Inheriting Money: Inherited IRA Rules, Step-Up Basis, and Estate Tax

Key Takeaways

• Non-spouse beneficiaries inheriting a traditional or Roth IRA must generally empty the account within 10 years under the SECURE Act (2020). Eligible Designated Beneficiaries (spouse, certain disabled individuals, minor children) may still use the old life expectancy stretch rules.
• Inherited taxable account assets receive a stepped-up cost basis to fair market value at the date of death. Only appreciation above the stepped-up value after inheritance is taxable to the beneficiary.
• Receiving an inheritance is not a taxable income event for federal purposes. Subsequent income from inherited assets is taxable. Inherited traditional IRA distributions are taxable as ordinary income.
• Federal estate tax applies only above the 2026 exemption of approximately $13.99 million per individual. Some states impose estate or inheritance taxes at lower thresholds.
• A 90-day waiting period before making major decisions with an inherited lump sum is a widely recommended best practice. Keep cash in a high-yield savings account or money market fund while planning.

Inherited IRAs: The 10-Year Rule

The SECURE Act (effective for decedents dying after December 31, 2019) ended the "stretch IRA" strategy for most non-spouse beneficiaries. Instead, most non-spouse beneficiaries must withdraw the entire inherited IRA balance by the end of the 10th calendar year following the year of the account owner's death. No minimum distributions are required in years 1 through 9 within this 10-year window, but the full balance must be out by the deadline.

IRS clarifications issued in 2022 and 2024 added a nuance: if the original account owner had already begun required minimum distributions (RMDs) before death, certain beneficiaries must take annual distributions in each of the 10 years (not just by the end of the 10th year). The final account balance must still be zero by the end of the 10th year.

Eligible Designated Beneficiaries (surviving spouses, minor children of the account owner until they reach majority age, disabled beneficiaries, chronically ill beneficiaries, and individuals not more than 10 years younger than the original owner) may still use prior stretch IRA rules based on their own life expectancy.

Inherited Roth IRA

Non-spouse beneficiaries inheriting a Roth IRA are also subject to the 10-year rule, but distributions from an inherited Roth IRA are generally income tax-free (provided the account has been open for at least 5 years from the original owner's first Roth contribution). The tax-free treatment and mandatory 10-year distribution period make timing and strategy different from a traditional inherited IRA.

Stepped-Up Cost Basis

Assets held in taxable (non-retirement) accounts that are inherited receive a stepped-up cost basis equal to fair market value on the date of the decedent's death. If the decedent owned stock purchased at $10/share that was worth $100/share at death, the beneficiary's basis is $100/share. Only appreciation above $100/share after the date of inheritance is taxable as capital gains when the beneficiary sells. The step-up permanently eliminates the capital gains that accrued during the decedent's lifetime.

First Steps After Receiving an Inheritance

Preserve options during grief. A 90-day minimum waiting period before making irreversible investment decisions is common guidance. Keep inherited cash in a high-yield savings account or money market fund during this period. Once ready to plan: identify all inherited account types, understand each account's tax treatment, consult an estate attorney if the estate is complex, and consider whether an inherited IRA rollover or disclaimer is appropriate.

Frequently Asked Questions

What is the 10-year rule for inherited IRAs?

Under the SECURE Act (effective 2020), most non-spouse beneficiaries who inherit a traditional IRA or Roth IRA must withdraw the entire balance within 10 years of the account owner's death. There is no requirement to take distributions in any specific year within the 10-year window, but the account must be fully distributed by the end of the 10th year after the year of death. Eligible Designated Beneficiaries (surviving spouses, minor children of the deceased until age of majority, disabled beneficiaries, chronically ill individuals, and individuals not more than 10 years younger than the deceased) may still use the old stretch IRA rules based on their own life expectancy.

What is stepped-up cost basis on inherited stocks?

Inherited assets held in a taxable (non-retirement) account generally receive a stepped-up cost basis equal to the fair market value of the asset on the date of the decedent's death (or an alternate valuation date). This means if the deceased held stock that had appreciated significantly, the inheritor's cost basis is reset to the date-of-death value, and any appreciation that occurred during the decedent's lifetime is not subject to capital gains tax when the inheritor eventually sells. Only subsequent appreciation above the stepped-up basis is taxable to the beneficiary.

Is an inheritance subject to federal income tax?

The receipt of an inheritance itself is generally not subject to federal income tax. However, income generated by the inherited assets after you receive them (dividends, interest, capital gains from sales) is taxable to you. Inherited traditional IRA distributions are taxable as ordinary income when withdrawn. Federal estate tax applies only to very large estates: the 2026 federal estate tax exemption is approximately $13.99 million per individual (subject to change by legislation). Some states impose their own estate or inheritance taxes at lower thresholds.