You just inherited an IRA from a parent or other loved one. The account holds $800,000. Your instinct is to leave it alone and let it grow. That instinct could cost you $150,000 or more in unnecessary federal income taxes.
The SECURE Act of 2019 (and its successor, SECURE 2.0 in 2022) fundamentally changed the rules for inherited retirement accounts. Most non-spouse beneficiaries who inherited an IRA after December 31, 2019, must now empty the account within 10 years of the original owner's death — and in many cases, must take annual required minimum distributions (RMDs) during that 10-year window.
The rules are complex, the IRS guidance has been inconsistent, and the tax consequences of getting this wrong are severe. Here is what you need to know.
The Old Rules: The "Stretch IRA"
Before 2020, a non-spouse beneficiary who inherited an IRA could "stretch" distributions over their own life expectancy. A 40-year-old who inherited an IRA could take small annual distributions over 40+ years, keeping the bulk of the account growing tax-deferred.
This stretch strategy was enormously powerful. It allowed a $500,000 inherited IRA to grow into several million dollars over the beneficiary's lifetime, with only modest annual tax obligations along the way.
The SECURE Act eliminated this for most beneficiaries. The stretch IRA is gone.
The New Rules: The 10-Year Rule
For most non-spouse beneficiaries — what the IRS calls "non-eligible designated beneficiaries" — the inherited IRA must be fully distributed by December 31 of the tenth year following the year of the original owner's death. There are no exceptions, no extensions, and the penalty for failure is steep: a 25% excise tax on any shortfall (reduced from the prior 50% by SECURE 2.0, and further reducible to 10% if corrected within two years).
The question that created years of confusion: do you also have to take annual RMDs during the 10-year period, or can you wait until year 10 and take a single lump-sum distribution?
The Annual RMD Requirement
After issuing proposed regulations in 2022 and repeatedly waiving penalties while the rules were finalized, the IRS confirmed the following framework effective for 2025 and beyond:
- If the original owner died on or after their required beginning date (generally April 1 of the year after turning 73), annual RMDs are required in years 1 through 9, and the remaining balance must be distributed in year 10.
- If the original owner died before their required beginning date, no annual RMDs are required — but the entire account must still be emptied by the end of year 10.
The distinction matters enormously. If your parent passed away at age 78, you must take annual distributions. If they passed away at age 65, you have more flexibility in timing — but less time to plan.
The Tax Trap: Why Timing Matters
The real danger of the 10-year rule is not the rule itself — it is the tax concentration it creates. Consider two scenarios:
Scenario A: No Planning
Sarah, age 50, inherits a $1,000,000 traditional IRA from her mother in 2026. Sarah earns $350,000 per year as a marketing executive. She ignores the inherited IRA for nine years, then withdraws the full balance (now grown to approximately $1,400,000) in year 10.
In that single year, Sarah's taxable income jumps to $1,750,000. The incremental federal tax on the $1,400,000 distribution is approximately $490,000 (at the 37% marginal rate for most of the distribution), plus Illinois state income tax of approximately $69,300 (at the 4.95% flat rate).
Total tax on the inherited IRA: approximately $559,300 — a 40% effective rate.
Scenario B: Strategic Distribution
Instead of waiting, Sarah works with her estate planning attorney and CPA to model optimal annual distributions. She withdraws approximately $100,000 to $120,000 per year for 10 years, timed to stay within the 32% or 35% bracket rather than pushing into the 37% bracket.
Over the 10-year period, her total federal and state tax on the inherited IRA distributions is approximately $420,000.
The difference: $139,300 in tax savings — simply from distributing the same money over 10 years instead of one.
Scenario C: Strategic Distribution With Roth Conversions
Sarah also has her own $500,000 traditional 401(k). Her attorney recommends coordinating inherited IRA distributions with partial Roth conversions of her own retirement account. In years where her income is lower (sabbatical, job transition, early semi-retirement), she accelerates inherited IRA distributions and Roth conversions to fill lower tax brackets.
This layered approach can reduce the total tax burden by an additional $30,000 to $60,000 over the decade, while also converting her own retirement assets to tax-free Roth status for her beneficiaries.
Who Qualifies for Exceptions?
Not all non-spouse beneficiaries are subject to the 10-year rule. "Eligible designated beneficiaries" can still use the old stretch rules:
- Surviving spouses — they can treat the inherited IRA as their own or roll it into their existing IRA
- Minor children of the decedent — but only until they reach the age of majority (21 under the SECURE Act), at which point the 10-year clock starts
- Disabled individuals — as defined under IRC Section 72(m)(7)
- Chronically ill individuals — as defined under IRC Section 7702B(c)(2)
- Beneficiaries who are not more than 10 years younger than the deceased account owner (siblings, for example)
Everyone else — including adult children, grandchildren, nieces, nephews, and friends — is a non-eligible designated beneficiary subject to the 10-year rule.
Trust Beneficiaries: An Additional Layer of Complexity
If the IRA was left to a trust rather than directly to an individual, the rules become significantly more complex. The tax treatment depends on whether the trust qualifies as a "see-through trust" (also called a "look-through trust") and whether it is a "conduit trust" or an "accumulation trust."
Conduit trusts — which require the trustee to distribute all RMDs immediately to the beneficiary — generally allow the beneficiary's individual tax brackets to apply. Accumulation trusts — which allow the trustee to retain distributions inside the trust — can trigger compressed trust tax brackets, where income above $15,200 (2026 estimate) is taxed at the top 37% rate.
If you are the beneficiary of a trust that holds an inherited IRA, or if you are considering naming a trust as your IRA beneficiary, specialized legal counsel is essential. The wrong trust structure can cost hundreds of thousands of dollars in unnecessary taxes.
Use Our Inherited IRA Calculator
We built a free tool to help beneficiaries model different distribution strategies and see the tax impact of each approach. You can enter the inherited IRA balance, your current income, your filing status, and your state of residence, and the calculator will show you the projected tax cost of various distribution schedules.
Try the Inherited IRA Calculator
What You Should Do Now
If you have inherited an IRA (or expect to), take these steps immediately:
- Determine which rules apply to you. When did the original owner die? Were they past their required beginning date? Are you an eligible or non-eligible designated beneficiary?
- Do not take a lump-sum distribution unless you have modeled the tax impact and confirmed it is the best approach. In almost all cases, it is not.
- Coordinate with your CPA and estate planning attorney to build a multi-year distribution plan that accounts for your other income, deductions, and tax projections over the 10-year window.
- Consider Roth conversion coordination. If you have your own pre-tax retirement accounts, the 10-year inherited IRA window is an opportunity to optimize your broader retirement tax picture.
- Review your own beneficiary designations. If you plan to leave retirement accounts to your children, the same 10-year rule will apply to them. A well-structured estate plan can mitigate the impact through trust design, life insurance, and Roth conversion strategies.
The SECURE Act created a tax trap that catches well-meaning beneficiaries every day. The difference between a planned approach and an unplanned one can be six figures. Do not leave that money on the table.
Schedule a consultation to build an inherited IRA distribution strategy tailored to your tax situation.