Inherited an IRA? Here’s What the 10-Year Rule Really Means for Your Taxes
Inheriting a large traditional IRA can feel like a windfall and a burden at the same time. If you’ve recently inherited one and discovered you’re required to empty it within 10 years, your instinct that this is a tax problem is correct. But there are ways to manage the impact, even if you can’t eliminate it entirely.
Someone Is Going to Pay the Tax
The first thing to understand is that the tax on a traditional IRA was always going to be paid by someone. The money was contributed pre-tax, so the IRS was going to collect eventually. The question is whether it gets paid by the original account holder during their lifetime or by the person who inherits it.
This is why multigenerational tax planning matters so much. When parents have significant IRA balances, it’s worth understanding what tax bracket their children are likely to be in when they inherit. If a parent can do Roth conversions at a 22% rate, but their child will inherit the account and pay at 35%, the math strongly favors converting during the parent’s lifetime. The hesitation is often that parents don’t want to ask their kids about their income, but that discomfort can cost the family significantly in the long run.
What the 10-Year Rule Actually Requires
Under the 10-year rule, most non-spouse beneficiaries must fully distribute an inherited IRA within 10 years of the original account holder’s death. There’s some variation in opinion on how distributions need to be timed within that window, but the end result is the same: all of it comes out, and all of it is taxable income.
On a $3.2 million inherited IRA, dividing evenly over 10 years means at least $320,000 in income per year before any investment growth is factored in. Using a rough Rule of 72, money in a growing account can double over 10 years, which means the actual total distributions could be closer to $4 or $5 million depending on growth and timing. That’s a significant tax exposure.
Strategies to Reduce the Damage
While you can’t avoid the tax entirely, there are ways to manage when and how much you pay.
Smooth your withdrawals strategically. Rather than taking large lump sums, spreading distributions over the full 10 years helps keep income from spiking dramatically in any single year. Coordinate withdrawals with your other income sources to avoid pushing yourself into a higher bracket unnecessarily.
Take advantage of market downturns. If the market drops significantly and the account value falls, that’s actually a good time to pull money out. If a $3.2 million account drops to $2 million in a down market and you distribute it then, you pay tax on $2 million. If the market recovers and the account climbs back to $4 million before you withdraw, you’ve paid tax on far more. Timing distributions around market conditions can meaningfully reduce your total tax bill.
Coordinate with income shifts. If your income fluctuates, look for years where other income is lower. Deferred compensation plans, for example, may give you some flexibility to push earned income into future years, freeing up space to take IRA distributions at a lower effective rate.
Use tax location to slow account growth. If you hold bonds or fixed income in your portfolio, consider moving that allocation into the inherited IRA. Fixed income grows more slowly than equities, which helps limit how large the account gets before you have to distribute it. Offset that by holding more equities in your brokerage or other accounts, where long-term capital gains treatment is more favorable.
Charitable strategies. If charitable giving is already part of your plan, directing some of the IRA distributions toward qualified charitable vehicles can help offset the income. This won’t preserve wealth for your heirs, but it can reduce the net tax cost if giving aligns with your goals.
The Bigger Lesson for Your Own Planning
If you find yourself managing an inherited IRA this way, it’s worth applying the same thinking to your own accounts. Understanding the tax situation your children or heirs will face when they eventually inherit from you is one of the most valuable things you can do for family wealth. The goal is to think about money not just for one lifetime, but across generations.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on inherited IRA tax strategies, listen to the full podcast episode here.