5 Things You Need to Know About Your Inherited IRA
An Inherited IRA is an account structure that allows a beneficiary to manage an inheritance that was passed down to them through an IRA or 401(k) account.
If you’ve inherited an IRA as a beneficiary, it’s up to you to figure out how to manage and make the most of the account.
You may be wondering when and how can you take a distribution of the assets within the account, your options for rolling over the account and more.
There are many unique IRS rules regarding Inherited IRAs that every beneficiary should know. Some of these rules apply to your distribution options, while others are dependent on your relationship to the benefactor; such as whether you’re a spouse.
Knowing these rules may help you design an informed investment and distribution strategy for the account.
Here are 5 things every Inherited IRA owner needs to know about their account.
1. Inherited IRA Account Structure
When you inherit an IRA, the account maintains the same tax structure and advantages of the original account as it was created by the benefactor.
This could mean the account maintains a post-tax structure, such as a Roth IRA, or a pre-tax structure, such as a Traditional IRA, Solo 401(k) and more.
2. Are You a Spouse or Non-Spouse?
Your relationship to the benefactor makes a difference in how you can manage and take distributions from your Inherited IRA.
If you are the spouse of the original account holder, then your Inherited IRA can be treated like a regular Roth or Traditional IRA, without any unique distribution or contribution rules. You essentially takeover the IRA as your own.
You also have the opportunity if you are a spouse under the normal retirement age of 59 ½ to elect to treat the account as inherited. This would allow you to take distributions from the account without the 10% penalty for early withdrawal.
However, if you’re a “non-spouse,” to the benefactor, then you can’t contribute any money into the Inherited IRA, and there are special distribution rules for the account.
3. Taking Distributions as a Non-Spouse
As a non-spousal inheritor of IRA, you must distribute the full account within 10 years from the death of the original account holder. This is a new rule effective beginning December 31st, 2019 based on the 2019 SECURE Act.
Certain account beneficiaries are exempted from this 10-year rule, and can draw down the account with required minimum distributions calculated over their life expectancy. These beneficiaries include:
- Disabled beneficiaries (as defined in IRC Section 72(m)(7))
- Chronically Ill beneficiaries (as defined in IRC Section 7702B(c)(2))
- Individuals not more than 10 years younger than the decedent
- Certain minor children of the original account owner, but only until they reach the age of majority
When you take a distribution from an Inherited Roth IRA, then the money within the account was contributed post-tax, and you don’t have to worry about paying taxes on any distributions from the account.
When you take distributions from a tax-deferred IRA such as a Traditional or SEP, then you will pay taxes on the amount distributed as regular income.
4. Taking Distributions as a Spouse
If you are the spouse of the original account owner, your distribution options for your Inherited IRA differ slightly from the non-spousal options.
As the beneficiary of an Inherited Roth IRA, you have 3 distribution options for your account:
- You can treat the Inherited IRA as your own by re-titling the account in your own name — which is only allowed if you’re the sole beneficiary. Or you can rollover/transfer the funds into your own IRA account.
- You can take “lifetime distributions” from you Inherited IRA, where you make your distributions payable over the life or life expectancy of the designated beneficiary. (However, you must take distributions by December 31st of whichever comes last: the year your spouse would have attained age 70 ½; or the year after your spouse passed.)
- You can distribute the account in full over a 10-year time span. There are no annual distributions required, as long as the account is emptied by the end of the 10th calendar year after the year of the original account owner’s death
5. You Can Self-Direct an Inherited IRA
If you’re a spouse to the original account owner of your Inherited IRA, you can self-direct your account using a self-directed IRA account provider.
That means you can give yourself access to a wide variety of investment assets to diversify your retirement portfolio, including real estate, private equity, precious metals and more.
There are many different distribution strategies afforded to both spousal and non-spousal Inherited IRA owners.
Choosing which strategy is best for your account depends on your individual investment goals, and the rules that govern your account type and distribution options.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
