The inherited IRA rules changed dramatically with the SECURE Act, and many beneficiaries are unaware of the 10-year withdrawal requirement that now applies. Getting it wrong can mean expensive penalties.
Quick answer: Most non-spouse beneficiaries must withdraw all funds from an inherited IRA within 10 years (SECURE Act). Spouses can roll it into their own IRA. Traditional IRA withdrawals are taxed as income. Roth IRA withdrawals are tax-free (but still subject to the 10-year rule). Plan your distributions strategically to minimize tax.
Inherited IRA Rules by Beneficiary Type
| Beneficiary | Distribution Rule | RMDs Required Annually? |
|---|---|---|
| Surviving spouse | Can roll into own IRA or keep as inherited | Own IRA rules / can delay RMDs |
| Non-spouse (most people) | 10-year rule — empty by Dec 31 of 10th year | Yes, if original owner was taking RMDs |
| Minor child | Stretch until age 21, then 10-year rule | Yes, annual distributions required |
| Disabled/chronically ill | Stretch over life expectancy | Yes, annual based on life expectancy |
| Beneficiary not more than 10 years younger | Stretch over life expectancy | Yes, annual based on life expectancy |
| Non-designated (estate) | 5-year rule (if owner died before RMD age) | Must be emptied in 5 years |
| Trust beneficiary | Depends on trust type | See-through trusts can use 10-year rule |
How Taxes Work on Inherited IRAs
| Account Type | Tax on Withdrawals | Strategy |
|---|---|---|
| Inherited Traditional IRA | Taxed as ordinary income | Spread withdrawals to stay in lower brackets |
| Inherited Roth IRA | Tax-free | Can wait until year 10 (maximize tax-free growth) |
| Inherited 401(k) | Taxed as ordinary income | Roll into inherited IRA for more flexibility |
| Inherited Roth 401(k) | Tax-free | Roll into inherited Roth IRA |
The 10-Year Rule: Withdrawal Strategies
Strategy 1: Spread Evenly Over 10 Years
| Year | Inherited Amount: $500,000 | Withdrawal | Tax Impact |
|---|---|---|---|
| 1 | $500,000 | $50,000 | Added to income |
| 2 | ~$470,000 (after growth) | $50,000 | Added to income |
| … | Continues | $50,000/year | Consistent tax bracket |
| 10 | Remaining balance | Everything left | Added to income |
Strategy 2: Front-Load in Low-Income Years
Best if you expect higher income later (early career, between jobs, etc.)
Strategy 3: Back-Load (Roth Inherited IRA)
Best for inherited Roth — let it grow tax-free for 10 years, then withdraw everything tax-free in year 10.
Tax Impact of Inherited Traditional IRA Withdrawals
| Your Income | Additional $50K Inherited IRA Withdrawal | Federal Tax on That $50K |
|---|---|---|
| $40,000 | Pushes income to $90,000 | ~$8,500 (17% effective) |
| $80,000 | Pushes income to $130,000 | ~$12,000 (24% effective) |
| $120,000 | Pushes income to $170,000 | ~$15,000 (30% effective) |
| $200,000 | Pushes income to $250,000 | ~$16,000 (32% effective) |
Spreading withdrawals over 10 years keeps you in lower brackets. Taking it all at once can push you into a much higher bracket.
Spousal Inherited IRA Options
| Option | How It Works | Best For |
|---|---|---|
| Roll into own IRA | Treat as your own IRA, delay RMDs until your age 73 | Spouse under 73, wants to delay taxes |
| Keep as inherited IRA | Penalty-free withdrawals before 59½ | Spouse under 59½ who needs money now |
| Disclaim (refuse) | Passes to contingent beneficiary | Estate planning strategies |
Common Mistakes
| Mistake | Consequence |
|---|---|
| Not taking required annual distributions | 25% penalty on amount that should have been withdrawn |
| Taking full amount in one year | Massive tax bracket jump, could trigger Medicare surcharges |
| Non-spouse trying to roll into their own IRA | Not allowed — must keep as inherited IRA |
| Forgetting the 10-year deadline | 25% penalty on remaining balance |
| Not considering Roth conversion strategy | Missing opportunity to optimize tax impact |
| Missing the 5-year rule for Roth qualification | Inherited Roth withdrawals not tax-free if Roth < 5 years old |
Bottom Line
Inherited IRAs come with strict rules and significant tax implications. Non-spouse beneficiaries must empty the account within 10 years — but how you distribute can save you thousands in taxes. For traditional inherited IRAs, spread withdrawals across years to stay in lower tax brackets. For Roth inherited IRAs, let them grow tax-free and withdraw near the end of the 10-year window. And always take annual distributions if required to avoid the 25% penalty.
For related guides, see what to do with an inheritance and financial checklist when someone dies.