The Inherited IRA Tax Map for California Beneficiaries

Does an inherited IRA have to go through California probate?

A retirement account with a named beneficiary is specifically excluded from California’s small estate calculation and generally passes directly to that beneficiary outside the probate process (Prob. Code §13050). That is true regardless of the account’s size. The complexity with an inherited IRA is rarely probate. It is the federal tax clock that starts running the moment you inherit it.

The one thing to remember

Most non-spouse beneficiaries have to empty an inherited retirement account within 10 years, California taxes every dollar you pull as ordinary income, and the single worst plan is to ignore it until year ten and take the whole thing in one taxable lump. Every federal detail below is CPA territory; treat this as a map, not the drive.

What is the 10-year rule for an inherited IRA?

Before the SECURE Act, a beneficiary could stretch distributions from an inherited IRA over their own life expectancy, spreading the tax across decades. That’s mostly gone. For most people who inherit a retirement account today, the account has to be fully distributed by the end of the tenth year after the owner’s death (Pub. L. No. 116-94 (2019); 26 U.S.C. §401(a)(9); confirm with your CPA).

There’s a group the law still treats more gently, called eligible designated beneficiaries. That group generally includes a surviving spouse, a minor child of the account owner (until they reach the age of majority, at which point the 10-year clock typically starts), a disabled or chronically ill beneficiary, and a beneficiary not more than ten years younger than the owner. If you’re in one of those categories, your timeline is different, and your CPA needs to confirm which rule applies to you.

Do you also owe annual withdrawals inside the 10 years?

This is the part that trips people up, and it’s the clearest reason this guide can’t be the last word. Whether you have to take a required minimum distribution every year during the 10-year window, on top of emptying the account by the end, can depend on whether the person you inherited from had already started taking their own required distributions before they died. IRS guidance on this point has shifted since the SECURE Act passed, and the penalties for getting a required distribution wrong are real. This is exactly the question to bring to your CPA, with the account owner’s date of death and their age in hand.

What options does a surviving spouse have?

A surviving spouse generally gets choices no other beneficiary has. A spouse can often roll the account into their own IRA and treat it as if it were always theirs, which can push the tax out for years. Or the spouse can keep it as an inherited IRA, which sometimes makes sense if under retirement age and the money might be needed without an early-withdrawal penalty. The two paths have very different tax and timing consequences, and the right answer depends on age, income, and what else you’re living on. Run this with your CPA before you touch anything, because some of these choices are hard to undo.

Will California tax the money you inherit in an IRA?

California has no state estate tax and no state inheritance tax, so inheriting the account does not by itself create a state tax bill. When you take a distribution from an inherited retirement account, however, California taxes it as ordinary income (Rev. & Tax. Code §17041). There’s no preferential rate the way there is for long-term capital gains. It stacks on top of your wages and everything else, and it can push you into a higher bracket in the year you take it, so confirm the current rate with your CPA. That’s the whole reason timing matters so much: a distribution in a high-income year costs more than the same distribution in a low-income year. Watch the withholding defaults too; the custodian may withhold at a rate that doesn’t match what you’ll actually owe.

Can naming a trust as beneficiary backfire?

Sometimes it’s right to name a trust as the beneficiary of a retirement account, to protect a beneficiary or control the timing of distributions. But a trust that wasn’t drafted with retirement accounts in mind can make the tax worse, not better. The two general designs go by conduit and accumulation. A conduit trust passes distributions straight through to the beneficiary, who’s taxed at their own rate. An accumulation trust can hold distributions inside the trust, where they may hit the compressed trust income tax brackets that reach the top rate at a very low income level. A generic trust named as beneficiary, with no retirement language, is where families get hurt. If a trust is going to be your beneficiary, it has to be built for the job, and the tax modeling belongs to your CPA.

What’s the smartest way to spread out the withdrawals?

The instinct many people have is to leave the account alone and deal with it later. That’s how you end up taking ten years of income in a single year, at the worst possible rate. The better approach for most people is to spread distributions across the 10 years, leaning into lower-income years and easing off in higher-income years, so no single year gets crushed. If you qualify by age, a qualified charitable distribution can let you route some of the money to charity in a tax-favored way; confirm your eligibility and the current rules with your CPA. All of this is arithmetic on your specific income, and the person who runs that arithmetic is your CPA. What’s plain to say: don’t cash the whole thing out in week one because it feels tidy.

Tax Planning Checklist for Inherited IRA Beneficiaries

• ☐ Confirm which beneficiary category applies to you, and whether you’re an eligible designated beneficiary
• ☐ Find out whether the account owner had already started their own required distributions before death
• ☐ Build a 10-year distribution schedule with your CPA instead of waiting until the deadline
• ☐ Model each withdrawal against your expected income for that year, to avoid pushing yourself into a higher bracket
• ☐ Check custodian withholding defaults against what you’ll actually owe, so you aren’t surprised at tax time
• ☐ If you’re eligible by age, ask your CPA whether a qualified charitable distribution fits your plans
• ☐ If a trust is named as beneficiary, have it reviewed for conduit vs. accumulation design before any distribution is taken
• ☐ Revisit the schedule every year. Income, rules, and life circumstances all change

Four moves, in order

1. Get the form and the owner’s RMD status. Pull the beneficiary designation from the custodian, not from memory. Find the account owner’s date of death and their age, and whether they had started their own required distributions. Your CPA needs all of it.
2. Meet the CPA before year-end. The clock runs on the calendar year. Get in front of your CPA before December so you don’t lose a planning year by accident. Bring the account details and your own income picture.
3. Set a distribution schedule. Map the withdrawals across the 10 years against your expected income, rather than leaving it all for year ten. Your CPA builds the schedule; you follow it.
4. Revisit every year. Income changes, rules change, life changes. A schedule you set once and never touch is how a good plan drifts into a bad tax year. Recheck annually.

What’s the rule of thumb for an inherited IRA?

Treat this guide as a map, not the drive. The single worst plan is to ignore the account until year ten and take the whole thing in one taxable lump.

This is general information about California law, not legal advice, and reading it doesn’t make you a client. Nearly everything about the tax treatment of inherited retirement accounts is federal, and the rules and IRS guidance change; every federal point here must be confirmed with your CPA before you act. This guide is a starting map, not a distribution plan.

If the inherited account is one piece of a larger estate you’re sorting through, our estate planning page is a good next stop.

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