What Happens to Your IRA When You Die? What Heirs Need to Know in 2026.

I think I speak for most people when I say it's a goal to be able to leave something behind for your loved ones after you've passed away. Whether it's jewelry, a house, cash, or investments, leaving assets behind is a good way to put someone in a better financial position.

The different tax implications and treatment depend on the type of asset being inherited. A common one is a retirement account, like an IRA, because many people spend years contributing to it. Let's take a look at how they may be handled when you pass away or if you're on the receiving end of one.

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The type of IRA matters

To begin, it's important to understand the difference between traditional IRAs and Roth IRAs because it affects the tax treatment of withdrawals.

Traditional IRAs are similar to 401(k)s in that contributions are typically pre-tax and grow tax-deferred. However, that means you owe taxes on the withdrawals you make in retirement (and there are required minimum distributions (RMDs) beginning at age 73).

Money you contribute to a Roth IRA is after-tax, so it grows tax-free, and you're allowed tax-free withdrawals in retirement. They also don't have RMDs.

How relationships affect how an inherited IRA is treated

The IRS puts beneficiaries into three buckets: surviving spouse, designated beneficiary, and eligible designated beneficiary. Each comes with a different set of rules.

Surviving spouse

You have a couple of options as the surviving spouse. The first is a spousal rollover, in which you transfer the deceased spouse's IRA into your own IRA. The second option is an inherited IRA, where you keep the deceased spouse's IRA separate and transfer assets into the new plan.

Surviving spouses get the best treatment when it comes to the tax implications of receiving an IRA, mainly because they aren't subjected to the 10-year rule, which requires that you withdraw all the money from the IRA by the 10th year after someone passes away.

Designated beneficiary

Most non-spouse beneficiaries (children, grandchildren, etc.) will fall into this category. As a designated beneficiary, you can't roll the IRA into your own; it must be transferred to an inherited IRA, and no new contributions can be made to it.

Unlike surviving spouses, designated beneficiaries are subject to the 10-year rule. The first year is the year after someone passes away, so if someone were to pass away in 2027, their non-spouse beneficiary would have until Dec. 31, 2037, to withdraw all the money from it.

The 10-year rule is a way for the IRS to ensure it begins collecting its tax money in a timely manner.

Eligible designated beneficiary

Eligible designated beneficiaries (EDBs) are non-spouses who check one of the following boxes:

• Within 10 years of age of the deceased
• Chronically ill or disabled
• A minor child

EDBs aren't subject to the 10-year rule. Instead, they're generally allowed to take withdrawals stretched over their life expectancy. The exception is a minor child. Once they turn 21, the 10-year clock begins.

How required minimum distributions work with the 10-year rule

Some people are confused about whether they need to make withdrawals in each of the 10 years or wait until year 10 and then withdraw it all. Most people would prefer the latter, because it gives the assets more time to (ideally) grow. However, whether or not you can depends on whether the deceased person had begun RMDs.

If the person died before reaching their RMD age, you only need to ensure all the money is withdrawn in year 10. If the person had already begun RMDs, you'll need to take RMDs in years 1 through 9 and then make sure it's emptied by year 10.

Forgetting to take an RMD will result in a 25% penalty on the amount you didn't withdraw. If you take the withdrawal within two years, the penalty can be reduced to 10%. Ideally, though, you'll stay on top of the RMDs and not have to worry about the penalty.

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