Inheriting a retirement account sounds like a windfall; you hope it is — and it can be. But the rules governing inherited IRAs have changed dramatically in recent years, and misunderstanding them can trigger a steep penalty and a much larger tax bill than necessary. If you have inherited an IRA or expect to, here is what you need to know in 2026 to keep more of your money and avoid costly mistakes.
The End of the Stretch IRA
For generations, a non-spouse who inherited an IRA could stretch withdrawals over their lifetime, allowing the account to grow tax-deferred for decades. The SECURE Act of 2019 ended that for most heirs. Now, most non-spouse beneficiaries who inherited an account after 2019 must empty it within 10 years of the original owner’s death, the so-called 10-year rule. This compresses what used to be a lifetime of tax-deferred growth into a single decade, often during the heir’s peak earning years.
According to Kiplinger and IRS guidance, the practical effect is that large inherited balances can push beneficiaries into higher tax brackets if they are not careful about how they time their withdrawals over that decade.
The Annual RMD Twist That Started in 2025
For several years, there was confusion about whether heirs simply had to empty the account by year 10 or also take withdrawals along the way. The IRS resolved it with final regulations published in 2024. The answer, effective for the 2025 distribution year, is this: if the original owner has already reached their required beginning date for RMDs, the beneficiary must take annual required distributions in years 1 through 9, then empty the remaining balance by the end of year 10. If the owner died before their required beginning date, annual RMDs are generally not required, but the account must still be emptied within 10 years.
Missing one of these annual distributions is costly. The penalty is a 25% excise tax on the amount that should have been withdrawn, reduced to 10% if corrected promptly. That makes understanding which rules apply to your specific situation essential, not optional.
“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
Warren Buffett’s line, collected by Nasdaq, is a fitting reminder that an inherited IRA represents decades of someone else’s discipline. Handling it wisely honors that planning rather than handing an outsized share to the IRS.
Who Is Exempt From the 10-Year Rule
Not everyone is bound by the 10-year clock. The law carves out a category called eligible designated beneficiaries who can still stretch withdrawals over their life expectancy. These include:
- Surviving spouses, who have the most flexibility of all.
- Minor children of the original owner, until they reach the age of majority.
- Beneficiaries who are disabled or chronically ill.
- Beneficiaries who are not more than 10 years younger than the original owner.
If you do not fall into one of these categories, which describes most adult children inheriting from a parent, the 10-year rule almost certainly applies to you.
The Tax Trap Hiding in the 10-Year Rule
The biggest danger is not the penalty; it is the tax bracket. Because withdrawals from a traditional inherited IRA are taxed as ordinary income, emptying a large account increases your taxable income in the years you take the money. The trap is waiting until year 10 and pulling the entire balance at once, which can rocket you into the top tax bracket and cost you far more than necessary. A six-figure inherited IRA withdrawn in a single year can easily lose 30% or more to federal and state taxes combined.
Strategies to Minimize the Tax Hit
Smart timing can save thousands. Consider these approaches:
- Spread withdrawals evenly: Taking roughly equal amounts over the full 10 years usually keeps you in a lower bracket than a single large withdrawal would.
- Withdraw more in low-income years: If you have a gap year, a sabbatical, or early retirement, pull more from the account when your other income is low.
- Coordinate with your own retirement timing: Many heirs benefit from emptying the account before they start their own Social Security or RMDs.
- Remember, Roth inherited IRAs: follow the 10-year rule too, but withdrawals are generally tax-free, so you can often let them grow until year 10.
Spouses Have Special Options
If you inherit an IRA from your spouse, you have advantages no other beneficiary gets. You can treat the account as your own by rolling it into your existing IRA, which lets you delay distributions until your own RMD age and name your own beneficiaries. Alternatively, you can remain a beneficiary, which may make sense if you are under 59.5 and need penalty-free access. The right choice depends on your age, your income needs, and the age difference between you and your late spouse, so it is one of the clearest cases where personalized advice pays off.
Don’t Forget the Estate Planning Side
Inherited IRAs are also a reason to keep your own beneficiary designations up to date. The person you name on the account, not your will, controls who inherits it, so an outdated designation can send money to an ex-spouse or bypass the people you intended.
If you have substantial retirement accounts, it is worth discussing with an estate attorney how the 10-year rule will affect your heirs and whether strategies such as Roth conversions during your lifetime or strategic beneficiary naming can ease their future tax burden. A little planning on your end can save your children a great deal of money and confusion later, making a complicated inheritance smooth.
A Simple Planning Example
Picture inheriting a $300,000 traditional IRA from a parent at age 52. If you ignore it and withdraw the entire balance in year 10, that $300,000 will add to your peak salary, likely taxed at the highest rates you will ever face. If instead you withdraw roughly $30,000 a year across the decade, each slice is taxed far more gently, and you might time larger withdrawals to a year you take a sabbatical, change jobs, or retire early.
The difference between these two approaches can easily be tens of thousands of dollars in taxes on the same inheritance. That is the entire lesson of the 10-year rule in miniature: the money is yours either way, but how you time the withdrawals determines how much of it the IRS keeps.
The Bottom Line
The inherited IRA rules are more complicated and less forgiving than they used to be. Most non-spouse heirs must now empty the account within 10 years, many must take annual distributions starting in 2025, and missing one triggers a 25% penalty.
The key to keeping more of an inheritance is timing: spread withdrawals to control your tax bracket, lean into low-income years, and understand exactly which rules apply to your situation. Because the details vary so much by relationship and circumstance, a session with a tax professional almost always pays for itself here. For more on tax-smart planning, see our personal finance section.
Image Credit: Pexels, Kampus Productions
