Inherited IRAs (Beneficiary IRAs) can be a powerful tool for preserving and growing the wealth left by a loved one. Account holders at Directed IRA can self-direct their Inherited IRAs into alternative investments like real estate, private companies, and more.
An Inherited IRA (aka, Beneficiary IRA) is a retirement account designed for individuals who have inherited an IRA from a spouse, parent, or other individual. Beneficiaries can use a Self-Directed Inherited IRA to extend the tax-deferred benefits of the IRA beyond the original account holder and invest in alternative assets like real estate, private equity, and private funds.
This concept was introduced under the provisions of the Employee Retirement Income Security Act of 1974 (ERISA), which sought to safeguard retirement savings for Americans. Over time, legislation refined the rules surrounding Inherited IRAs—creating distinct options for spousal and non-spousal beneficiaries to manage inherited funds while preserving their tax-advantaged growth.
An important note for self-directed inherited IRAs with non-liquid assets is that you need to be prepared to meet RMD requirements which may be a lump sum in 5 years, a lump sum in 10 years, payments over 10 years and then fully distributed, or the life expectancy method. Self-directed investors using inherited accounts should consult with their tax advisor as to RMD planning for the asset over time based on their situation.
Distribution Options
When you inherit an IRA, you have three options for accessing the funds. The “Life Expectancy Method” is the most popular as it lets you delay the withdrawal of funds as long as possible—allowing additional growth in the account before distribution.
Open a Self-Directed Inherited IRA
• If you’ve inherited a Roth IRA, you’ll need to open an Inherited Roth IRA. If Traditional, an Inherited Traditional IRA. If you inherited a traditional 401(k) or a SEP IRA (traditional funds) those can be transferred to an Inherited Traditional IRA. Fill out a new account application or book a call if you have questions.
Transfer of Funds
• Our team facilitates a trustee-to-trustee transfer. This is a tax-free movement of funds directly from your existing IRA custodian to your new self-directed IRA custodian.
Invest Your Account
• Account holders at Directed IRA can invest in any asset allowed by law. This includes alternative assets like real estate, private funds, crypto, private equity, and more.
Taxes on distributions from an Inherited IRA depend on the type of IRA and the beneficiary’s tax situation. It’s important to comply with IRS rules to avoid penalties, such as the 50% excise tax for failing to take RMDs when required.
Yes, if you are the spouse of the original IRA owner, you can transfer the deceased spouse’s account and funds into your own IRA through a Spousal Rollover. This is the only scenario where inherited funds can be merged into an existing IRA. This approach allows you to treat the funds as if they were always in your IRA, enabling continued tax-deferred or tax-free growth based on the original account type.
1. Verify your eligibility as a spousal beneficiary.
2. Elect to treat the Inherited IRA as your own (open an Inherited IRA) or transfer the funds directly into an existing IRA (Spousal Rollover).
3. Follow IRS contribution and RMD rules as applicable to your personal account (learn more).
1. Notify the Current Custodian: Contact the custodian managing the original IRA account and inform them of your beneficiary status.
2. Provide Required Documentation: Submit a certified copy of the death certificate and any other forms requested by the custodian.
3. Open an Inherited IRA Account: Transfer the funds into your new Self-Directed Inherited IRA under your name, or for spousal beneficiaries wishing to do a spousal rollover into an IRA in the surviving spouse’s name
4. Follow Distribution Rules: Ensure compliance with IRS regulations, such as Required Minimum Distributions (RMDs) or the 10-year withdrawal rule.
To qualify for an Inherited IRA (Beneficiary IRA), you must be named as a beneficiary on the original account. The rules vary slightly based on your beneficiary status:
In 2019, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, legislation eliminated the “Stretch IRA” strategy, which previously allowed non-spousal beneficiaries to stretch required minimum distributions (RMDs) over their lifetime. Instead, non-spousal beneficiaries are now generally required to withdraw the entire balance of the inherited account within 10 years. These reforms aimed to accelerate federal tax revenue while encouraging broader accessibility to retirement funds. Learn more.
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Directed IRA is a Tradename of Directed Trust Company. Directed Trust Company performs the duties of a directed custodian, and as such does not provide due diligence to third parties on prospective investments, platforms, sponsors or service providers, and does not sell investments or provide investment, legal, or tax advice. Directed Trust Company is not an FDIC-insured financial institution. Alternative investments are not insured by the FDIC; are not deposits or other obligations of, or guaranteed by Directed Trust Company or any of its divisions; and are subject to investment risks, including possible loss of the principal amount invested. While uninvested funds in certain types of Directed Trust Company accounts may be eligible for FDIC pass-through deposit insurance, certain conditions must be satisfied for such insurance coverage to apply. 2025 Directed Trust Company
Mat Sorensen, Attorney, CEO, and Founder of Directed IRA, wrote the #1 book on self-directed IRAs – selling over 50,000 copies nationwide. The Self Directed IRA Handbook is a comprehensive guide written for both investors and advisors alike. Download your free copy today!