If you’ve inherited an Individual Retirement Account (IRA) as a non‑spouse beneficiary, you’ve likely noticed different rules compared to those for a surviving spouse. One of those rules is the SECURE Act’s 10‑year distribution requirement.
What often leads to confusion is how to integrate those required decisions into the rest of your financial life, especially if you’re still earning a high income or approaching retirement.
The biggest risk many beneficiaries face isn’t missing a deadline. It’s waiting too long to plan and discovering in year ten that a large remaining balance has created an avoidable spike on your tax bill.
This kind of outcome is often referred to as a “tax bomb,” and with thoughtful planning, the risk can often be reduced.
Understanding the Risk Behind the 10 Year Rule
Under the SECURE Act, the IRS requires most non‑spouse beneficiaries to fully distribute an inherited IRA within 10 years of the original account holder’s death.
In this context, the account holder (also referred to as the decedent) may have owned a traditional IRA or another pre-tax, tax-deferred type of account, which directly affects the tax treatment of future distributions.
Without a strategy, many beneficiaries default to taking only the minimum required annual distributions (when applicable) in the early years.
While that may feel conservative, it can leave a substantial account balance to be withdrawn later or even in the 10th year which could coincide with your peak earning years or happen in a single, high-income year, thus pushing you into a higher tax bracket.
This is how tax inefficiencies emerge: not because the rules are broken, but because the rules are followed without coordination.
Some exceptions apply. Eligible designated beneficiaries—such as a minor child of the decedent or individuals with certain disabilities—may be permitted to take distributions based on their own life expectancy rather than the standard 10‑year rule. In the case of a spousal beneficiary, a rollover into their own IRA may also be an option, which can significantly change distribution rules and timing.
Why the “Right” Withdrawal Strategy Is Personal
Inherited IRA distribution strategies work best when they are coordinated with the IRA beneficiary’s broader financial picture. Important considerations typically include:
- Expected changes in income (retirement, career transitions, equity compensation)
- Current and future tax brackets
- Cash‑flow needs
- How the inherited assets fit into longer‑term goals
Two beneficiaries inheriting identical IRAs can (and often should) end up with very different strategies depending on these factors.
At Plancorp, we view inherited IRA decisions as part of a broader alignment between wealth and life priorities—not an isolated tax exercise.
Three Common Withdrawal Approaches
While there’s no single best answer, most inherited IRA strategies tend to fall into one of three broad planning frameworks.
1. Spreading Distributions Evenly Over 10 Years
Because distributions from most inherited IRAs are taxed as ordinary income in the tax year they’re received, the timing and size of withdrawals can materially affect your marginal tax rate.
For beneficiaries who expect their income to remain steady or increase over time, evenly spacing withdrawals can help manage income tax exposure over time rather than concentrating taxable income in a single year.
This approach typically involves distributing a meaningful portion of the account each year, well in excess of any required minimum distribution (RMD). The goal isn’t about mathematical precision. It’s about avoiding a future concentration of taxable income.
This approach is often considered by high earners seeking greater predictability and control over marginal tax exposure.
2. Taking Smaller Distributions Early, Larger Ones Later
If a beneficiary expects their income to decline in the coming years, such as retiring within 10 years of the original account owner’s death, a different approach may make sense.
In these cases, beneficiaries might:
- Take only required distributions (if applicable) in the early years
- Preserve more of the account for years with lower taxable income
- Use future withdrawals to “fill” lower tax brackets
This approach typically benefits from careful, scenario‑based modeling to evaluate tradeoffs over time.
3. Avoiding the “Wait Until Year Ten” Trap
One of the most common mistakes beneficiaries make is deferring the majority of distributions until the final year without a deliberate reason.
Deferring most withdrawals until the final year can effectively turn the remaining balance into a lump-sum distribution of the entire account.
Unless future income is expected to be significantly lower, this approach often creates a sharp increase in taxable income in that tax year.
In some cases, large, last‑minute withdrawals may increase taxable income enough to affect Medicare premiums or other income‑based thresholds
Without a clear plan, deferring decisions often limits your future options.
Beyond Timing: Other Variables That Matter
Effective inherited IRA planning goes beyond deciding when to take distributions. While inherited IRAs are not subject to early withdrawal penalties, IRS rules still govern how and when distributions must occur.
Understanding these distribution rules and coordinating withholding appropriately can help reduce the risk of underpayment penalties.
Tax Withholding Strategy
Withholding taxes directly from inherited IRA distributions can sometimes reduce the need for quarterly estimated payments. Unlike estimated taxes, IRA withholding is treated similarly to paycheck withholding, which can help prevent penalties when income is uneven throughout the year.
Investment Allocation During the 10‑Year Period
Inherited IRAs are still investment accounts, but their time horizon may be shorter than a traditional retirement account.
A beneficiary planning to use a significant portion of the account within the next decade may want to reconsider risk exposure, especially if the inherited assets represent funds earmarked for near‑term goals such as education, real estate purchases, or lifestyle support in retirement.
Why Planning Early Matters
Many of the costliest inherited IRA mistakes happen not because beneficiaries act too aggressively, but because they wait too long to engage.
Decisions made (or avoided) in the first year often shape what’s possible later. Once large balances remain late in the 10‑year window, options narrow and tax exposure increases.
These considerations are most effective when evaluated in coordination with a broader financial plan—one that accounts for taxes, investments, cash flow, and long‑term goals together.
Bringing It All Together
Avoiding a 10‑year tax bomb isn’t about finding a loophole. It’s about coordinating inherited IRA decisions with the rest of your financial life—your income, your investments, and your long‑term goals.
Because these decisions are nuanced and deeply personal, many beneficiaries choose to work with a fee‑only fiduciary financial advisor who can model multiple scenarios, explain tradeoffs clearly, and help evaluate how inherited assets may support long‑term priorities over short‑term tax outcomes.
If you’ve inherited an IRA and are considering the right strategy for you, our team is here to help.
For a more comprehensive overview of inherited IRA rules and planning considerations, visit our Wealth Management for Inherited IRAs guide, which walks through beneficiary options, tax rules, and how inherited accounts fit into a broader financial plan.
Inherited IRA distribution rules for surviving spouses are governed by the SECURE Act and SECURE 2.0, which establish required minimum distribution (RMD) ages of 73 or 75 depending on year of birth. A surviving spouse who maintains an IRA as an inherited account may, in certain circumstances, delay RMDs until the deceased spouse would have reached their applicable RMD age. Once the IRA is rolled into the surviving spouse’s own IRA, standard RMD rules apply based solely on the surviving spouse’s age, and inherited IRA distribution rules no longer apply.
