When you think about family, you imagine comfort, small traditions, and the hope that what you build lasts. This guide begins with that feeling. It aims to turn concern into clear action so your retirement account supports loved ones when you are gone.
Today’s rules for inherited IRAs changed for deaths in 2020 and later. Beneficiary type and the original owner’s age at death shape timelines, taxes, and options. I will walk you through the key choices that reduce friction and shield value for heirs.
We’ll cover timing traps like year-of-death RMDs and the nine-month disclaimer window. You’ll learn when a lump-sum is taxable and why self-directed IRAs may let you hold real estate or other property — but also why collectibles and plan lookthrough rules can trigger an immediate tax bill.
Think of this as practical planning: align investment options, custodian choices, and transfer design with your heirs’ needs so your estate moves smoothly and with minimal tax friction.
Key Takeaways
- New inherited-IRA rules depend on beneficiary type and owner age at death.
- Year-of-death RMDs must be satisfied to avoid steep penalties.
- Disclaimers give heirs nine months to refuse an inheritance when useful.
- Self-directed accounts allow property but watch prohibited collectibles and lookthrough risks.
- Choose custodian and transfer methods to match heirs’ liquidity and income needs.
Understand your goal: preserving a tangible store of wealth for heirs
Start by deciding whether your goal is income for heirs or a clear, simple transfer of value.
The IRS defines certain collectibles as prohibited in an ira under IRC 408(m)(2). That list includes art, antiques, some metals, stamps, and coins unless they meet the 408(m)(3) exceptions. Buying prohibited items can trigger a deemed distribution and extra tax costs.
In everyday terms, heirs often think “tangible” means something they can see or use — a rental property that pays rent or a physical asset that feels real.
Weigh control versus simplicity. Direct real estate gives hands-on control and cash flow. REITs or funds are easier to manage but offer less direct influence for the owner and beneficiaries.
- Match your timeline to required distribution rules so taxes and cash needs align.
- Document a written strategy that names custodians, transfer steps, and short-term actions for heirs.
- Plan liquidity so heirs can cover income tax, expenses, and fees without forced sales.
Map your beneficiary strategy under today’s SECURE Act rules
Start by mapping who will inherit your IRA and which distribution rules will apply to each individual.
This step clarifies beneficiary types so you can align your retirement account designations with intended outcomes. For deaths in 2020 or later, the SECURE Act splits beneficiaries into designated and eligible designated beneficiaries (EDBs).
Designated vs. eligible designated beneficiaries
EDBs include a spouse, a direct descendant under 21, someone less than 10 years younger, and disabled or chronically ill individuals. These beneficiaries have more flexible distribution options than standard designated beneficiaries under the new rules.
Special treatments and timing
A spouse may roll over funds to their own IRA or delay required withdrawals until the decedent would have reached RMD age. Most non-EDB beneficiaries must empty the account by the end of the 10th year. If the owner died after reaching RMD age, annual withdrawals during those years may also be required.
Trusts and estate considerations
Trust outcomes depend on trust language. A properly drafted see-through trust can preserve tax deferral and protect heirs, but complex trusts need counsel. Estates named as beneficiaries often follow the 5-year rule if the owner died before RMD age, or payout over remaining life expectancy if after.
| Beneficiary Type | Main Rule | Key Consideration |
|---|---|---|
| Spouse | Rollover or inherited IRA; delay RMDs | Choice affects transfer and income timing |
| Eligible Designated | Life-expectancy or extended options | Includes minor child (until 21), disabled |
| Designated (non-EDB) | 10-year full distribution | Annual RMDs if owner died after RMD age |
| Estate / Non-designated | 5-year or life-expectancy rules | Depends on owner’s age at death |
Choose the right distribution path to maximize what heirs keep
A smart transfer plan balances liquidity needs, tax timing, and long‑term preservation for beneficiaries.
Rollover for spouses versus inherited accounts
Spouses may roll funds into their own IRA or leave them as an inherited account. A rollover preserves tax deferral and keeps retirement account rules simple.
Note: any year‑of‑death RMD the owner left outstanding must be withdrawn by December 31. Missing it risks heavy penalties.
10‑year rule, life‑expectancy payouts, and estates
Most designated beneficiaries face the 10‑year rule: the account must be emptied by year 10. If the owner died after RMD age, annual withdrawals may be required during those years.
Estates and non‑designated beneficiaries often use the 5‑year rule when death occurs before RMD age. If death was after RMD age, payouts can follow the decedent’s remaining life expectancy.
Coordinating year‑of‑death RMDs and tax sequencing
Calculate the year‑of‑death RMD first, then plan distributions that manage taxable income. Filling lower tax brackets over several years or bunching charitable gifts can reduce total tax paid.
- Compare a spouse rollover versus an inherited ira for transfer flexibility and future distributions.
- Build a pacing plan to avoid a year‑10 surprise under the 10‑year rule.
- Document a simple playbook for heirs: custodian contact, required forms, and timing steps.
How can I pass down a tangible store of wealth through my IRA?
Holding real estate or notes inside an IRA gives heirs an asset that feels real, while keeping tax deferral intact.
Using self-directed IRAs to access real estate and other alternative assets
A self-directed ira lets investors own rental homes, mortgage notes, tax liens, or private partnerships inside the account. All income and expenses must flow through the account, and the owner may not use the property personally.
Custodians that support self-directed iras handle titling and recordkeeping. They ensure the account — not you personally — is listed as buyer and owner.
Structuring for heirs: liquidity, titling, and custodian capabilities
Plan liquidity so beneficiaries have cash for taxes, insurance, and upkeep. Keep some income-producing investments or reserve cash in the account to avoid forced sales at transfer.
Confirm your custodian can service heirs and complete a smooth transfer or distribution. Name primary and contingent beneficiaries that match estate documents.
Practical rules to avoid compliance problems
- Never allow personal use or “sweat equity.”
- Avoid prohibited collectibles under IRC rules; check coin and bullion exceptions.
- Do not transact with disqualified persons — this risks a deemed distribution and penalties.
Finally, build a beneficiary binder with property deeds, leases, insurance, custodian contact, and a simple calendar of obligations. This short playbook helps heirs move quickly and preserve estate value.
Self-directed IRA real estate: compliant ways to create durable, “real world” value
Using an IRA for direct property investments demands strict compliance but can preserve value for beneficiaries.
Permissible options include residential rentals, commercial spaces, improved or unimproved land, public or private REITs, mortgage notes, trust deeds, tax lien certificates, joint ventures, and limited partnerships. Each type can fit an heir-focused plan: rentals for steady income, REITs for liquidity, and notes for predictable cash flow.
Compliance guardrails
The custodian must hold title in the account name and all receipts and expenses must flow through the account. No personal use, no services or “sweat equity,” and no deals with disqualified persons. These rules prevent deemed distributions and steep tax penalties.
Direct property vs. REITs
Direct ownership gives heirs control and ongoing income but demands active management and liquidity. REITs provide diversification and easier transfer at death, with less administrative burden for the estate.
Funding and tax risks
Purchases may use all-cash from the account or non-recourse loans. Be aware: debt-financed income can trigger UDFI/UBIT that the account must pay. Keep cash reserves in the IRA for vacancies, repairs, insurance, and taxes to avoid forced sales.
- Example: an IRA buys a rental home with a non-recourse loan; rent flows into the account, and heirs inherit an income-producing asset.
- Create a written property-management plan for heirs: who to hire, how rent is collected into the account, and how to request distributions.
Avoid prohibited collectibles and lookthrough pitfalls
Before you add art, classic cars, or certain funds to an IRA, know the rules that can convert an investment into a taxable event.
What counts as a collectible: IRC 408(m)(2) bars IRAs from owning art, rugs, antiques, metals and gems (with limits), stamps, alcoholic beverages, and other tangible personal property designated by the IRS.
Limited exception: IRC 408(m)(3) allows specific coins and bullion that meet metallurgical standards, but only if they are held in trust and vetted by your custodian.
Plan-asset lookthrough rules
The DOL treats an account as owning underlying holdings when a self-directed IRA holds more than 25% of an investment entity, or 100% of an operating company (29 C.F.R. §2510.3-101).
This means indirect interests can turn into prohibited assets for your IRA. Get full written information from sponsors before you invest.
Real examples and practical cautions
“A fund that buys fine art or classic cars may be imputed to your account and trigger a deemed distribution equal to cost.”
- Example: a classic‑car fund looks attractive, but if underlying cars are prohibited, the IRA may face immediate tax and penalties.
- Example: partnerships holding collectibles can impute assets to the account—check ownership percentages and documents.
- Providing services or operating a business-like venture linked to the investment can create prohibited transactions and compound penalties.
| Risk Type | What Triggers It | Action for Owner / Custodian |
|---|---|---|
| Prohibited collectible | Direct purchase of art, rugs, antiques, alcoholic beverages | Confirm IRC classification and avoid purchase |
| Coin/bullion exception | Metallurgical standard coins held in trust | Use custodian-approved trust storage and documentation |
| Plan-asset lookthrough | IRA owns >25% of an entity or 100% of operating co. | Require sponsor disclosure of underlying assets and percentages |
Next step: ask sponsors and your custodian for complete asset lists and lookthrough analysis, and follow formal guidance to avoid prohibited transactions.
Tax timing, penalties, and practical planning for heirs
Timing decisions after an owner’s death affect how much heirs keep.
Traditional IRA distributions count as ordinary tax. Heirs should model expected income and income tax to decide whether to spread withdrawals over several years to manage brackets.
Roth five‑year rule and early withdrawal notes
Inherited Roth accounts generally avoid the 10% early withdrawal penalty for beneficiaries.
To get tax‑free treatment, the Roth must meet the five‑year rule. Verify the original account opening date before assuming distributions are tax-free.
Annual RMDs when the decedent was past RMD age
Under final regs, many designated beneficiaries must take annual RMDs during the 10‑year period if the owner died after RMD age.
Any year‑of‑death RMD not taken must be withdrawn by December 31 or the estate risks a heavy penalty.
UBIT and UDFI for leveraged or business-like real estate
Business income inside an IRA may trigger UBIT; debt‑financed property can create UDFI. The IRA pays these taxes and files the returns, not the beneficiary’s personal return.
| Issue | Effect on Heirs | Practical Move |
|---|---|---|
| Traditional distributions | Subject to ordinary tax | Plan withdrawals to manage brackets |
| Roth five‑year rule | Determines tax-free status | Confirm account opening date |
| Year‑of‑death RMD | Missed RMD = penalty | Complete withdrawal by Dec 31 |
| UBIT / UDFI | IRA-level tax on business or leveraged income | Set aside cash in account; consult tax pro |
Practical checklist: keep cash reserves in accounts for taxes, coordinate distributions with other estate income, and give custodians clear documentation to speed transfer and reporting.
Conclusion
End with a clear planning strategy that balances taxes, liquidity, and the investments your heirs will manage.
, Align your accounts and retirement accounts so each owner and beneficiary understands timing and transfer steps. Consolidate investment options toward what heirs can maintain. Keep some cash in accounts to cover taxes and upkeep to protect estate value and return.
Choose custodians and professional services that support self-directed property and handle beneficiary requests quickly. Sync beneficiary designations with your trust and will and document the transfer playbook so heirs avoid delays.
Practical action: confirm titles and records, pre-plan liquidity for taxes and upkeep, educate the beneficiary, and review this strategy each year so your account and estate deliver the results you intend.