If you have inherited an IRA from a parent, spouse, or other loved one, you need to understand the tax rules before you touch a single dollar. The rules changed significantly in recent years, and making the wrong move can cost you thousands in unnecessary taxes.
The 10 Year Rule Has Changed Everything
Before 2020, beneficiaries who inherited an IRA could stretch distributions over their entire lifetime, taking small required minimum distributions each year and letting the rest of the account grow tax deferred. This was called the stretch IRA strategy. The SECURE Act of 2019 eliminated the stretch IRA for most beneficiaries. Now, if you inherit an IRA from someone who was not your spouse, you generally must withdraw all the funds within 10 years of the original owner's death. There are no required annual distributions, but the entire account must be emptied by the end of the 10th year. This sounds simple, but the tax implications are significant. If you wait and take everything in year 10, you could receive a massive lump sum that pushes you into a much higher tax bracket for that year.
Who Is Exempt from the 10 Year Rule
Not everyone has to follow the 10 year rule. There are exceptions for what the IRS calls eligible designated beneficiaries. These include: Surviving spouses, who have the most flexibility. A spouse who inherits an IRA can roll it into their own IRA and treat it as their own, delaying distributions until their own required minimum distribution age. Minor children of the original account owner (until they reach the age of majority, at which point the 10 year rule kicks in). Disabled or chronically ill individuals. Beneficiaries who are not more than 10 years younger than the original account owner. If you fall into one of these categories, you may have more options for how and when you take distributions.
The Tax Strategy That Matters Most
If you are subject to the 10 year rule, the most important thing you can do is plan your distributions strategically. Taking everything in year 10 is usually the worst approach from a tax perspective. Instead, consider spreading distributions across the 10 years in a way that keeps you in a lower tax bracket each year. Work with a CPA or tax advisor to model out the scenarios and find the distribution schedule that minimizes your total tax bill. If you inherited a Roth IRA, the good news is that qualified distributions are tax free. The 10 year rule still applies, but you will not owe income tax on the withdrawals.
Do Not Wait to Get Advice
Inherited IRA rules are complex and the stakes are high. A mistake can trigger significant taxes and penalties. If you have recently inherited an IRA or expect to in the future, talk to a tax professional who specializes in this area before making any decisions. The money in that account represents someone's lifetime of saving. Handle it with the care and intention it deserves.