Chances are you already know about some of the advantages of individual retirement accounts (IRAs) when it comes to retirement. How about when it comes to leaving something to your heirs?
What Is a Legacy IRA?
A legacy IRA, also known as an inherited IRA or an IRA inheritance, is one way to leave behind assets and continue tax-deferred growth. An inherited IRA can play a role in passing wealth across generations, as it lets you name and control your beneficiary or beneficiaries.
Imagine you have built a strong foundation for your retirement using a Roth or traditional IRA. As a result of your planning, you may not expect to use all of your IRA during your lifetime. Instead of drawing it down, you choose to use savings and other investments so more money can remain in your IRA.
When you pass away, the beneficiary of your IRA will establish a new inherited IRA. If you have multiple beneficiaries, the funds in your IRA will be divided and distributed based on your instructions.
Legacy IRA Fundamentals
Inherited IRAs are treated differently than other types of IRAs. They must be maintained as separate accounts. Another key difference is that the owner of an inherited IRA cannot delay withdrawals until retirement.
10-Year Rule and Exceptions
For traditional and Roth IRA owners who die after December 31, 2019, the full account balance must be distributed to the beneficiary within 10 years.1
Some beneficiaries are exceptions to this rule. These are called eligible designated beneficiaries (EDBs):
- Surviving spouses
- Minor children
- Individuals who are disabled or chronically ill
- Individuals not more than 10 years younger than the account owner
Required Minimum Distributions (RMDs)
An EDB must take required minimum distributions (RMDs), which are amounts that must be withdrawn each year. Instead of starting withdrawals at age 70½ or 72, your beneficiary must begin by the end of the year following your death and continue each year after that, according to the Internal Revenue Service (IRS).2
The RMD is based on your beneficiary’s life expectancy, calculated starting the year after your death. For example, if your beneficiary turns 50 the year after you pass, the IRS may estimate a life expectancy of about 34 years. This means the first year’s RMD would be about 1/34 of the account balance.3
Non-EDB Beneficiaries
Under the SECURE Act of 2019, non-eligible designated beneficiaries must withdraw the full account balance within 10 years. They are not required to take annual required minimum distributions and can withdraw funds at any pace, as long as the account is fully distributed by the end of the 10-year period.
Early Withdrawal Rules
RMDs for inherited IRAs change each year, similar to traditional IRAs, as the beneficiary’s life expectancy decreases. However, withdrawals from an inherited IRA are not subject to the 10% early withdrawal penalty, even if taken before age 59½.
Because of the SECURE Act, non-EDB beneficiaries are not required to take annual RMDs. They can withdraw funds at any pace, as long as the account is fully distributed within 10 years after your death.
Tax Treatment
For inherited Roth IRAs, the account must have been open for at least five years before your death for earnings to be withdrawn tax-free.4 Contributions can always be withdrawn tax-free, but earnings may be taxed if the account does not meet the five-year rule. Withdrawals from an inherited traditional IRA are generally taxed as income.
Leaving a Legacy
Your beneficiary can withdraw more than the required minimum distribution at any time. They can also withdraw the full balance of the inherited IRA, though this may create tax consequences for traditional IRAs.
You may want your loved one to manage the account with care, similar to how you approached your own retirement savings. Talking through your intentions may help them make informed decisions and use the inherited IRA in a thoughtful way.
An IRA inheritance can help you pass assets to your loved ones and support their future needs. A financial representative can help you build a strategy for what comes next.
Final Thoughts
A legacy IRA can be a thoughtful way to pass assets to your beneficiaries while maintaining tax advantages. Understanding the rules and how distributions work can help your loved ones make informed decisions. Working with a financial professional can help you create a plan that aligns with your goals and supports your long-term legacy.
Sources
- H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019. https://www.congress.gov/bill/116th-congress/house-bill/1994/text.
- Required Minimum Distributions for IRA Beneficiaries. https://www.irs.gov/retirement-plans/required-minimum-distributions-for-ira-beneficiaries.
- Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs). https://www.irs.gov/publications/p590b.
- Retirement Topics - Beneficiary. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary.
