Receiving an inheritance might seem like a financial windfall—but if that inheritance includes a traditional IRA, it may come with an unexpected side effect: a substantial tax bill. Thanks to recent changes from the SECURE Act, many beneficiaries now face new rules and tighter timelines when it comes to inherited retirement accounts. If you’re not careful, you could end up losing a significant portion of your inheritance to taxes.
The SECURE Act Changed the Game
Prior to 2020, non-spouse beneficiaries could stretch IRA distributions over their lifetimes, spreading the tax burden over decades. But the SECURE Act of 2019 eliminated this strategy for most non-spouse heirs.
Now, most beneficiaries must withdraw the entire balance of an inherited IRA within 10 years of the original account holder’s death. That’s a dramatically shorter window—and for high-income earners or those still in their peak working years, this can push you into a much higher tax bracket.
Who’s Affected?
This rule applies to:
- Adult children inheriting their parents’ IRA
- Siblings, friends, or other non-spouse heirs
- Grandchildren in many cases
Exceptions are limited to:
- Spouses
- Disabled or chronically ill beneficiaries
- Minor children (until they reach majority, at which point the 10-year clock starts)
- Beneficiaries less than 10 years younger than the decedent
Why the 10-Year Rule is a Tax Trap
Let’s say you inherit a $500,000 traditional IRA in your mid-40s, while already earning a six-figure salary. You now have 10 years to withdraw—and pay ordinary income taxes on—that $500,000. That’s an additional $50,000 (or more) per year in taxable income, potentially pushing you into a higher tax bracket and increasing exposure to other taxes, like the Net Investment Income Tax or Medicare surcharges.
Without proper planning, you could lose 30%–40% of the inherited IRA’s value to taxes.
Smart Strategies to Reduce the Tax Hit
Fortunately, there are ways to minimize the tax burden—if you plan ahead:
1. Strategic Withdrawals
You’re not required to take annual distributions, but spreading withdrawals out over the 10 years—especially during lower-income years—can help avoid bracket creep.
2. Roth Conversions by the Original Owner
If the person leaving the IRA is still alive and planning their legacy, they may consider converting traditional IRA assets to Roth gradually over time. While they’ll pay taxes now, the inherited Roth IRA can be distributed tax-free by the beneficiary—still within 10 years, but with no income tax liability.
3. Layered Beneficiary Planning
Naming trusts or staggered beneficiaries (for example, naming grandchildren instead of adult children) can be effective in some cases, especially when coordinated with broader estate and tax strategies.
4. Income and Tax Timing
If you’re planning major life changes—such as retiring, selling a business, or sending a child to college—coordinate your IRA withdrawals to occur during lower-income years to reduce the tax burden.
5. Charitable Giving
If you’re charitably inclined, donating part of the IRA (via Qualified Charitable Distributions if eligible) or naming a charity as beneficiary can bypass income taxes entirely.
Why Coordination is Critical
Inherited IRAs require more than just good intentions—they require precise, strategic action. Poor timing, incorrect beneficiary forms, or missed opportunities can lead to:
- Unnecessarily high taxes
- IRS penalties for missed distributions
- Lost opportunity to align inheritance with broader retirement or estate goals
That’s why working with both a tax advisor and a financial planner is essential. Together, they can help you:
- Map out optimal withdrawal strategies
- Coordinate inherited assets with your existing retirement plan
- Avoid tax pitfalls and penalties
- Create a lasting legacy that honors the original intent of the inheritance
An inherited IRA is not a simple bank deposit—it’s a complex asset with powerful tax implications. Whether you’ve already inherited or expect to in the future, don’t wait until the 10-year window is nearly closed. The sooner you plan, the more you’ll keep—and the better positioned you’ll be to integrate it into your long-term financial picture.