Have you ever inherited something valuable, only to realize it comes with a tangle of rules and deadlines? That’s exactly what happens with an inherited IRA. It’s like being handed a golden egg—except it’s got a timer, and the IRS is watching. Navigating the rules around inherited IRAs can feel overwhelming, but with the right plan, you can turn this financial gift into a tax-smart opportunity.
Why Inherited IRAs Demand Your Attention
An inherited IRA is a retirement account passed down after the original owner’s death. It’s a powerful tool for building wealth, but the SECURE Act of 2019 flipped the script on how these accounts work. Gone are the days of stretching withdrawals over a lifetime. Now, most beneficiaries face the 10-year rule, a deadline that forces you to empty the account within a decade. Miss it, and you’re looking at hefty penalties. Let’s break down what you need to know to stay ahead.
The 10-Year Rule: What’s the Deal?
The 10-year rule is the IRS’s way of saying, “You’ve got a decade to clear out that inherited IRA.” If the original account holder died in 2020 or later, this rule likely applies to you. By the end of the 10th year after their death, the account must be empty. Sounds simple, right? Not quite. The catch lies in whether you need to take required minimum distributions (RMDs) along the way.
If the account holder had already started taking RMDs (typically at age 73 as of 2025), you’re on the hook for annual withdrawals based on your life expectancy for the first nine years. If they hadn’t started RMDs, you’ve got flexibility—you can wait until the final year to withdraw everything, or spread it out however you like, as long as the account is zeroed out by year 10.
The 10-year rule gives beneficiaries flexibility, but it’s a double-edged sword. Without a plan, you could face a massive tax bill.
– Financial planner
Here’s where it gets personal: I’ve seen friends scramble as the deadline approaches, wishing they’d planned better. The key is to start early and think strategically about taxes.
Who’s Exempt from the 10-Year Rule?
Not everyone has to follow the 10-year rule. The IRS carved out exceptions for a group called eligible designated beneficiaries. These folks can stretch withdrawals over their life expectancy, which can be a game-changer for tax planning. Wondering if you qualify? Here’s the list:
- Spouses: They can treat the IRA as their own, delaying withdrawals until their own RMD age.
- Minor children: They can stretch distributions until they reach adulthood.
- Disabled or chronically ill beneficiaries: They get lifelong withdrawal options.
- Beneficiaries within 10 years of the decedent’s age: They can also stretch payments.
If you’re not in this group, the 10-year clock is ticking. But don’t panic—there’s plenty you can do to make the most of it.
RMDs: Do You Need Them or Not?
Whether you need to take RMDs depends on a few factors. If the original account holder was already taking RMDs, you’ll need to continue them annually, calculated based on your life expectancy. Skip these, and you’re hit with a 25% penalty on the amount you should’ve withdrawn—though this drops to 10% if you fix it within two years.
Here’s a pro tip: RMDs are just the minimum. You can always take out more if it makes sense for your financial plan. For example, pulling extra funds in a low-income year could keep you in a lower tax bracket. On the flip side, if the account holder wasn’t yet required to take RMDs, you’ve got freedom. You could take nothing for nine years and withdraw it all in year 10—but that’s rarely the smartest move.
| Scenario | RMD Required? | Withdrawal Flexibility |
| Holder died before RMD age | No | Withdraw anytime within 10 years |
| Holder died after RMD age | Yes | Annual RMDs + extra if desired |
| Eligible designated beneficiary | No | Stretch over life expectancy |
This table sums it up, but the real challenge is figuring out what’s best for you. That’s where tax planning comes in.
Tax Planning: Lump Sum or Spread It Out?
One of the biggest decisions you’ll face is how to withdraw the money. Do you take a lump sum or spread withdrawals over the 10 years? Each option has pros and cons, and the tax implications are huge.
The Lump Sum Temptation
Taking the entire IRA in one go might seem appealing if you need cash fast—say, to pay off debt or invest elsewhere. But here’s the rub: the full amount counts as ordinary income in the year you withdraw it. A big withdrawal could push you into a higher tax bracket, leaving you with a monster tax bill.
Imagine you inherit a $500,000 IRA. Taking it all at once could add $500,000 to your taxable income, potentially costing you 37% or more in federal taxes alone. Ouch. Personally, I’d rather keep that money working for me than hand it over to the IRS.
The Power of Periodic Withdrawals
Spreading withdrawals over several years is usually the smarter play. By taking smaller amounts annually, you can stay in a lower tax bracket and keep more of your inheritance. Plus, the money left in the IRA continues to grow tax-deferred, which is a huge perk.
For example, withdrawing $50,000 a year for 10 years from that $500,000 IRA might keep you in the 22% tax bracket, saving you thousands compared to a lump sum. You can also reinvest those withdrawals into other accounts to keep your wealth growing.
Spreading withdrawals can feel like a slow burn, but it’s the best way to minimize taxes and maximize growth.
– Tax advisor
Timing Matters: Watch the Tax Landscape
Here’s something to chew on: tax rates aren’t set in stone. The Tax Cuts and Jobs Act of 2017 lowered rates, but those cuts expire at the end of 2025 unless Congress extends them. If rates rise, waiting until year 10 to withdraw could cost you more. Taking larger withdrawals now, while rates are lower, might be a savvy move.
Of course, nobody has a crystal ball. But keeping an eye on tax policy can help you decide when to pull the trigger on withdrawals. A financial advisor can be a lifesaver here, helping you crunch the numbers and plan for the future.
Approaching the Deadline: Don’t Get Caught Off Guard
If you inherited an IRA in 2020, you’re already halfway through the 10-year window as of 2025. Time flies, doesn’t it? Now’s the moment to check your account balance and map out your withdrawal plan. Here’s a quick checklist to stay on track:
- Review your account: How much is left? What’s your annual withdrawal rate?
- Assess your taxes: Will withdrawals push you into a higher bracket?
- Plan for RMDs: If required, are you taking enough each year?
- Consult a pro: A financial planner can help you avoid costly mistakes.
If you’re worried about having too much left as the deadline looms, don’t wait. Start taking larger withdrawals now to spread the tax hit over multiple years. The last thing you want is a rushed lump sum in year 10 that obliterates your tax return.
The Bottom Line: Plan Now, Save Later
An inherited IRA is a financial gift, but it comes with strings attached. The 10-year rule means you can’t just set it and forget it. By understanding RMDs, weighing lump sum versus periodic withdrawals, and keeping an eye on tax rates, you can make the most of your inheritance without getting burned by the IRS.
My advice? Don’t go it alone. A trusted financial advisor can help you navigate the rules and craft a plan that fits your goals. After all, this is about building your future—not stressing over deadlines.
Inherited IRA Strategy: 50% Tax Planning 30% Withdrawal Timing 20% Professional Guidance
