This article is accurate to the best of my knowledge, but you are responsible for verifying the information before using it.
Introduction
I inherited a small Traditional IRA from my mother. This article started from researching how all three children could pay the least possible taxes (legally) while taking distributions from the inherited IRA. I researched and identified some promising options, so I started reading more about inherited IRAs.
The IRS overview page on inherited IRAs is not incredibly useful. The rules for healthy adult children inheriting IRAs are simple, but the IRS overview page does not explain it very well. The rules for the other classes of inheritors were kind of confusing, and it turns out that the other classes of inheritors were equally poorly explained. At least the IRS is consistent?
I finally decided to write a short article that explained the best options for the three individual inheritor classes (i.e., not an estate or business) for various life situations. In large part, I am trying to identify the best options for my brother, sister, and Kate. (Based on family history, Kate will probably out live me.) After skimming 8 different resources, the short article was 25 pages long. Now, I am separating it into smaller articles. Someday, I will learn my lesson.
The primary focus of these articles is on inheritance, but there will be some general information on Traditional IRAs. If you want more information on retirement planning and using Traditional IRAs to accumulate retirement savings, you should read the Retirement Planning article.
Overview
This is my best understanding of the laws as of 2024 for relatively “normal” situations. This is not going to cover more advanced situations such as an inheritor passing away and someone else inheriting an inherited IRA. I am not a CPA; you are responsible for verifying that this is accurate. Use this information as a starting point, not as definitive tax advice. You are responsible for the accuracy of your taxes, not me.
There are three basic classes of taxation for investment accounts – Brokerage Accounts (normal taxes paid annually), Tax-deferred Accounts (taxed when taken out), and Tax-free Accounts (taxed before put in). They have different advantages and disadvantages that are not the topic of this discussion. This article is primarily about inheriting one variant of the tax-deferred accounts – a Traditional IRA.
This article was written in 2024 for the Traditional IRA accounts of account holders that passed away in 2024. This means that the SECURE Act and SECURE Act 2.0 both apply, so seek guidance elsewhere for account holders that passed away before 2024. The laws relating to Traditional IRAs change periodically, so in the future, you should verify the current Traditional IRA laws. If you are not sure, you should talk to a CPA or tax advisor.