Inherited IRA - tax free growth question for beneficiary?

My wife just inherited a traditional IRA from her aunt who passed away a few months ago. It's not a huge amount, but we're trying to figure out the tax implications. The financial institution automatically set it up as an inherited traditional IRA since my wife is considered a non-eligible designated beneficiary according to their paperwork. We're thinking about moving it over to Schwab where we keep most of our other investments, but we're getting some conflicting information that's confusing us. I did some research online but wanted to double-check with people who might know better. Here's what I'm unsure about: Is the original inherited amount tax-free? Or is it taxable because it's a pre-tax traditional IRA? Also, a tax advisor at Schwab told us that any investment gains in the inherited account are tax-free. From what I understand with the SECURE Act, we'd need to liquidate within 10 years without yearly RMDs until the final year. But tax-free growth on a pre-tax account sounds too good to be true - the IRS doesn't typically let that slide. Is Schwab giving us incorrect information?

0 coins

18 comments

Reina Salazar

•8M

The Schwab advisor is incorrect. For an inherited traditional IRA, both the original amount AND any subsequent growth are subject to income tax when distributed. This is because traditional IRAs are funded with pre-tax dollars. Here's what you need to know about your wife's inherited IRA: 1) The original amount is NOT tax-free since it's a traditional (pre-tax) IRA. 2) Any growth or earnings in the account will also be taxed when withdrawn. 3) Under the SECURE Act, as a non-spouse beneficiary, your wife must withdraw the entire account balance within 10 years of the original owner's death. 4) There are no annual RMDs during those 10 years, but the entire balance must be emptied by the end of year 10. You can absolutely transfer it to Schwab to keep your investments together, but I'd suggest speaking with a different tax advisor there who understands inherited IRAs better.

0 coins

Reina Salazar

•8M

For an inherited Roth IRA, the rules would be quite different. Distributions from an inherited Roth IRA are generally tax-free, including both the original contributions and any earnings, as long as the original Roth IRA met the 5-year holding period requirement. The 10-year rule for emptying the account would still apply for non-spouse beneficiaries under the SECURE Act, but you wouldn't pay taxes on those distributions since Roth IRAs are funded with after-tax dollars and grow tax-free.

0 coins

Demi Lagos

•8M

It took maybe 15 minutes to get the full analysis back! I uploaded the inheritance documents and IRS notices, and their system broke everything down clearly. They definitely explained the distribution requirements. For non-spouse beneficiaries under the SECURE Act, you generally don't need annual withdrawals - you just need to empty the account within 10 years of the original owner's death. There's flexibility on when you take distributions during that period, which is helpful for tax planning.

0 coins

Mason Lopez

•8M

I tried taxr.ai after seeing the recommendation here and wow, it actually cleared up all my confusion! I was overthinking my grandma's inherited IRA situation. The document analysis confirmed that as a non-spouse beneficiary, I don't need annual withdrawals but must empty the account within 10 years. It also explained that distributions from her traditional IRA will be taxed as ordinary income, which makes sense since she never paid taxes on that money. The system even suggested some distribution strategies to minimize my tax burden. Definitely worth checking out if you're confused about inherited IRA rules!

0 coins

Jake Sinclair

•8M

When my father died last year, I had to deal with his IRA and couldn't get clear answers from anyone. Spent literally WEEKS trying to reach the IRS for clarification - always on hold forever and nobody ever picked up. Finally found https://claimyr.com which got me connected to an actual IRS agent in under 10 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed everything about inherited IRA taxation that others have mentioned here. Traditional IRAs are taxable when distributed (including growth), must be emptied within 10 years for non-spouse beneficiaries, and there's no requirement for annual distributions within that period. I never would have figured this out without getting through to an actual person at the IRS.

0 coins

Jake Sinclair

•8M

The service basically uses technology to navigate the IRS phone tree and wait on hold for you. When they actually reach a human agent, they call you to join the conversation. It's that simple - they just do the waiting so you don't have to. I was skeptical too initially, but desperation made me try it. The difference is they have systems that continuously redial and navigate the prompts until they get through, which is something individual callers can't realistically do. I waited less than 10 minutes after signing up, instead of hours on hold getting nowhere.

0 coins

Honorah King

•8M

Well I'm eating my words. I tried Claimyr after posting my skeptical comment and I actually got through to an IRS agent in about 15 minutes! Explained my inherited IRA situation (similar to yours but from my mother) and got clear confirmation about taxation. Everything withdrawn from a traditional IRA is taxable income - both principal and earnings - because no taxes were paid when the money went in. The agent was super helpful and even sent me some documentation about the 10-year rule. Honestly shocked this worked after months of frustration trying to get answers.

0 coins

Oliver Brown

•8M

One thing nobody's mentioned yet - consider your withdrawal strategy over the 10 years carefully. Since distributions are taxed as ordinary income, taking out the entire balance in one year could push you into a much higher tax bracket. I inherited an IRA from my uncle a couple years ago, and my accountant suggested spreading withdrawals over several years to minimize the tax impact. You might want to take larger distributions in years when your other income is lower.

0 coins

Oliver Brown

•8M

It really depends on your current income situation and future expectations. If your income is particularly high right now, it might make sense to delay distributions until a later year when you might be in a lower tax bracket. However, if you expect your income to increase in coming years or if the account might grow substantially, earlier withdrawals could make sense. There's also the benefit of tax-loss harvesting opportunities in down markets. I'd recommend running some projections with different withdrawal scenarios to see what makes the most sense for your specific situation.

0 coins