How do I calculate the tax on inherited IRAs?

by Lotus Li | Dec 6, 2025 | AI Tax Answer Library

Here’s what HIVE AI had to say about “How do I calculate the tax on inherited IRAs?”:

Calculating tax on inherited IRAs

Start with the account type and your beneficiary status

Identify whether the account is a traditional IRA or a Roth IRA, and whether you’re a spouse beneficiary treating the account as your own or remaining a beneficiary. Spouses can elect to treat an inherited traditional IRA as their own (including rollovers to their own IRA or certain plans), or keep it as an inherited IRA; non-spouse beneficiaries cannot roll over inherited IRA distributions. 1
For non-spouse inherited IRAs, tax-free “60-day” rollovers aren’t allowed. Only direct trustee-to-trustee transfers between inherited IRAs for the same decedent are permitted without triggering income; distributions themselves are taxable when received. 2

Determine required distribution rules

Inherited IRAs are subject to required minimum distribution (RMD) rules. When inherited IRAs are split among multiple beneficiaries, each beneficiary is responsible for their own inherited IRA RMDs, calculated independently, and is responsible for any related taxes. Plan and IRA custodial agreements drive the distribution options; for qualified plans (like 401(k)s), ask the plan administrator. 3
For aggregating RMDs, you may only combine RMDs for inherited IRAs from the same decedent; RMDs for each qualified plan must be taken from that specific plan. 4
Inherited Roth IRAs generally follow the same RMD framework as inherited traditional IRAs; contributions come out tax‑free, and earnings are tax‑free if the Roth met the 5‑year rule at the time of the withdrawal. 5

Compute the taxable amount of each distribution

Traditional inherited IRAs

Distributions are generally taxable as income in the year received under the “income in respect of a decedent” (IRD) rules. Report the gross distribution from Form 1099‑R; the taxable amount is typically the full distribution unless the decedent had basis (after‑tax contributions) in the IRA. 6
If the inherited traditional IRA has basis, you cannot combine that basis with basis in your own IRAs or basis from inherited IRAs of other decedents. Use a separate Form 8606 to compute the nontaxable portion for each distribution from the inherited IRA. 7

Roth inherited IRAs

Withdrawals of contributions are tax‑free. Earnings are tax‑free if the Roth 5‑year holding period is met; otherwise, the earnings portion is taxable. Track ordering rules and the 5‑year clock to determine if any portion is taxable. 5

Apply penalties and exceptions

10% early distribution tax

Distributions from inherited IRAs to beneficiaries are not subject to the 10% early distribution penalty. However, if a surviving spouse elects to treat the inherited IRA as their own and then takes a pre‑59½ distribution, the 10% penalty may apply (subject to exceptions). Use Form 5329 to figure any additional tax. 7

Missed RMD excise tax

Beneficiaries are responsible for RMDs from their inherited IRAs; failure to take RMDs can trigger an excise tax. Each beneficiary is separately responsible for any missed-RMD liabilities from their respective inherited IRA. 3

Don’t overlook the estate tax IRD deduction

If federal estate tax was paid and the IRA value was included in the decedent’s estate, you may deduct the share of estate tax attributable to the IRD you include in income (section 691(c)). Claim the deduction in the year you report the IRA income; compute it as the allocable portion of estate tax attributable to the net value of IRD. 7
The deduction is figured using a ratio of the IRD you recognize to total IRD included in the estate, multiplied by the estate tax attributable to net IRD. This deduction can also apply downstream (for example, when a spouse who previously received IRD later dies and their estate/beneficiaries receive IRD). 8

Reporting and withholding

Report Form 1099‑R distributions on your Form 1040; attach Form 8606 if you are computing a nontaxable portion due to basis. Use Form 5329 to report any early distribution additional tax or to address RMD-related excise tax, if applicable. 7
IRA distributions are subject to federal income tax withholding unless you opt out. If you opt out, consider making estimated tax payments to avoid underpayment penalties. 9

Putting it together: a quick workflow

Step 1: Identify your situation

Traditional vs Roth; spouse treating as own vs remaining a beneficiary; number of inherited IRAs and decedent(s). 1

Step 2: Determine required distributions

Confirm your IRA’s distribution schedule and compute your RMDs (and whether aggregation applies). For qualified plans, consult the plan administrator. 5

Step 3: Calculate the taxable portion

Traditional: usually fully taxable unless there’s basis; if basis exists, compute nontaxable portion using a separate Form 8606 for the inherited IRA. 7
Roth: contributions tax‑free; earnings tax‑free if 5‑year rule satisfied; otherwise, earnings portion taxable. 5

Step 4: Apply penalties and deductions

No 10% penalty for inherited IRA distributions; but spouses treating the IRA as their own may owe it on early withdrawals. Address any missed RMD excise tax. 7
If estate tax was paid, compute and claim the section 691(c) IRD deduction for the portion of estate tax attributable to the IRA income you report. 8

Step 5: File and manage withholding

Report on Form 1040 (and Form 8606/Form 5329 if needed). Review withholding on each distribution or make estimated payments. 9

Special notes and limits

Non-spouse beneficiaries cannot do 60‑day rollovers; only trustee‑to‑trustee moves of inherited IRAs are permitted without triggering income. 2
Direct splits of an inherited IRA into separate inherited IRAs for multiple beneficiaries via trustee‑to‑trustee transfer don’t create immediate income; IRD is included when beneficiaries actually receive distributions. 6

Sources

1 – IRS – Publication 590-A Contributions to Individual Retirement Arrangements (IRAs) 📄 Summarize
2 – IRC § 408(d) 📄 Summarize
3 – PLR 202506004 📄 Summarize
4 – IRS – Instruction 5329 Instructions for Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts 📄 Summarize
5 – IRS.gov – Retirement topics – Beneficiary 📄 Summarize
6 – CCA 201430022 📄 Summarize
7 – IRS – Publication 590-B Distributions from Individual Retirement Arrangements (IRAs) 📄 Summarize
8 – PLR 200316008 📄 Summarize
9 – IRS.gov Tax Topics 📄 Summarize

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