Inheriting a parent’s IRA once came with more flexibility for many beneficiaries. Before the SECURE Act changed the rules, an adult son or daughter could generally transfer the inherited account into a properly titled inherited IRA, take annual withdrawals based on life expectancy, and leave the remaining funds invested. Taxes on traditional IRA distributions could be spread over decades.
That option is gone for most non-spouse beneficiaries who inherited after 2019. In its place is a ten-year deadline to empty the account, with annual required minimum distributions (RMDs) applying in certain circumstances.
For beneficiaries inheriting traditional IRAs during their highest-earning years, the accelerated withdrawals can create a significant tax planning challenge.
The Adult Child Inheriting Mid-Career
A working-age son or daughter in their forties or fifties may inherit a traditional IRA from a parent while already earning near the top of their career. Taxable withdrawals from that account generally add to the heir’s ordinary income, potentially increasing the overall tax burden.
Waiting until year ten and taking the whole balance at once can create problems. A six-figure IRA distribution in a single tax year may push an heir into a higher tax bracket, increase certain income-based taxes or Medicare premiums where applicable, and raise the state income tax bill.
Spreading withdrawals across the ten-year period may reduce the total tax burden, depending on the beneficiary’s income, deductions, and other circumstances. A financial advisor who evaluates the heir’s projected tax brackets year by year can help develop a withdrawal strategy that accounts for those variables.
One important detail is when the original account owner died relative to their required beginning date for RMDs. If the owner died on or after that date, beneficiaries subject to the ten-year rule generally must also take annual distributions during years one through nine. As Kiplinger explains, the account must still be fully distributed by the end of year ten.
If the original owner died before their required beginning date, beneficiaries subject to the ten-year rule generally have more flexibility over the timing of withdrawals, provided the account is emptied by the deadline.
The Surviving Spouse Has Options Nobody Else Gets
A spouse inheriting an IRA has options that generally aren’t available to other beneficiaries. Depending on the circumstances, a surviving spouse may treat the IRA as their own, roll eligible funds into their own IRA, or maintain the account as an inherited IRA.
Each choice can affect distribution timing and potential penalties. For a younger surviving spouse who may need access to the funds before age 59½, keeping the account as an inherited IRA can be beneficial because distributions made to beneficiaries after the original owner’s death are generally exempt from the 10% early-distribution tax.
A spouse who doesn’t need immediate access may benefit from treating the IRA as their own, potentially allowing distributions to follow their own retirement timeline. The appropriate choice depends on factors including the surviving spouse’s age, the deceased owner’s age, whether RMDs had begun, and the household’s financial needs.
The Beneficiary Who Is Exempt and Does Not Know It
Not every heir is subject to the standard ten-year withdrawal deadline immediately after the original owner’s death. Schwab outlines five categories of eligible designated beneficiaries who may qualify for different distribution treatment:
- Surviving spouses.
- Minor children of the original account owner.
- Beneficiaries who meet the applicable definition of disability.
- Chronically ill beneficiaries who meet the applicable requirements.
- Individuals who are not more than ten years younger than the deceased account owner.
These beneficiaries may qualify to take distributions over their life expectancy, subject to the rules governing their particular circumstances.
For example, a sibling who is three years younger than the deceased account owner may qualify for eligible designated beneficiary treatment.
Minor children of the original account owner also receive special treatment. Under the applicable federal rules, they generally reach the age of majority for this purpose at 21. At that point, the ten-year distribution period begins, requiring the remaining inherited IRA balance to be distributed by the end of the tenth year following the year they turn 21.
These exceptions matter because an heir who qualifies for different distribution treatment may have more time to manage withdrawals and their associated tax consequences.
The Heir Who Misses an RMD Entirely
Missing a required distribution can still be costly. The federal excise tax on an RMD shortfall is generally 25% of the amount not withdrawn as required. That rate may be reduced to 10% if the shortfall is corrected within the applicable correction window. The IRS may also waive the tax when the beneficiary meets the requirements for reasonable-error relief.
The rules have created confusion for beneficiaries subject to the ten-year deadline. During the transition to final regulations, the IRS provided relief from certain annual RMD penalties for 2021 through 2024.
Beginning in 2025, the annual distribution requirements generally became applicable to affected beneficiaries under the finalized rules.
That means someone who inherited an IRA in 2021 or 2022 should confirm whether annual RMDs apply and whether the required distribution for the current year has been completed. Earlier penalty relief doesn’t eliminate the obligation to satisfy applicable requirements going forward.
Build the Withdrawal Plan Before the Statement Arrives
- Confirm your beneficiary category. Determine whether you’re a surviving spouse, another eligible designated beneficiary, or a non-spouse beneficiary subject to the ten-year rule. Different rules may apply when an estate or trust inherits the account.
- Check whether annual RMDs apply. The original owner’s required beginning date and the beneficiary’s classification can affect whether distributions are required before year ten.
- Model the full withdrawal period. Consider how distributions might affect taxable income across multiple years rather than focusing only on the final deadline.
- Coordinate with the rest of the financial plan. Employment income, charitable giving, investment gains, retirement decisions, and a spouse’s income can all influence the most appropriate withdrawal strategy.
An inherited IRA can be a valuable financial resource, but the distribution rules require attention. Understanding the deadlines and tax implications early gives beneficiaries more opportunities to plan withdrawals rather than reacting when the final distribution year arrives.
