opportunities in lower-bracket years
4. Plan for the final year to avoid a massive tax hit

Limited Exceptions to the 10-Year Rule

Certain “eligible designated beneficiaries” can still use the life expectancy method:

• Disabled or chronically ill individuals
• Minor children (until they reach majority, then the 10-year rule applies)
• Beneficiaries less than 10 years younger than the original owner

Traditional vs. Roth

Traditional Inherited IRAs

Every distribution is taxable as ordinary income. The strategy focuses on tax bracket management—spreading distributions to minimize the overall tax burden.

For spouses, the ability to delay RMDs can be incredibly valuable. Consider the difference between taking $80,000 annually for 10 years versus delaying distributions for 15 years and then taking smaller amounts based on life expectancy.

Roth Inherited IRAs

Distributions are generally tax-free, but the 10-year rule still applies for non-spouse beneficiaries. The strategy shifts from tax minimization to growth maximization.

Spouse advantage: Surviving spouses can treat inherited Roth IRAs as their own, eliminating RMDs entirely during their lifetime. This makes Roth IRAs powerful wealth transfer tools.

Costly Mistakes to Avoid

Mistake #1: Missing the 10-Year Deadline

The penalty: 25% of the remaining balance (reduced to 10% if corrected promptly)

This is still one of the harshest IRS penalties. If you’re a non-spouse beneficiary and forget to empty the account by the 10-year deadline, a quarter of what’s left can go straight to the government.

Mistake #2: Spouse Beneficiaries Making Hasty Decisions

The consequence: Hundreds of thousands in lost opportunity.

Too often, surviving spouses rush to take distributions they aren’t required to, locking in unnecessary taxes and forfeiting years of potential tax-deferred growth. Once done, this choice can’t be reversed—and the long-term cost can be staggering.

Mistake #3: Ignoring Annual RMD Requirements

The penalty: 25% of the missed distribution

Some inherited IRAs—particularly when the original owner was already taking RMDs—still require annual withdrawals during the 10-year window. Miss one, and you’ll pay 25% of what you should have taken, plus you’ll still owe the regular income tax.

Mistake #4: Poor Tax Coordination

The consequence: Pushing yourself into higher tax brackets unnecessarily

Taking a large inherited IRA withdrawal in the same year as a big bonus, RSU vest, or property sale can push you into a much higher tax bracket. Smart timing and coordination can save thousands—and protect more of your wealth from unnecessary taxes.

The Bottom Line

Inherited IRAs come with complex rules that create dramatically different outcomes based on your relationship to the original owner.

Whether you’re working within the constraints of the 10-year rule or maximizing the advantages of spouse beneficiary status, the decisions you make in the months following inheritance will impact your taxes for years—possibly decades—to come.

The most expensive mistake is assuming all inherited IRAs work the same way. They don’t.

Inherited IRA planning intersects tax strategy, investment management, and estate planning. The decisions you make affect not just your immediate tax bill, but your long-term wealth accumulation and even what you’ll pass to the next generation.

Recently inherited an IRA or planning for future inheritance scenarios? Our team specializes in helping high-income individuals and families navigate these complex decisions. Book a free call to discuss strategies that work for your specific situation.