Key Takeaways

Inherited IRAs in Illinois mostly follow federal distribution rules, while Illinois mainly affects probate, state tax, estate tax, and beneficiary issues. The result is simple in concept but easy to mismanage if you procrastinate.

• Under the Secure Act and SECURE 2.0, most beneficiaries who are a non-spouse beneficiary and inherit in 2020 or later must withdraw all the money from inherited IRAs and other inherited retirement accounts within 10 years of the original owner’s death.
• Eligible designated beneficiaries, including a spouse, minor child of the decedent, disabled person, chronically ill person, and someone less than 10 years younger than the original owner, may often use life expectancy required minimum distributions.
• Illinois law excludes traditional and Roth IRAs distributions from state income tax, including inherited IRAs regardless of the beneficiary’s age, but federal tax still applies to most inherited traditional IRA withdrawals as ordinary income.
• Beneficiary designations override wills in Illinois, so an estate planning attorney or CPA can help avoid penalties, probate delays, and unexpected tax implications.

 

 

Overview: How Inherited IRAs Work in Illinois

An inherited IRA is an account opened after an IRA owner dies so a beneficiary can receive inherited IRA assets. It may hold assets from a traditional IRA, Roth IRA, 401(k), 403(b), or similar retirement account.

Beneficiaries cannot make new contributions to inherited IRAs, but the funds can keep tax deferred growth, or potentially tax-free growth for inherited Roth IRAs, until withdrawals are taken.

Federal tax law, the Secure Act of 2019, and SECURE 2.0 control required minimum distributions and distribution rules. Illinois mainly affects probate, state tax, guardianship, trust administration, and whether beneficiary designations are valid. The treatment of IRA distributions may vary depending on the type of IRA and the beneficiary’s relationship to the deceased.

Illinois-Specific Treatment of Inherited Retirement Accounts

Illinois does not rewrite federal inherited IRA accounts rules, but it matters a lot for administration. Most retirement accounts, including IRAs and 401(k)s, go directly to whoever is named as the beneficiary. This avoids probate.

If no beneficiary is named on a retirement account, or if the named beneficiary has passed away, the account will likely go through probate, which can delay distribution and may incur costs under the Illinois Probate Act of 1975. As of 2026, Illinois has no state inheritance tax, and beneficiaries of inherited retirement accounts, such as traditional IRAs, do not have to pay a state inheritance tax, but they are still subject to federal income tax on distributions taken from these accounts.

Illinois has no separate estate tax on most modest-size estates, but the Illinois estate tax was updated to increase the exclusion limit to $8 million. Large estates should confirm current thresholds with an attorney because retirement assets, life insurance, real estate, and investments can all matter.

Inherited IRA Basics Under Current Federal Law

The SECURE Act, enacted in 2019 and effective January 1, 2020, changed inherited retirement rules by significantly limiting the old stretch IRA option. SECURE 2.0, enacted in December 2022, added phased-in rules and clarifications.

A designated beneficiary is an individual named on the account. Non-designated beneficiaries include estates, charities, and some trusts; this matters because RMD timing can be faster. Currently, beneficiaries who fail to separate inherited accounts must calculate RMD timelines using the life expectancy of the oldest beneficiary.

For most beneficiaries who inherit in 2020 or later, inherited IRAs, both traditional IRA and Roth, must be distributed by December 31 of the 10th year after the owner’s death. In 2022, the IRS proposed regulations requiring annual distributions from inherited IRAs, which would apply to beneficiaries who inherited accounts from owners who had already begun taking required minimum distributions before the original owner’s death. A financial institution usually requires a separate inherited account title before taking distributions, and non-spouse heirs generally may use trustee-to-trustee transfer but not 60-day rollovers.

Spouse Beneficiaries of Inherited IRAs

Surviving spouses in Illinois have the most flexibility and are generally eligible designated beneficiaries. A spouse may treat the account as their own IRA, roll it into their own IRA, or keep it as an inherited IRA in the deceased spouse’s name.

Keeping the inherited account can make sense if the spouse is under 59½ and wants penalty-free access, and consulting a tax advisor helps determine whether that choice makes sense for the spouse’s situation. If the spouse treats the account as their own, required minimum distributions usually wait until the spouse’s own RMD age, currently 73 for those reaching 72 after 2022. Surviving spouses have the flexibility to treat an inherited IRA as their own, delaying mandatory distributions until reaching their own RMD age.

Rollovers are not taxable events, but distributions from a traditional IRA are ordinary income in the year received. Illinois-specific family issues, such as children from prior marriages or whether the spouse is executor, make planning especially important.

Non-Spouse Beneficiaries and Eligible Designated Beneficiaries

Most Illinois heirs inheriting from a parent, sibling, partner, or friend are non-spouse beneficiaries. Common examples include adult children, grandchildren, siblings, unmarried partners, and friends.

Under the SECURE Act, eligible designated beneficiaries, such as minor children or disabled individuals, may still take distributions based on their life expectancy rather than the 10-year rule that applies to most non-spouse beneficiaries.

A minor child generally uses life-expectancy RMDs until age 21, then the 10-year clock begins. Non-EDB heirs usually must empty the inherited IRA by year 10 and may owe annual distributions if the original owner died after the required beginning date.

Pre‑2020 vs. Post‑2019 Deaths: Stretch IRA Rules and the SECURE Act

Before the SECURE Act, many inherited retirement beneficiaries could stretch annual distributions over decades. When the original account owner died in 2019 or earlier, many designated beneficiaries can still use life-expectancy required minimum distributions.

When death occurred on or after January 1, 2020, most non-spouse beneficiaries fall under the 10-year rule. IRS Notice 2022-53 and Notice 2023-54 delayed enforcement of certain annual RMD rules for 2020–2023, but beneficiaries should expect enforcement for later years unless new guidance says otherwise.

Example: assume an Illinois parent died in 2018 and named an adult child; the child may still stretch. If the parent died in 2022, the child likely must withdraw the entire balance by December 31, 2032. Missing a federal required minimum can create federal penalties even though Illinois does not tax the income.

Required Minimum Distributions (RMDs) for Inherited IRAs

RMDs are mandatory withdrawals. Original traditional IRA owners usually begin by April 1 after reaching age 73, but beneficiaries may need to start the year after death regardless of their own age.

If the original IRA owner was already taking required minimum distributions (RMDs), the beneficiary must continue to take annual withdrawals in addition to depleting the account by the end of the 10-year period. In other words, if the owner had started RMDs and reached RMD age, the beneficiary may owe an annual RMD amount during years 1–9 plus full payout by year 10.

Simple example: a 50-year-old Illinois beneficiary inherits a $200,000 traditional IRA. If the IRS Single Life Table factor is 36.2, the first inherited IRA RMD is about $5,525. Beneficiaries can track current limits and find IRS life-expectancy tables on the IRS website for their distributions.

Missing an RMD results in a steep federal penalty of up to 25% of the amount missed, potentially reduced to 10% if corrected in time. If a beneficiary fails to take the required minimum distributions (RMDs) from an inherited IRA, they may face penalties starting in 2025, which could lead to additional tax liabilities.

Taxation of Inherited IRA Distributions for Illinois Beneficiaries

Withdrawals from a traditional IRA are taxed as ordinary income. Withdrawals from a Roth IRA can be tax-free if certain conditions are met.

Traditional IRA distributions count as federal ordinary taxable income, potentially impacting the beneficiary’s tax bracket and financial interest in preserving more after-tax value from the account. Inherited Roth IRA withdrawals are tax-free federally if the original account met the 5-year aging rule, but non-spouse heirs still must empty the account within 10 years.

Illinois residents report inherited IRA income federally, receive Form 1099-R for distributions, which must be reported on their tax return, and usually subtract qualifying retirement income on the Illinois return. Large lump-sum IRA distributions can affect brackets, Medicare premium surcharges, deductions, credits, and sometimes the 3.8% net investment income tax.

 

 

Planning Strategies for Inherited Retirement Accounts in Illinois

Timing can change the after-tax value of inherited IRAs in Illinois. Beneficiaries of inherited IRAs should plan their withdrawals strategically to avoid a large tax bill in the final year of the 10-year period, especially if they are required to take annual distributions.

Consider spreading distributions over several years, especially during lower-income years, career breaks, or early retirement. Review whether you qualify as an EDB and whether life-expectancy RMDs produce better results.

A beneficiary can disclaim an inherited IRA within 9 months of death if no benefit has been accepted, allowing assets to pass to contingent beneficiaries. Trusts require special care: see-through trusts, accumulation trusts, and special needs trusts can radically change RMD rules. Coordinate inherited retirement distributions with Illinois real estate, brokerage assets, insurance, and cash needs.

Protecting Illinois Retirement Accounts Before Death

For current Illinois owners, good planning makes life easier for heirs. Keeping beneficiary designations current is crucial because they override wills; if an ex-spouse is still named as a beneficiary, they may receive the funds regardless of changes in the will.

Name primary and contingent beneficiaries on every retirement account, including traditional IRA, Roth IRAs, 401(k), 403(b), and other plan assets. Review forms after marriage, divorce, birth, adoption, or death.

A trust may be useful for a disabled child, spendthrift beneficiary, or minor, but it can complicate required minimum rules. Work with an Illinois estate planning attorney and tax advisor to align beneficiary forms, wills, trusts, and future SECURE Act changes.

 

 

Frequently Asked Questions About Inherited IRAs in Illinois

Do I owe Illinois income tax on distributions from an inherited IRA?

Usually no. Most Illinois residents do not owe state income tax on qualifying retirement income, including properly reported distributions from inherited traditional IRAs and other retirement accounts. Federal income tax still applies to taxable portions, so confirm unusual situations with a tax professional.

What happens if the original IRA owner in Illinois did not name a beneficiary?

The custodian may pay the account to the estate, causing Illinois probate, delays, and added costs. Missing or default beneficiaries can also change required minimum distribution rules and may force faster payout than if an individual beneficiary had been named.

Can I roll an inherited IRA into my own IRA if I am not the spouse?

No. Non-spouse beneficiaries generally cannot roll an inherited IRA into their own IRA. They must maintain a separate inherited account and follow the applicable distribution rules. Only a surviving spouse typically can do a spousal rollover.

Can I convert an inherited traditional IRA to a Roth IRA?

A non-spouse beneficiary generally cannot convert an inherited traditional IRA to a Roth IRA. A surviving spouse who rolls the account into their own IRA may later choose a Roth conversion under normal rules. Illinois owners can consider lifetime Roth conversions to manage heirs’ future tax exposure.

How do Illinois courts treat inherited IRAs in divorce or creditor situations?

ERISA plans often have strong federal protections, but inherited IRAs may receive different treatment in Illinois divorce or creditor cases. Outcomes are fact-specific, so discuss asset protection, trusts, and account structure with an Illinois attorney before problems arise.

___________________________________________

Massey and Company CPA works with Nathan Sandoval, Attorney at Law, for Chicago-based clients who need estate planning, wills and trusts.  Thank you to Nathan for his contributions to this article.  Nathan can be reached directly at Nathan@Sandovallc.com or 708-825-7426.

___________________________________________

For more information about the tax and accounting services we provide, visit our Home Page!  The friendly CPAs, Enrolled Agents, accountants, tax professionals and bookkeepers at Massey and Company CPA are here to assist you.

If you want my team and I to handle your tax matter for you, click here.

You are welcome to email me directly at gary.massey@masseyandcompanyCPA.com.

Massey and Company CPA is a boutique tax and accounting firm serving individuals and small businesses in Atlanta, Chicago and throughout the country.  Our services include tax return preparation, tax planning, IRS tax problem resolution, IRS audits, accounting and bookkeeping.