Inherited Accounts: Rules for Inherited IRAs, 401(k)s and Brokerage Accounts
Direct answer: Inheriting an investment account is not a windfall without conditions. Rules vary sharply by account type and your relationship to the deceased. For inherited IRAs and 401(k)s, the SECURE Act (2019) eliminated the "stretch IRA" for most beneficiaries, replacing it with a 10-year rule: all funds must be distributed within 10 years of the account owner's death. Eligible designated beneficiaries (surviving spouses, minor children, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger) retain more favorable treatment. Inherited taxable brokerage accounts receive a step-up in basis, potentially eliminating all capital gains tax on appreciation up to the date of death.
Inherited Traditional IRA: The 10-Year Rule
The SECURE Act of 2019 fundamentally changed how most beneficiaries must handle an inherited IRA. For account owners who died after December 31, 2019, the old "stretch IRA" strategy is no longer available to most beneficiaries.
The basic rule: Most beneficiaries must empty the inherited IRA by December 31 of the year that is 10 years after the year of the account owner's death. A beneficiary inheriting from an owner who died in 2023 must fully distribute the account by December 31, 2033.
Annual distributions during the 10-year period: Whether annual distributions are required during the 10-year period depends on whether the original owner had already begun taking required minimum distributions (RMDs) before their death. Per IRS guidance in Notices 2022-53 and 2023-54, if the original owner had started RMDs, beneficiaries subject to the 10-year rule must also take annual distributions in years 1 through 9. If the original owner had not yet reached RMD age, the non-EDB beneficiary has flexibility to take distributions on any schedule within the 10-year window.
Penalty for missing distributions: The excise tax on a missed distribution is 25% of the shortfall amount, reduced to 10% if corrected within the 2-year correction window established by SECURE 2.0.
Practical implication: The 10-year rule compresses what used to be decades of tax-deferred growth into a single decade. For a beneficiary in their peak earning years inheriting a large IRA, this can push a significant amount of taxable income into already-high-bracket years. Tax planning around inherited IRAs, including whether to take distributions early in the 10-year period or defer to lower-income years, has become a meaningful financial planning exercise.
Eligible Designated Beneficiaries (EDBs): The Exceptions
Five categories of beneficiaries are classified as "eligible designated beneficiaries" (EDBs) and retain the ability to use the old stretch distribution method, taking distributions over their own life expectancy rather than within 10 years.
- Surviving spouse: The most flexible EDB category. A surviving spouse can treat the inherited IRA as their own, roll it into their own IRA, or open an inherited IRA and take distributions based on their own life expectancy. The ability to treat the account as their own is unique to surviving spouses among all beneficiary categories.
- Minor child of the deceased account owner: While the child is a minor, they qualify as an EDB and can take distributions based on their life expectancy. Once the child reaches the age of majority (generally 18, with some states and plan documents specifying 21), the 10-year rule kicks in for the remaining balance.
- Disabled individual: Beneficiaries who meet the IRS's definition of disabled qualify as EDBs. The IRS definition requires an inability to engage in any substantial gainful activity due to a medically determinable physical or mental impairment expected to last continuously for at least 12 months or result in death.
- Chronically ill individual: Beneficiaries who are chronically ill as defined under IRC Section 7702B(c)(2) (requiring long-term care services) qualify as EDBs.
- Individual not more than 10 years younger than the original account owner: A sibling, friend, or other beneficiary who is close in age to the deceased (within 10 years younger) retains the stretch distribution option.
Inherited Roth IRA
An inherited Roth IRA follows the same 10-year rule as an inherited traditional IRA for most non-EDB beneficiaries. However, the tax treatment of distributions is fundamentally different.
No annual RMDs during the 10-year period: Because the original Roth IRA owner had no RMDs during their lifetime, a non-EDB beneficiary inheriting a Roth IRA does not have annual distribution requirements during the 10-year period, regardless of whether the account had been open for 5 years. The entire account can be distributed at any point within the 10 years, including all on the last day of year 10.
Tax-free distributions: Distributions from an inherited Roth IRA are tax-free if the original account satisfied the 5-year rule. The 5-year clock runs from the date the original account owner first opened any Roth IRA account, not the date the beneficiary inherited. If the deceased had opened the Roth account at least 5 years before their death, all distributions to the beneficiary are tax-free.
Strategic implication: An inherited Roth IRA with the 10-year rule is almost always preferable to let grow to the end of the 10-year window and then distribute, since the beneficiary owes no income tax on qualified distributions. This contrasts sharply with an inherited traditional IRA, where tax planning around distribution timing matters considerably.
Inherited 401(k)
An inherited 401(k) generally follows the same SECURE Act rules as an inherited IRA for non-spouse beneficiaries, with some important structural differences.
Non-spouse beneficiaries: Cannot roll an inherited 401(k) directly into their own IRA. They can, however, roll it into an inherited IRA (also called a beneficiary IRA) to access the inherited IRA distribution rules, including stretching over a life expectancy if they qualify as an EDB.
Surviving spouse: A surviving spouse who inherits a 401(k) has more options. They can roll the inherited 401(k) into their own IRA (treating it as their own), roll it into an inherited IRA, or in some cases leave it in the plan as an inherited account. Rolling into a traditional IRA allows the surviving spouse to delay RMDs until they reach their own RMD starting age. A surviving spouse who needs funds before age 59.5 may choose to keep the account as an inherited 401(k) rather than rolling to their own IRA, since distributions from an inherited account are not subject to the 10% early withdrawal penalty regardless of the survivor's age.
Roth 401(k) conversion: A surviving spouse rolling an inherited Roth 401(k) into their own Roth IRA generally does so without tax, preserving the tax-free treatment.
Inherited Taxable Brokerage Account: The Step-Up in Basis
Inheriting a taxable brokerage account is fundamentally different from inheriting an IRA. There are no mandatory distribution rules, no 10-year window, and no income tax triggered by the inheritance itself. Instead, the step-up in basis rule provides a significant tax benefit.
What the step-up in basis does: When you inherit securities held in a taxable brokerage account, your cost basis in those securities is reset to their fair market value on the date of the original owner's death. All capital gains that accrued during the original owner's lifetime are permanently eliminated for income tax purposes.
Example: The deceased purchased 1,000 shares of stock at $10 per share ($10,000 total) 20 years ago. At the date of death, those shares are worth $100,000. Without the step-up, the heir would owe capital gains tax on $90,000 of gain if they sold. With the step-up, the heir's basis becomes $100,000, and selling immediately after inheriting generates zero capital gains tax.
Community property states: In the nine community property states, both spouses' shares of community property receive a full step-up in basis at the first spouse's death, not just the decedent's half. This can eliminate all embedded capital gains on a portfolio accumulated during the marriage.
Practical advice: Many heirs sell inherited taxable securities promptly after inheriting to lock in the step-up benefit while the position is at or near its death-date value. If the securities are held after the date of death, future appreciation accrues at the stepped-up basis and is subject to capital gains in the normal way when eventually sold.
The step-up does not apply to IRAs: This is a common point of confusion. The step-up in basis applies only to assets held in taxable brokerage accounts. Inherited IRA assets do not receive a step-up. Traditional IRA distributions are fully taxed as ordinary income regardless of when or at what price the original owner bought the securities.
The Critical Mistake: Missing RMDs on Inherited IRAs
The most costly mistake an inherited IRA beneficiary can make is failing to take required distributions in years when they are required.
Whether annual distributions are required during the 10-year period depends on whether the original account owner had begun RMDs. If the original owner had started RMDs before their death, non-EDB beneficiaries must take annual distributions in years 1 through 9 of the 10-year window. Missing a required distribution triggers a 25% excise tax on the shortfall, reduced to 10% if corrected within the 2-year correction window.
The IRS provided relief in 2021, 2022, 2023, and 2024 for beneficiaries who missed distributions during the transitional period when the final regulations under the SECURE Act were being developed. That relief has largely ended. Beneficiaries who inherited after the SECURE Act's effective date should verify their specific distribution obligations with a tax advisor rather than assuming no annual distributions are required.
The first step is determining whether the original owner had begun RMDs. Contact the plan custodian or the executor of the estate to confirm whether the decedent had reached their RMD starting age and whether any RMDs were taken in the year of death (the year-of-death RMD must be taken by the beneficiary if the original owner did not take it).
See also: Investment Accounts & Brokerage Accounts hub, Joint Brokerage Accounts.
Frequently Asked Questions
What is the inherited IRA 10-year rule?
The 10-year rule, established by the SECURE Act of 2019, requires most beneficiaries who inherit a traditional IRA after December 31, 2019, to fully distribute all assets within 10 years of the original account owner's death. The 10-year window ends on December 31 of the year that is 10 years after the year of death. There are no required annual distributions for non-eligible designated beneficiaries under the rule itself, but if the original owner had already begun taking required minimum distributions, IRS guidance requires annual distributions in years 1 through 9. Eligible designated beneficiaries (surviving spouses, minor children, disabled individuals, chronically ill individuals, and those within 10 years of the decedent's age) are not subject to the 10-year rule and can use the old stretch distribution method.
Does an inherited IRA receive a step-up in basis?
No. Traditional and Roth IRAs do not receive a step-up in basis at death. The step-up in basis rule applies to inherited taxable accounts (stocks, ETFs, and other securities held in regular brokerage accounts), not to tax-advantaged retirement accounts. When you inherit a traditional IRA, you pay ordinary income tax on all distributions, just as the original owner would have. When you inherit a Roth IRA, qualified distributions are tax-free, but the account does not receive a basis reset either. Only non-retirement investment assets, those held in taxable brokerage accounts, benefit from the step-up that resets the cost basis to the fair market value at the date of death.
Can a surviving spouse treat an inherited IRA as their own?
Yes. A surviving spouse has the most flexibility of any beneficiary type. They can: elect to treat the inherited IRA as their own by rolling it into an existing IRA or rolling it into a new IRA in their own name; open an inherited IRA using the stretch distribution method (based on their own life expectancy); or, if the original owner had not yet reached RMD age, treat the account as their own and delay RMDs until they themselves reach their own RMD age. Rolling into their own IRA is often the most beneficial approach for younger surviving spouses, as it defers distributions longer and simplifies account management.