Naming Beneficiaries for Inherited IRAs: What You Need to Know
The rules for how to handle an inherited IRA differ depending on the beneficiary, and you should also consider the tax implications of required minimum distributions (RMDs).


Naming a beneficiary over your IRA is a key step in the estate planning process. It’s a way to ensure the wealth you’ve accumulated throughout your working years goes to the beneficiary you designate. This can be your spouse, children, grandchildren, trusts or even charities and other organizations. Nonetheless, it’s a decision that should be made with care and understanding, because the rules are complex, and any mistakes in the process can be costly.
Before diving into designating beneficiaries, it’s important to understand what an inherited IRA is. An inherited IRA, or beneficiary IRA, is an account that is opened when a beneficiary inherits an IRA or employer-sponsored retirement plan after the original owner dies. A beneficiary can open one of these accounts using proceeds from any type of IRA including traditional, Roth, SEP and SIMPLE IRAs. However, in most cases, once the original owner of an IRA has died, the assets must be transferred to a new account in the beneficiary’s name.
When making your choice, it’s important to know that the rules on how to handle the IRA differ depending on the beneficiary. Typically, surviving spouses have the most options for handling the account; subsequently, non-spousal beneficiaries have their own restrictions. However, the IRS does have a common requirement that applies to all beneficiaries known as required minimum distributions (RMDs).
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Because the IRS doesn’t allow money to sit in an IRA account forever, it requires account holders to withdrawal a minimum amount from their retirement accounts each year. These withdrawals must be taken once the account owner reaches a certain age, which is currently 73. These withdrawals become part of your taxable income, and the purpose of them is to eventually deplete the account. It’s important to note that Roth account owners are exempt from this rule, but for non-Roth account holders, whether the original owner began taking RMDs at the time of their death will largely impact the beneficiary.
10 years to deplete the account
Under the SECURE Act, the entire balance of the beneficiary’s inherited IRA account must be distributed or withdrawn by the end of the 10th year following the original account owner’s death. This is known as the 10-year rule. Prior to this act, beneficiaries could stretch distributions out over decades. In some cases, those rules are still in place if the person who owned the account died before January 1, 2021.
These distributions become part of your taxable income except for portions that were already taxed, like your basis, or that you received tax-free, like qualified distributions from Roth accounts. So what does this mean for your heirs?
If you die before you’re required to start collecting distributions, your spousal or non-spousal beneficiary will be impacted. If your spouse is the sole beneficiary over the account, they have a few different options. They can leave it as an inherited account, allowing them to choose how they’d like to take the distributions. One option is to delay taking them until the original owner would have reached the required age to start taking them.
The surviving spouse could also take distributions based on their own life expectancy or follow the 10-year rule.
The surviving spouse could also roll the inherited account into their own IRA, claiming new ownership over those assets.
If you die after you’ve started taking RMDs, your spouse can remain a beneficiary on the account, taking distributions based on their life expectancy, or roll over the funds into their own IRA. For non-spousal beneficiaries, they can take the distributions over the longer of their own life expectancy and the original owner’s remaining life expectancy, or follow the 10-year rule if the account owner died before they started taking distributions.
Make sure your estate plan is clear
Regardless of what person or entity you choose to name as beneficiary over your IRA account, you must ensure the language in your estate plan reflects your exact wishes. This becomes especially important when family dynamics get more complex — for instance, because of divorce and remarriage. In these situations, it’s best to name a trust as the beneficiary. This ensures all of your heirs inherit the account, preventing one person from cutting another person out, which can bring serious financial consequences and cause emotional turmoil for your loved ones.
Naming beneficiaries is a necessity in estate planning, especially when it comes to your retirement accounts. The IRS has specific rules and requirements depending on who you name, and if your beneficiary is not named correctly, it can become costly and chaotic.
Before naming a beneficiary to these accounts, consider consulting with a financial adviser or estate planning attorney. They can evaluate your individual circumstances, helping you make the best decision for you and your family.
Pat Simasko is an investment advisory representative of and provides advisory services through CoreCap Advisors, LLC. Simasko Law is a separate entity and not affiliated with CoreCap Advisors. The information provided here is not tax, investment or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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Patrick M. Simasko is an elder law attorney and financial adviser at Simasko Law and Simasko Financial, specializing in elder law and wealth preservation. He’s also an Elder Law Professor at Michigan State University School of Law. His self-effacing character, style and ability have garnered him prominence and recognition throughout the metro Detroit area as well as the entire state.
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