The basis rules for an inherited IRA are the same rules that governed the original owner’s account: basis is the total of after-tax contributions that were never deducted, and it carries over to you unchanged. There is no step-up at death. For most inherited Traditional IRAs the basis is zero, meaning every dollar you withdraw is taxable as ordinary income. For inherited Roth IRAs the contributions are always basis and come out tax-free, with earnings tax-free once the original owner’s five-year clock has run.
What Basis Means Inside an IRA
Basis is money the original owner already paid income tax on before it went into the account. A deductible Traditional IRA contribution has no basis, because the tax bill was postponed. A non-deductible Traditional IRA contribution has basis equal to the amount contributed, because tax was paid first. Roth contributions are always basis for the same reason.
You inherit whatever basis the original owner had. Nothing more, nothing less. That single fact drives everything else about how your withdrawals will be taxed.
Why There Is No Step-Up at Death
Most inherited assets, a house or a taxable brokerage account for example, get their basis reset to fair market value on the date of death. That reset erases the unrealized gain the deceased owner built up during life. Retirement accounts are carved out of that rule. IRC Section 1014(c) says the step-up does not apply to property that constitutes a right to receive income in respect of a decedent.1Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
The reasoning is straightforward. Pre-tax IRA money was never taxed to the owner, so there is no unrealized gain to forgive. The deferred tax bill simply follows the account to you.
Tracking Basis With Form 8606
Non-deductible contributions are reported each year on IRS Form 8606, which is the running tally of after-tax money inside the IRA.2Internal Revenue Service. About Form 8606, Nondeductible IRAs If you inherit a Traditional IRA, ask the executor for copies of every 8606 the owner filed. Without that documentation, the IRS defaults to treating the entire account as zero basis, and every withdrawal becomes fully taxable.
Reconstructing basis after the fact is possible but hard, and old transcripts from the IRS may not include those forms. If you suspect the deceased made non-deductible contributions, start looking for records now rather than at your first distribution.
The Pro-Rata Rule
When basis exists, you cannot pull it out first. Each distribution is split proportionally between taxable earnings and tax-free return of basis across all of the decedent’s Traditional IRAs combined. If the total basis is 10% of the combined balance, then 10% of every dollar you withdraw is tax-free and 90% is taxable income. You run this calculation on Form 8606 for each year you take a distribution.3Internal Revenue Service. Instructions for Form 8606 – Nondeductible IRAs
Traditional Inherited IRA: How Withdrawals Are Taxed
Distributions from an inherited Traditional IRA are ordinary income in the year you receive them. They stack on top of your other income at your marginal rate. The only portion that escapes tax is the pro-rata share of any basis the original owner established.
The 10% early withdrawal penalty that normally hits distributions before age 59½ does not apply to inherited IRAs. Federal law exempts distributions made to a beneficiary after the account owner’s death.4Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts You can withdraw at any age without the extra 10%, but the ordinary income tax still applies.
The IRD Deduction for Large Estates
Inherited IRA assets are treated as Income in Respect of a Decedent under IRC Section 691, which means they enter your gross income when received.5Office of the Law Revision Counsel. 26 U.S.C. 691 – Recipients of Income in Respect of Decedents That creates a potential double tax: the account is counted in the deceased owner’s estate for federal estate tax purposes, and then again in your income when you draw it down.
If the estate actually paid federal estate tax, you can claim an itemized deduction on Schedule A for the portion of estate tax attributable to the inherited IRA. The deduction is taken proportionally as you receive distributions, and it survived the Tax Cuts and Jobs Act unlike most miscellaneous itemized deductions. In practice this only helps when the estate exceeded the federal estate tax exemption.
Roth Inherited IRA: Basis and the Five-Year Clock
Roth IRAs are the easier case. Every contribution dollar is basis and comes out tax-free at any time. The question with an inherited Roth is whether the earnings are also tax-free, and that turns on the five-year rule.
Earnings are tax-free once five tax years have passed since the original owner’s first contribution to any Roth IRA. The clock starts January 1 of the year of that first contribution, and you inherit the owner’s clock rather than starting a new one. If the owner opened their first Roth in 2018, the requirement was satisfied at the start of 2023, and every dollar you withdraw is tax-free.
If the owner died before the five years were up, you can still pull contributions tax-free, but earnings withdrawn before the clock runs out are taxed as ordinary income. The 10% early withdrawal penalty does not apply regardless of your age.4Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts For most inherited Roths the clock is already long satisfied. The trouble spot is a late-in-life Roth conversion where the owner dies within five years.
How Distribution Timelines Change the Tax Bill
Basis controls what percentage of each withdrawal is taxable. The distribution timeline controls how fast those withdrawals have to happen, which in turn controls whether your taxable income spikes in a single year or spreads across many. The SECURE Act, effective for deaths after December 31, 2019, tightened those timelines sharply for most non-spouse beneficiaries.6Internal Revenue Service. Retirement Topics – Beneficiary
Surviving Spouses
A surviving spouse has the most flexibility. You can do a spousal rollover, moving the inherited account into your own IRA, after which it is treated as always having been yours. You defer required minimum distributions until age 73 and pick your own beneficiaries.7Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
The one catch: rolling the account into your own resurrects the 10% early withdrawal penalty for pre-59½ distributions. If you are younger than 59½ and might need the money, keeping it titled as an inherited IRA preserves penalty-free access. You can always roll it over later.
The 10-Year Rule
Most non-spouse beneficiaries who inherit from someone who died after 2019 must empty the entire account by December 31 of the tenth year after the year of death.8Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Owner dies in 2024, account is gone by the end of 2034. The rule applies to Traditional and Roth inherited IRAs alike.
For a Traditional IRA with zero basis, this compresses decades of deferred tax into a decade of taxable withdrawals. Taking the whole balance in year 10 can push you into a much higher bracket, so spreading distributions across the ten years usually produces a lower total tax bill. For a Roth where the five-year rule is already satisfied, the 10-year deadline stings much less because the distributions are tax-free anyway.
Eligible Designated Beneficiaries
A narrow group can still stretch distributions over their own life expectancy:
- Minor children of the deceased owner, until they reach age 21, at which point the 10-year clock starts. Grandchildren and other minors do not qualify.
- Disabled individuals meeting the Internal Revenue Code definition.
- Chronically ill individuals meeting the statutory definition.
- Beneficiaries not more than 10 years younger than the deceased owner, often siblings or partners close in age.
These beneficiaries use IRS life expectancy tables to calculate the smallest possible annual withdrawal, keeping more of the account growing tax-deferred.
Annual RMDs Inside the 10-Year Window
Whether you also owe an annual RMD during years one through nine depends on whether the original owner had already reached their required beginning date, generally April 1 following the year they turned 73. If the owner died before that date, no annual distribution is required and you only need to empty the account by year 10. If the owner died on or after that date, the IRS’s proposed regulations require annual RMDs during years one through nine with the balance due in year 10.
The IRS waived the excise tax for missed annual RMDs in 2021 through 2024 while the guidance was being finalized, most recently in Notice 2024-35 for owners who died in 2020 through 2023.9Internal Revenue Service. Notice 2024-35 – Certain Required Minimum Distributions Starting in 2025, plan on taking the annual RMD if the owner died after their required beginning date. The excise tax for a missed RMD is 25% of the shortfall, dropping to 10% if corrected within two years, reported on Form 5329.
Moving an Inherited IRA Without Losing the Tax Treatment
Non-spouse beneficiaries cannot use the 60-day rollover. Federal law prohibits it: if a check for inherited IRA money is issued to you personally, the full amount is immediately taxable and cannot be redeposited into another inherited IRA.10Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts To change custodians, use a trustee-to-trustee transfer only, with the funds going directly from one institution to another.
One wrong form at the brokerage can turn a tax-free transfer into a taxable event that cannot be undone. Surviving spouses doing a spousal rollover are the exception, because the account is becoming their own IRA and the standard 60-day rollover process applies.
What Basis Documentation to Gather Now
If you have just inherited an IRA, the most valuable thing you can do is nail down the basis before you take any distributions. For a Traditional IRA, ask the executor for every Form 8606 the deceased ever filed and keep them with your own tax records; you will need them each year you take a withdrawal to calculate the taxable portion correctly. For a Roth, confirm the year of the deceased’s first Roth contribution so you know when the five-year clock started. Without those two pieces of information you are working blind, and the default assumption the IRS will apply is the one that costs you the most.