What Happens to an IRA When You Inherit One?

At some point, you're going to inherit an IRA, or someone you love will. It might be from a parent. It might be a spouse. And when that moment comes, there's usually a question nobody planned for: now what?

The answer matters more than most people realize. Pull the wrong lever and you hand the IRS a check you didn't have to write. In Oregon especially, where state income tax layers on top of federal, that gap can be significant.

Before we get into the options, one thing worth knowing: the rules changed. The SECURE Act of 2019 overhauled how inherited IRAs work, and SECURE 2.0 in 2022 added more updates on top of that. If you inherited an IRA before January 1, 2020, different rules may apply to you. Everything below reflects where things stand today for accounts inherited after that date.

Here's how it works.

If You're a Surviving Spouse

You have more options than anyone else in this situation.

You can roll the inherited IRA into your own account and treat it like it was always yours. Your timeline, your rules, your required minimum distributions. This usually makes sense if you're younger and don't need the money right away.

Or you can keep it titled as an inherited IRA. That sounds like a technicality, but it matters if you're under 59½. As a surviving spouse beneficiary, you can take distributions without the 10% early withdrawal penalty that would apply to your own account. Once you hit 59½, you can roll it over.

Neither option is always right. It depends on your age, your income, and what you actually need the money to do.

If You're Anyone Else

Adult children. Siblings. A close friend. The rules are different, and they changed in 2020.

Most non-spousal beneficiaries now fall under the 10-year rule. You have to fully distribute the inherited IRA within 10 years of the original owner's death. No exceptions, no extensions.

What trips people up is thinking "10 years, plenty of time." Then year 9 arrives and they take a $400,000 distribution all at once. That's $400,000 added to their taxable income in a single year. At Oregon's top rate of 9.9% on top of federal, that's potentially 40 cents on every dollar gone.

The smarter play is to spread it out. Take more in years when your income is lower, less in years when it's higher. But that only works if you plan for it ahead of time.

Some Beneficiaries Still Get the Old Rules

There are exceptions. Certain beneficiaries can still stretch distributions over their lifetime rather than being forced into 10 years. This applies to surviving spouses, minor children (until they reach adulthood, then the 10-year clock starts), people with a disability or chronic illness, and anyone within 10 years of age of the person who died.

If you or your beneficiaries fall into one of these categories, the planning looks different. Worth knowing before you assume the 10-year rule applies.

Did the Original Owner Already Start Taking RMDs?

This is where it gets a little more technical. If the person who left you the IRA had already started required minimum distributions, you generally have to continue taking annual distributions during years 1 through 9, based on your own life expectancy, and then clear the account by year 10.

If they hadn't started yet, you have more flexibility on timing within the 10 years. Either way, the account has to be empty by the deadline.

Inherited Roth IRAs Are Different

Same 10-year window. Very different tax picture.

Qualified distributions from an inherited Roth are tax-free. So the strategy often flips: let it sit and grow for all 10 years, then take the full amount at the end. No income tax owed.

A Note on Oregon

Oregon taxes all retirement income as ordinary income. There is a small retirement income credit available after 62, but it phases out at modest income levels. For most people receiving a meaningful inherited IRA, you're paying Oregon's full rate.

That makes the timing of distributions a real planning opportunity. A year with lower income, maybe early retirement before Social Security starts, or a slower year in business, might be the right time to pull more from an inherited IRA and pay tax at a lower rate.

What This Means for You

If you've inherited an IRA, the most important thing to do is understand which category you're in and what your timeline looks like. Then build a distribution strategy around your actual tax situation, not just the deadline.

If you're still in the accumulation phase and thinking about estate planning, now is a good time to review your beneficiary designations. Your beneficiaries should know what they're inheriting and roughly what the rules will mean for them.

This is the kind of thing that's easy to put off because nothing forces the conversation. But waiting usually just means fewer options later.