Inheriting an IRA can feel like a blessing and a burden at the same time. The money is there, but the rules are strict, the deadlines arrive quietly, and one wrong move can trigger taxes or penalties you could have avoided.
This guide walks through the key inherited IRA rules as they stand now, including the 2024 final IRS regulations that took effect in 2025, what typically gets taxed federally, how Illinois usually treats these distributions, and a step-by-step plan if you live in Chicago or anywhere in Illinois.
Note: This article is general information only, not tax or legal advice. Inherited IRA rules are detailed and fact-specific, so confirm your situation with a qualified tax professional through our individual tax preparation services before acting.
Quick Answer
Most non-spouse beneficiaries who inherit an IRA from someone who died in 2020 or later must empty the account by the end of the 10th year after the year of death. As of the 2025 distribution year, if the original owner had already started required minimum distributions (RMDs) before death, you must also take an RMD every year in years 1 through 9, not just empty the account by year 10.
The right strategy is about managing your federal tax brackets, never missing an RMD, and coordinating the inherited IRA with the rest of your income.
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Inherited IRAs come with strict timelines and tax traps that get expensive when you guess. We review the account type, your beneficiary classification, and a withdrawal plan that fits your income and your deadlines.
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What Is an Inherited IRA, and Why the Rules Matter
An inherited IRA is an IRA you receive as a beneficiary after the original owner dies. Once that happens, the IRS applies beneficiary distribution rules. The SECURE Act of 2019 ended the old “stretch IRA” for most beneficiaries, replacing lifetime payouts with the 10-year rule.
That is why doing nothing is risky. Even if you are not ready to take the money, the clock starts the year the owner dies.
The 10-Year Rule Explained
If you are a designated beneficiary and you do not fall into an exception category, you generally must distribute the entire inherited IRA by the end of the 10th year after the year the owner died.
Example:
Owner dies in 2026.
The 10-year period ends December 31, 2036.
The account must be fully distributed by that date.
Do You Also Need Annual RMDs in Years 1 Through 9?
This is the part that changed, and the part people get wrong most often. It depends on whether the owner died before or after their required beginning date, which is generally April 1 of the year after they turned 73.
If the owner died before their required beginning date, you do not need annual RMDs. You can withdraw whenever you like, as long as the account is empty by the end of year 10.
If the owner died on or after their required beginning date, you must take an annual RMD in years 1 through 9, based on your own life expectancy, and still empty the account by year 10.
Under the IRS final regulations published in July 2024, these annual RMDs became mandatory starting with the 2025 distribution year. The penalty relief that applied from 2021 through 2024 has ended. Because this hinges on the decedent’s age and whether they had started RMDs, confirm both before you build a withdrawal plan.
A Note for Anyone Who Inherited Between 2020 and 2024
If you inherited during the penalty-waiver years and did not take RMDs in 2021 through 2024, you are not required to make up those missed years. But your 10-year deadline is not extended. The clock still runs from the year of death.
For example, if you inherited in 2022 from someone who had already started RMDs, you take annual RMDs from 2025 onward and must empty the account by the end of 2032.
Who Does Not Follow the Standard 10-Year Rule?
The IRS recognizes “eligible designated beneficiaries” who may use life-expectancy payouts instead. Common categories:
Surviving spouse
Minor child of the account owner, until they reach age 21, after which a 10-year clock begins
Disabled or chronically ill individuals, as defined by IRS rules
Someone not more than 10 years younger than the decedent
If you think you qualify, confirm it. The payout method can change your taxes for a decade.
Spouse vs Non-Spouse: Your Options Differ
If you are the surviving spouse, you usually have the most flexibility. Depending on your situation you may be able to:
Treat the IRA as your own through a spousal rollover
Keep it as an inherited IRA, which can help if you are under 59½ and may need access without the early-withdrawal penalty
Delay RMDs based on your age if the owner died before reaching their required beginning date
As a spouse, the 10-year rule generally does not force you out. You can typically stretch distributions over your lifetime.
If you are a non-spouse beneficiary, such as an adult child, sibling, or friend, you generally cannot roll the account into your own IRA. You must keep it titled as an inherited IRA and follow the beneficiary rules, most commonly the 10-year rule for deaths in 2020 or later.
The Year-of-Death RMD Trap
If the original owner was required to take an RMD in the year they died and had not yet taken it, that final RMD still has to come out, and it usually falls to the beneficiary to complete. Families focused on probate and account transfers miss this constantly, because the deadline passes quietly. Confirm it directly with the custodian rather than assuming it was handled.
What Gets Taxed: Federal vs Illinois
Federal taxes are the main event.
Distributions from an inherited Traditional IRA are generally taxed as ordinary income, not capital gains. Because they stack on top of your salary or business income, large withdrawals can push you into higher brackets, which is why coordinated tax planning and advisory to spread withdrawals across years often lowers your total tax when the rules allow.
Distributions from an inherited Roth IRA are generally tax-free at the federal level if the account satisfies the 5-year rule. An inherited Roth is still subject to the 10-year emptying requirement, but it does not carry annual RMDs in years 1 through 9, because Roth owners are always treated as having died before their required beginning date. With a Roth, waiting often makes sense, since the money keeps growing tax-free until you withdraw it.
Illinois taxes are usually friendlier. Illinois generally does not tax qualifying retirement income that is included in your federal adjusted gross income, including many IRA distributions, because Illinois allows a subtraction on the IL-1040 for the federally taxed portion of that income. This means many Chicago beneficiaries focus their planning on federal taxes and IRS deadlines. Still, confirm the specific distribution type and how it is reported, since “usually not taxed” is not the same as “never taxed.”
Penalties You Want to Avoid
Missing an RMD triggers an excise tax of 25% of the amount you should have withdrawn. That can be reduced to 10% if you correct the shortfall within the IRS correction window, generally two years, by taking the missed amount and filing Form 5329. The penalty applies separately for each year you miss, and it does not reduce the amount that still has to come out by year 10.
If you have already missed an RMD or received an IRS notice, our IRS representation services can help you correct it and request penalty relief.
Also watch for:
Taking the wrong type of distribution when there are multiple beneficiaries
Failing to retitle the account properly as an inherited IRA
Waiting too long to begin distributions when annual payouts are required in your scenario
The safest approach is simple: do not miss the deadline, and if you do, fix it quickly and document the correction.
Step-by-Step Checklist for Chicago Beneficiaries
Confirm the year of death and account type. Traditional or Roth, and the exact year the owner died.
Confirm whether you are a spouse or non-spouse beneficiary. This changes everything.
Determine if you are an eligible designated beneficiary. If so, your payout options may differ.
Find out whether the owner had started RMDs. Ask the custodian or check prior-year tax records. This decides whether annual RMDs apply.
Check for an unpaid year-of-death RMD. Do not assume the custodian handled it.
Map withdrawals against your next 2 to 10 years of income. Plan around federal brackets, bonus years, business income swings, and major life events.
Choose a compliant distribution strategy. Even withdrawals across years, larger withdrawals in low-income years, or holding funds for later while still meeting any required annual RMDs.
Set calendar reminders and keep proof. Statements, RMD notices, and distribution confirmations.
Coordinate with your CPA before year-end. Especially with multiple inherited accounts, multiple beneficiaries, a trust beneficiary, or other big tax events.
Frequently Asked Questions
When to Get Professional Help
Do not wing it if any of these apply:
- The decedent died after starting RMDs, so annual distribution timing matters
- You inherited both Traditional and Roth accounts
- There are multiple beneficiaries, or a trust is named as beneficiary
- You expect large withdrawals that could push you into higher federal brackets, an area where our high-net-worth tax services help most
- You have other major tax events this year, such as a business sale, relocation, home sale, or stock options
Heard & Associates LLC helps Chicago beneficiaries get the classification right, build a withdrawal plan around their brackets and deadlines, and avoid the penalties that catch people off guard.
Call (312) 810-3603 or book a consultation to review your inherited IRA before year-end.
