Inherited IRA vs. Beneficiary IRA: Are They Really Different or Just the Same Thing With Different Names?

So you’ve recently found yourself inheriting retirement assets from a loved one and now you’re confused about all these terms being thrown around – inherited IRA beneficiary IRA… what’s the deal? Are they different things or just fancy terms for the same account? Let me clear this up for you in simple terms.

The Short Answer

Spoiler alert An inherited IRA and a beneficiary IRA are actually the same thing They’re just two different names for the exact same type of account

An inherited IRA (or beneficiary IRA) is an account that’s opened when someone inherits an IRA or employer-sponsored retirement plan after the original owner’s death, The beneficiary must then take over this account according to specific IRS rules,

What Exactly Is an Inherited/Beneficiary IRA?

When someone passes away and leaves you their retirement account, you can’t just add those funds to your own existing IRA (unless you’re the spouse – more on that special case later). Instead, you need to set up a special account called an inherited IRA or beneficiary IRA.

This account holds the assets you’ve inherited from a deceased person’s retirement account. It can be funded from:

• Traditional IRAs
• Roth IRAs
• SIMPLE IRAs
• SEP-IRAs
• 401(k) plans
• Other employer-sponsored retirement plans

The important thing to understand is that these accounts have specific rules about:

• How the money can be withdrawn
• When withdrawals must happen
• What taxes might apply
• Who can contribute to them (spoiler: you can’t add more money to them)

Key Features of an Inherited/Beneficiary IRA

Let me break down some important characteristics:

1. No new contributions allowed – You can’t add your own money to an inherited IRA
2. Tax-deferred growth – The money continues to grow tax-advantaged, similar to regular IRAs
3. No early withdrawal penalties – You can take money out before age 59½ without the usual 10% penalty
4. Required distributions – You’ll generally need to withdraw the money according to specific timeframes
5. Special title format – The account must be properly titled to show it’s an inherited account

Special Rules Based on Who You Are

The rules for inherited IRAs vary dramatically depending on your relationship to the deceased person.

For Spousal Beneficiaries (You Inherited from Your Spouse)

If you inherited an IRA from your spouse, you have three options:

1. Treat it as your own – Transfer the assets into your existing or new IRA
2. Rollover – Roll the assets into your own IRA or qualified employer plan
3. Remain a beneficiary – Keep it as an inherited IRA

Spouses have the most flexibility. If you choose option 1 or 2, you basically get to treat the money as if it had been yours all along. This means:

• You can make new contributions
• You follow the normal RMD rules based on your age
• Early withdrawal penalties apply if you’re under 59½

For Non-Spouse Beneficiaries (You Inherited from Someone Other than Your Spouse)

If you inherited from a parent, grandparent, sibling, friend, etc., your options are more limited:

1. You cannot roll the money into your own IRA
2. You cannot make additional contributions
3. You must follow stricter withdrawal rules

The 10-Year Rule and Required Distributions

When you have to take money out of an inherited IRA is one of the most important things you should know. When the SECURE Act was passed in 2019, the rules changed a lot.

For Deaths After January 1, 2020:

If the original owner died in 2020 or later, most non-spouse beneficiaries must follow the “10-year rule,” meaning:

• You must withdraw the entire balance of the inherited IRA by December 31 of the 10th year following the year of the original owner’s death
• There are no annual RMDs within that 10-year period (you can take as much or as little as you want each year, as long as the account is emptied by the end of year 10)

Exceptions to the 10-Year Rule:

Some “eligible designated beneficiaries” are exempt from the 10-year rule:

• Surviving spouses
• Disabled or chronically ill individuals
• Individuals not more than 10 years younger than the deceased
• Minor children of the deceased (but only until they reach the age of majority, then the 10-year rule kicks in)

These individuals can take distributions based on their life expectancy instead.

For Deaths Before January 1, 2020:

If the original owner died before 2020, different rules apply. Non-spouse beneficiaries could generally:

• Take distributions over their life expectancy (the “stretch” method)
• Empty the account within 5 years if the original owner died before their required beginning date

Tax Implications of Inherited IRAs

When it comes to taxes, inherited IRAs follow these general rules:

For Traditional Inherited IRAs:

• Distributions are typically taxable as ordinary income
• No 10% early withdrawal penalty applies, regardless of your age
• If the original owner made non-deductible contributions, a portion of each distribution may be tax-free

For Roth Inherited IRAs:

• Distributions of contributions are always tax-free
• Earnings can be withdrawn tax-free if the original Roth IRA was established at least 5 years before the original owner’s death
• If the 5-year rule hasn’t been met, earnings (but not contributions) will be taxable

Multiple Beneficiaries: Splitting an Inherited IRA

If an IRA has multiple beneficiaries (like several siblings inheriting from a parent), you have options:

1. Keep the inherited IRA as a single account with multiple beneficiaries
2. Split the IRA into separate inherited IRAs for each beneficiary

Option #2 is usually smarter because:

• Each beneficiary can follow their own investment strategy
• Each beneficiary can use their own life expectancy for RMD calculations (if applicable)
• One beneficiary’s decisions won’t affect the others

If you want to split an inherited IRA, you must do so by December 31 of the year following the year of the original owner’s death.

How to Set Up an Inherited/Beneficiary IRA

Setting up an inherited IRA isn’t complicated, but it must be done correctly:

1. Do NOT cash out the check from the original IRA if you want to maintain tax advantages
2. Open a new inherited IRA account with a bank or brokerage
3. Ensure the account is properly titled, usually in a format like: “[Original Owner’s Name], deceased [date of death], IRA FBO [Your Name], Beneficiary”
4. Complete a trustee-to-trustee transfer from the original IRA to your new inherited IRA
5. Begin taking distributions according to the rules that apply to you

Common Mistakes to Avoid With Inherited IRAs

People make these mistakes all the time with inherited IRAs:

❌ Depositing inherited IRA funds into your own IRA (if you’re not the spouse)
❌ Missing RMD deadlines and facing penalties
❌ Taking a lump sum distribution when stretching distributions would be more tax-efficient
❌ Not splitting inherited IRAs when there are multiple beneficiaries with different needs
❌ Incorrectly titling the inherited IRA account

To Sum It All Up

To recap what we’ve learned:

1. An inherited IRA and beneficiary IRA are two names for the same thing
2. The rules differ drastically depending on whether you’re a spouse or non-spouse
3. Most non-spouse beneficiaries now must withdraw all funds within 10 years
4. Taxes will vary based on the type of IRA you’ve inherited
5. You can’t contribute new money to an inherited IRA

Frequently Asked Questions

I got an inherited traditional IRA. Can I change it to a Roth IRA? No, you can’t change it to a Roth IRA unless you’re married and treat the inherited IRA as your own.

How long do I have to transfer an inherited IRA?
You should transfer the assets to an inherited IRA as soon as possible. If you take a distribution first, you generally cannot roll it back into an inherited IRA (there’s no 60-day rollover rule for inherited IRAs).

Is there a way to not pay taxes on an inherited IRA? You can’t completely avoid taxes on a traditional inherited IRA, but you can lessen the effect by spreading out distributions over the longest time allowed, which could be life expectancy or 10 years. If the 5-year rule is met, Roth IRA distributions may already be tax-free.

What happens if I miss a required distribution?
If you miss a required distribution, you may face a penalty of 25% of the amount that should have been withdrawn (though this can be reduced to 10% if corrected promptly).

Remember, inheriting an IRA can be complicated, and the rules have changed significantly in recent years. What worked for someone who inherited an IRA in 2019 may not work for someone inheriting in 2025. If you’ve inherited substantial retirement assets, it’s probably worth consulting with a financial advisor or tax professional to make sure you’re handling everything correctly.