An inherited IRA does not carry the 10% early withdrawal penalty. Federal tax law exempts distributions taken by a beneficiary after the account owner’s death, so a 30-year-old who inherits a Traditional IRA can withdraw the whole balance without owing that additional tax. Income tax on Traditional IRA money still applies, and there is one important situation where the penalty comes back: a surviving spouse who rolls the inherited account into their own name and then withdraws before age 59½.
Why the Death Exception Removes the Penalty
The 10% additional tax on early distributions is set out in Internal Revenue Code Section 72(t) and is meant to discourage people from tapping their own retirement savings before age 59½.1Internal Revenue Service. Substantially Equal Periodic Payments The same statute carves out an exception for distributions “made to a beneficiary (or to the estate of the employee) on or after the death of the employee.”2Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
The exception is unconditional. Your age doesn’t matter. The original owner’s age doesn’t matter. Whether you take a small distribution or drain the account in a single year doesn’t matter. IRS Publication 590-B puts it plainly: “If you die before reaching age 59½, the assets in your traditional IRA can be distributed to your beneficiary or to your estate without either having to pay the 10% additional tax.”3Internal Revenue Service. Publication 590-B – Distributions from Individual Retirement Arrangements (IRAs)
Income tax is a separate matter. Every dollar withdrawn from an inherited Traditional IRA is taxed as ordinary income in the year it’s received.4Internal Revenue Service. Retirement Topics – Beneficiary A large lump-sum withdrawal can push you into a higher bracket, and that tax bill is often bigger than the 10% penalty would have been. Removing the penalty doesn’t remove the planning problem.
The One Situation Where the 10% Penalty Comes Back
Surviving spouses have options no other beneficiary gets, and one of those options undoes the penalty exemption. If you’re a surviving spouse under 59½, this is the decision that matters most.
Rolling the Account Into Your Own IRA
A spousal rollover retitles the inherited IRA as the surviving spouse’s own account. Once that happens, the account is no longer inherited. The spouse can make new contributions and defer required minimum distributions until their own required beginning date, which is age 73 for those born from 1951 through 1959 and age 75 for those born in 1960 or later.5Congress.gov. Required Minimum Distribution (RMD) Rules for Original Owners
The cost of that flexibility: the death exception no longer applies. Any withdrawal before the spouse turns 59½ is treated like an early distribution from any other IRA and is generally subject to the 10% additional tax.2Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts A 50-year-old widow who rolls over and then needs cash will face the penalty that every other IRA owner under 59½ faces.
Keeping It as an Inherited IRA
The alternative is to leave the account titled as an inherited IRA. The spouse remains a beneficiary in the eyes of the tax code, and the death exception stays in place. A 50-year-old spouse can pull funds out without any 10% penalty, though ordinary income tax on a Traditional IRA still applies.
The trade-off is on the deferral side. Distributions from an inherited IRA generally must begin by the year the deceased would have reached their required beginning date, and the spouse takes them based on their own life expectancy.
Choosing Between the Two
The rollover is effectively one-way. Once the funds are in your own IRA, penalty-free access is gone until you turn 59½ unless a different Section 72(t) exception applies. A common approach for younger surviving spouses is to keep the inherited IRA status until age 59½ and then complete the rollover, preserving penalty-free access in the meantime and gaining long-term deferral afterward.
Making Sure Your 1099-R Reflects the Exception
When a custodian pays out an inherited IRA, it issues Form 1099-R. Box 7 carries the distribution code, and for a death benefit distribution the correct code is 4. That code tells the IRS the distribution qualifies for the death exception.6Internal Revenue Service. Instructions for Forms 1099-R and 5498
If Box 7 shows Code 4, you generally don’t need to do anything else to claim the exception. But coding mistakes happen. If your 1099-R shows Code 1 (early distribution, no known exception) or another code that doesn’t reflect the death, file Form 5329 and enter exception number 04 (“distributions due to death”) on Line 2. That’s how you claim the exception on the return and stop the IRS from assessing the 10% tax automatically.7Internal Revenue Service. 2025 Instructions for Form 5329 Check that box before you file.
Inherited Roth IRAs
Roth inherited accounts follow the same penalty rule. Whether or not a distribution is qualified, the 10% additional tax doesn’t apply to a beneficiary taking money out after the owner’s death.2Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
What can differ is income tax on the earnings portion. A Roth distribution is fully tax-free if five tax years have passed since the original owner first funded any Roth IRA. The clock starts on January 1 of the year of the first contribution and continues after the owner’s death.4Internal Revenue Service. Retirement Topics – Beneficiary If the owner opened their first Roth in 2020, distributions after January 1, 2025 are tax-free.
If the five-year period isn’t satisfied, the earnings portion is taxable as ordinary income. It is not, however, subject to the 10% penalty. That’s a common source of confusion. Inheriting a young Roth might cost you income tax on the earnings, but not a penalty on top.
A Different Penalty You Should Know About
The 10% early withdrawal penalty is not the only additional tax that touches inherited IRAs. If you’re required to take a minimum distribution and you miss it, the excise tax on the shortfall is 25%. That rate drops to 10% if you correct the shortfall within the correction window, which generally runs through the end of the second taxable year after the missed year.8Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans The correction is reported on Form 5329.
This matters more starting in 2025. Most non-spouse beneficiaries must empty an inherited IRA by December 31 of the tenth year after the owner’s death. When the owner died on or after their required beginning date, annual RMDs are also required in years one through nine of that ten-year window. The IRS waived enforcement of those annual RMDs for 2021 through 2024, but the final regulations apply for calendar years beginning on or after January 1, 2025.9Internal Revenue Service. Notice 2024-35 – Certain Required Minimum Distributions Missing one now triggers the excise tax.
The Rollover Mistake That Cannot Be Undone
A non-spouse beneficiary cannot roll over an inherited IRA. Section 408(d)(3)(C) explicitly prohibits rollovers of inherited accounts held by anyone other than the surviving spouse.10Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts If the custodian cuts you a check, that money is a taxable distribution. You cannot deposit it into your own IRA. You cannot deposit it into a new inherited IRA. It’s out of the tax-advantaged system and it cannot be put back.
To move inherited IRA assets to a different custodian, use a direct trustee-to-trustee transfer. Call the receiving institution and let them pull the funds. Never accept a check payable to you personally unless you actually intend to take the distribution and pay the tax.
Surviving spouses have more room here because they can do a 60-day rollover into their own IRA, but even then a direct transfer is safer than handling a check and racing a deadline.