Inherited IRAs and Taxes
The United States has no federal inheritance tax paid by heirs. Even when an estate is large and taxable, the federal tax is paid by the estate itself. Keep in mind, however, that several states, including New Jersey and Pennsylvania, collect a state inheritance tax from heirs, depending on how closely they were related to the deceased. The assets on which an heir must pay income tax are inherited tax-deferred retirement plans. Examples include a traditional IRA, 401(k), SIMPLE and SEP (but not a Roth IRA).
The trap: If an heir withdraws all the money from an inherited IRA in one lump sum, the entire amount is added to his taxable income and he will pay a high income tax. That is why, when planning to pass an IRA on to our heirs, we should think about what to do so that the nest egg serves our loved ones for as long as possible.
Advice: It pays to slow down withdrawals from an inherited IRA (within the limits the rules allow) in order to:
- pay as little tax as possible,
- keep the capital growing tax-deferred for as long as possible.
Naming a Beneficiary
A real-life example: Mr. Marian put money into his IRAs every year. In return he received tax deductions, and his money grew tax-deferred. Marian named his daughter as the beneficiary of the account. His daughter and her husband turned out to be spendthrifts, so Marian decided to leave his entire estate to his son. He went to a lawyer and drew up a will accordingly. Who got the IRA after his death? The daughter!
What you need to know: You cannot leave an IRA in your will. You can dispose of it only by naming a beneficiary (heir). A will cannot change that beneficiary.
To name the beneficiaries of your IRA, ask your bank (mutual fund, brokerage firm) for a document called a Beneficiary Designation Form. On it you will see fields for a primary beneficiary and a secondary beneficiary.
- Primary beneficiary. On many forms we can name two or three people and divide the money among them in any percentages we like.
- Additional beneficiaries. In case the primary beneficiaries die, we can name additional heirs (secondary beneficiaries). If there are no secondary beneficiaries, after our death the money in the IRA passes to our estate.
Beneficiaries can be changed at any time by filling out a new form, but they cannot be changed through a provision in a will.
Split IRAs
Since January 1, 2003, the tax rules have allowed an IRA left to several heirs to be split after the owner’s death (splitting the account). Previously, the heirs had to keep one account, make decisions about it jointly and use the age of the oldest heir to calculate the distribution schedule. Starting January 1, 2003, an IRA left to several heirs can be divided into separate accounts. There are several advantages:
- Each heir makes his or her own decisions about how to manage the account.
- Each heir applies the payout rules that fit his or her own situation to his or her share (e.g., a widow – the rules for a spouse, and an adult child – the 10-year rule described below).
Important: An inherited IRA must be divided among the heirs no later than the end of the year following the year of the account owner’s death.
An inherited IRA can be emptied as quickly as you like, even in one immediate lump sum, but you will pay a lot of income tax on it. Smart investors try to preserve the tax-advantaged status of IRAs for as long as possible and withdraw money from them as slowly as the rules allow.
Withdrawing Money from an Inherited IRA
Every heir may withdraw the inherited money immediately, but for tax reasons it pays to delay the process as much as possible. Here, in brief, are the rules for taking money out of an inherited IRA.
- The widow or widower of the IRA owner may treat the deceased’s IRA as his or her own (after it has been properly retitled).
- Other people (who are not the deceased’s spouse) must – under the SECURE Act, for owners who died after December 31, 2019 – empty the inherited account no later than the end of the 10th year after the year of the owner’s death (the 10-year rule). Only so-called eligible designated beneficiaries may still withdraw the money gradually, based on their own life expectancy (life expectancy of the beneficiary): besides the spouse, these are the deceased’s minor children, disabled and chronically ill individuals, and people no more than 10 years younger than the deceased.
- If the IRA owner did not name a beneficiary, the account passed to the estate, and the heir was designated in a will, the beneficiary must withdraw the money within 5 years at the latest (the five-year rule).
The rules on how fast an IRA must be liquidated are fairly complicated and also depend on whether the deceased had already started taking distributions or not. It is worth getting information about your specific situation from a retirement account specialist at your bank or credit union.
The heir should go to the bank and retitle the IRA (traditional, rollover, SEP, SIMPLE or Roth) as an inherited IRA. The money will keep growing tax-deferred until the account is liquidated.
Note: The heir should not transfer the inherited retirement money into his or her existing IRA. Nor should he or she make contributions to that account. It is better to keep the inherited money separate. One of the reasons is that withdrawing money from your own account before age 59½ is subject to a 10% penalty, but that penalty does not apply to money withdrawn from inherited accounts.
Withdrawals from an inherited IRA are not penalized, regardless of the beneficiary’s age (for an account owner, the penalty is 10% of money withdrawn before age 59.5), unless a spouse takes over the account as his or her own. The conclusion: a young spouse would do well to keep the account as an inherited IRA rather than take it over as his or her own.
As an IRA owner or as an heir, you should know that it pays to think carefully before deciding what to do with a large inherited retirement account. To do so, you will need to fill out a Beneficiary Request for Distribution form. It is a good idea to ask the bank for this form and fill it out calmly at home.
The bank reports retirement account transactions to the IRS using special letter codes that correspond to the situation. Based on that code, the IRS treats the inherited account accordingly and either expects taxes or not. If you fill out the Beneficiary Request for Distribution imprecisely, it may be impossible to undo the transaction.
When You Want to Leave an IRA to Several Beneficiaries
Every reader who has a retirement account should do the following:
- Make sure the beneficiaries on your account are designated correctly. If you have any doubts, ask your financial institution for a new Beneficiary Designation Form, fill it out carefully and keep copies.
- Tell your heirs about your decision. After your death, your bank will not look for your heirs: they have to come forward. Either give them a copy of the Beneficiary Designation Form or tell them where you keep the relevant documents.
- Make sure your heirs know the rules on IRA distributions and splitting (split accounts). If a family member carelessly pulls out all of your money, he or she will pay high (avoidable) taxes, which will wipe out years of your savings.
- Make sure your financial institution (IRA trustee) allows IRAs to be split (IRA splitting). Although the rules permit an IRA to be divided among heirs, not every financial institution agrees to it.
- Check whether the IRA trustee will charge an extra fee for splitting the IRA. If the fee is substantial, move the account elsewhere.
- If you are worried that splitting the account after your death may be too complicated for your family, do it for them. If, for example, you have two heirs, divide one account into two and name one heir on each. Split your IRA yourself if your financial institution does not allow heirs to split accounts or charges extra fees for it.
When Family in Poland Inherits an IRA
Before you leave an IRA to your family in Poland, you must keep in mind the legal consequences of doing so. Collecting this money may be neither simple nor cheap for a foreign beneficiary. Foreigners who are nonresident aliens for US tax purposes must first obtain a taxpayer identification number (ITIN) by filling out Form W-7 (it can be downloaded from www.irs.gov). The foreigner must fill out Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting, at the bank (or a W-9, depending on the situation).
For nonresident aliens, the bank will withhold 30% as a flat tax (called a flat tax or treaty tax). You can read more about this in IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
The conclusion: If you are planning your estate, it is better to leave your retirement account to people in the States and leave the money in regular accounts to your family in Poland.
Don’t “Authorize” Your Friends
Before leaving for Poland, some retirees prefer to “authorize” friends to manage their account so that if they fall ill or die, the friends can pass the money on to their family in Poland. Making someone a beneficiary is not an authorization but a legal designation that, upon the owner’s death, makes that person the new owner of the money. The beneficiary can then make a gift and hand the money over to the deceased’s family, but legally – he does not have to. With retirement accounts, two additional problems arise.
First, the friend, as the heir to the retirement money, will be required to pay income tax on it – the higher his income in a given year, the higher the tax. The IRS, notified that the friend took a distribution, will demand taxes, and explaining that the money is meant for someone else will not help. Second, if the amount is substantial – more than $19,000 a year per person (the 2026 limit) – the friend will have to report the gift to the IRS on Form 709, and with a very large estate may also have to pay gift tax. And so, in many cases, taxes will shrink the IRA by as much as half, and the family in Poland will hold a grudge, or even accuse the friend of keeping the money for himself.
Summary
A mistake in naming the beneficiary of a retirement account (or a regular one) can cause the money to end up in the wrong hands. On the other hand, a mistake in handling an inherited IRA can cost your heirs a lot of money and wipe out your earlier tax savings. Know the law and handle your IRA with care.
Elżbieta Baumgartner
Elżbieta Baumgartner is the author of many books on the financial and consumer affairs of immigrants, including “Obywatelstwo z przeszkodami. Jak przejść przez procedurę naturalizacji mimo potencjalnych problemów” (“Citizenship with Obstacles: How to Get Through the Naturalization Process Despite Potential Problems”) – tel. 718-224-3492, www.PoradnikSukces.com
Updated October 2026.
