Ways Not To Squander The Money

I assume that if you were reading this non-spouse IRA article, you may be suffering through the loss of a loved one. My condolences. It’s been my experience that it’s not just the money; it’s a tie to someone that cared enough about you to make you a beneficiary. Ties to money can be good and bad. The good part is that you now have money that you otherwise wouldn’t have. However, you may be challenged with spending that money.

Inheriting an IRA as a non-spouse beneficiary can be a great financial opportunity, but it comes with a unique set of rules and challenges. From understanding the impact of the Secure Acts to planning for required distributions, this guide will help you navigate the complexities of non-spouse inherited IRAs. If you have also inherited a 401(k), you should also see my Avoid Making Costly Moves With A Non-Spouse Inherited 401(k).

What Is a Non-Spouse Inherited IRA?

When someone other than a spouse inherits an IRA, the rules for managing the account differ significantly than if you were married to the deceased. This is especially true if the account is a traditional (pre-tax) IRA as opposed to a Roth (after-tax) IRA. You must carefully navigate these rules to minimize taxes and make the most of the inherited funds.

The Secure Act of 2020 and Secure Act 2.0 introduced new guidelines for non-spouse beneficiaries, including the elimination of the “stretch IRA” for most heirs, replacing it with a 10-year distribution rule, for traditional IRAs.

Secure Act Changes and Their Impact

The Secure Act of 2020 made significant changes to inherited traditional IRA rules, particularly for non-spouse beneficiaries.

Before the Act, non-spouse beneficiaries could stretch distributions over their lifetime, allowing the funds to grow tax-deferred for decades (thus the term “stretch IRA”). Now, most beneficiaries must follow the 10-year rule, accelerating distributions and potentially increasing their tax liability.

Secure Act 2.0 clarified some of these provisions, including required minimum distribution (RMD) requirements during the 10-year period. If the account owner passed away after their RMD start date, annual RMDs must be taken during the first nine years, with the balance withdrawn by the end of the 10th year.

Key Rules for Non-Spouse Inherited Traditional IRAs

Non-spouse beneficiaries must follow specific guidelines for inherited traditional IRAs, including:

The 10-Year Rule

• Most non-spouse beneficiaries must empty inherited traditional IRA account(s) within 10 years of the original owner’s death. Distributions can be made at any time within this period, but all funds must be withdrawn by the end of the 10th year, if annual RMDs are not required.

Annual RMDs (If Required)

1. If the original owner had started taking RMDs before their death, non-spouse beneficiaries may need to continue annual RMDs during the 10-year period. Let’s say you inherit a $500,000 traditional IRA from your parent, who passed away in 2024 at age 75. Because the original owner had started RMDs, you must:
2. Continue taking annual RMDs based on the original owner’s schedule for the first nine years.
3. Withdraw the remaining balance by December 31, 2033.

By planning distributions strategically, you can avoid pushing yourself into a higher tax bracket while allowing the funds to grow tax-deferred.

No Rollovers

• non-spouse beneficiaries cannot roll inherited IRA funds into their own IRA. Instead, they must keep the account as an inherited IRA titled in the name of the deceased.

Tax Implications

• Traditional IRA distributions are taxed as ordinary income.

Special Rules for Eligible Designated Beneficiaries

The Secure Act introduced a subset of beneficiaries called Eligible Designated Beneficiaries (EDBs) who are exempt from the 10-year rule. These include:

• Minor children of the account owner (until they reach 21)
• Individuals who are disabled or chronically ill
• Beneficiaries less than 10 years younger than the account owner

EDBs can take distributions over their life expectancy, similar to pre-Secure Act rules. However, once a minor child reaches adulthood, they must follow the 10-year rule.

Strategies for Managing a Non-Spouse Inherited IRA

To make the most of an inherited IRA, non-spouse beneficiaries should consider these strategies:

Plan for Taxes

• Distributions from traditional IRAs are taxable as ordinary income. If you inherit a traditional IRA, the amounts that are withdrawn each year are added to your gross income. For example, if you make $100,000 and receive a $200,000 IRA and cash it out, your gross income is now $300,000. If you’re single your marginal tax rate jumps from 22% to 35%. To avoid a hefty tax bill, consider spreading withdrawals over multiple years to stay in more favorable tax brackets.

Plan for a potential Medicare Income-Related Monthly Adjustment

• If you are on Medicare, distributions may also affect your Medicare premiums. IRMAA stands for Income-Related Monthly Adjustment Amount. It’s a surcharge that some Medicare beneficiaries pay in addition to their standard Medicare premium. Using the same income scenario above, your Part B premiums will increase by an additional $384.30 per month and your Part D premiums, if you have a separate prescription drug plan, to $74.20.

Take Advantage of Tax-Free Growth

• You don’t need to take 10 equal distributions. If you don’t need immediate access to the funds, allow the account to grow tax-deferred for as long as possible within the 10-year period, if you are not required to continue the decedent’s RMDs.

Consider Your Retirement

• Whereas monies left to a spouse are set up to aid their retirement, the rules for non-spouses are not. That said, you can use the funds withdrawn from an inherited IRA to help you invest in an IRA or Roth IRA, or possibly help you maximize savings in your employer’s retirement plan, 401(k) or 403(b). IRAs have rules which may limit your ability to use them.

Traditional IRA (tax deductible) contribution rules

Earned income requirement

• You must have earned income (e.g., wages, salary, tips, bonuses, self-employment income, or taxable alimony).
• Earned income excludes investment income, Social Security, rental income, or inheritance.

Contribution limit

• For 2025, the maximum contribution is $7,000 if you’re under age 50.
• If you’re 50 or older, you can contribute an additional $1,000 as a catch-up contribution, for a total of $8,000.

Tax deductibility:

Your ability to deduct contributions depends on:

• Participation in a workplace retirement plan (e.g., 401(k)).
• Modified Adjusted Gross Income (MAGI).

For example, if you’re covered by a workplace retirement plan in 2025, the deduction phases out between:

• $73,000–$83,000 for single filers.
• $116,000–$136,000 for married couples filing jointly.

Roth IRA contribution rules

Earned income requirement

Like the Traditional IRA, you must have earned income to contribute.

Income limits

Your eligibility to contribute to a Roth IRA is subject to Modified Adjusted Gross Income (MAGI) limits:

In 2024, you can contribute the full amount if your MAGI is:

• Less than $146,000 (single filers).
• Less than $230,000 (married filing jointly).

Contributions phase out and are eliminated for MAGI:

• $146,000–$161,000 (single filers).
• $230,000–$250,000 (married filing jointly).

Contribution limit

Same as Traditional IRA: $7,000 or $8,000, if 50+ years of age.

Spousal IRA rule

• If you’re married and your spouse has little or no earned income, they can contribute to an IRA based on your joint earned income using the spousal IRA rule.
• You must file taxes as married filing jointly to use this rule.

401(k) Contribution rules

The Internal Revenue Service (IRS) has announced the following 401(k) contribution limits for 2025:

Employee contribution limit

The maximum amount employees can contribute to their 401(k) plans is $23,500, an increase from $23,000 in 2025.

Catch-Up contributions for ages 50 and over

Employees aged 50 and older can make additional catch-up contributions of up to $7,500, maintaining the same limit as in 2024. This allows for a total contribution of $31,000 for these individuals.

Enhanced catch-up contributions for ages 60 to 63

A new provision permits employees aged 60 to 63 to make catch-up contributions up to $11,250, higher than the standard catch-up limit. This enables a total contribution of $34,750 for individuals in this age group.

Common Mistakes to Avoid

Ignoring RMDs

• If the original account owner had already begun taking RMDs, you must continue them during the 10-year period. Failure to do so can result in a penalty of 25% of the missed distribution (reduced to 10% if corrected promptly under Secure Act 2.0).

Waiting until year 10

• Taking the entire balance in the final year could result in a massive tax bill. Spread distributions over the 10-year period to avoid this issue. Consider Social Security, pensions, annuity payments and other future taxable income in determining the optimal timing for withdrawals.

Misunderstanding beneficiary designations

• Ensure the account’s beneficiary designations are up-to-date. If no beneficiary is named, the account may default to the estate, triggering even stricter distribution rules.

Concluding thoughts

The rules for non-spouse inherited IRAs are complex, especially with recent changes under the Secure Acts. By understanding the 10-year rule, tax implications, and your distribution options, you can make informed decisions that align with your financial goals. Consulting designated professionals, such as a Certified Financial Planner, Certified Public Account or Enrolled Agent, to plan distributions strategically can help you keep more of what was intended for your benefit.

Helpful Resources:

1. IRS Guidance on Required Minimum Distributions
2. Secure Act 2.0 Overview
3. Inherited IRAs: Rules for Beneficiaries
4. IRA Beneficiary Planning