Inherited IRAs: the 10-year rule and the beneficiary mistakes that cost thousands

Before 2020, someone who inherited an IRA could 'stretch' withdrawals over their own lifetime, letting the account compound tax-deferred for decades. The SECURE Act ended that for most people. If you inherit an IRA today, you're probably on a 10-year clock — and how you distribute the money across those 10 years is a tax decision worth tens of thousands of dollars. Most beneficiaries get it wrong in one of two directions: they cash out immediately in a panic, or they ignore the account until year 10 and take the whole thing at their peak bracket.

The 10-year rule in plain English

Most non-spouse beneficiaries who inherit an IRA from someone who died in 2020 or later must fully empty the account by December 31 of the tenth year after the year of death. Every dollar withdrawn from an inherited traditional IRA is ordinary income to you in the year you take it — stacked on top of your salary. There is no early-withdrawal penalty on inherited accounts regardless of your age, but the income tax is unavoidable. The only question is which years it lands in.

One wrinkle trips up thousands of beneficiaries: if the original owner had already reached their required minimum distribution (RMD) age and started taking RMDs, the IRS requires you to take annual RMDs in years 1 through 9 too — you can't just wait and empty it in year 10. If the owner died before their RMD start date, no annual withdrawals are required; only the year-10 deadline applies. The IRS waived penalties on missed annual RMDs for 2021–2024 while it sorted out the confusion, but that grace period is over — the rule is enforced now, and the penalty for a missed RMD is 25% of the amount you should have taken.

Who escapes the 10-year rule

The law carves out 'eligible designated beneficiaries' who can still stretch distributions over their own life expectancy:

• Surviving spouses — who also get options nobody else gets (more below).
• The decedent's minor children — but only until they turn 21, at which point the 10-year clock starts. Grandchildren don't qualify.
• Disabled or chronically ill individuals, as defined by strict IRS criteria.
• Anyone not more than 10 years younger than the deceased — a sibling close in age, a partner, a friend.

If you fit one of these categories, do not let a custodian default you into the 10-year rule. Life-expectancy stretch treatment can mean decades of extra tax-deferred growth, and custodians process these transfers by the thousands — mistakes happen. Confirm in writing how your inherited account is coded.

Spouses: the rollover decision

A surviving spouse can treat the inherited IRA as their own — rolling it into their own IRA as if they'd always owned it — or keep it as an inherited IRA. Rolling it over is usually right for spouses at or past age 59½: RMDs follow your own schedule and the account behaves normally. But a younger spouse who needs the money should think twice. Withdrawals from your own IRA before 59½ trigger the 10% early-withdrawal penalty; withdrawals from an inherited IRA never do. A 48-year-old widow who rolls over the account and then needs $40,000 has just bought herself a $4,000 penalty that keeping the inherited title would have avoided. You can keep it inherited now and roll it over later — the option only runs one direction.

The year-10 tax bomb

The most expensive mistake under the new rules is procrastination. Because nothing forces early withdrawals (when the owner died before RMD age), the path of least resistance is to leave the account alone — and then take the entire balance in year 10, piling it all into a single tax year at your highest marginal rate. The smarter play is usually to spread withdrawals roughly evenly across the 10 years, filling up your current bracket each year without spilling into the next one, and taking bigger distributions in any low-income years (a sabbatical, a job gap, early retirement).

Inherited Roth IRAs: opposite timing

Inherited Roth IRAs follow the same 10-year emptying rule for most non-spouse beneficiaries, but with no annual RMDs and no tax on qualified withdrawals. That flips the strategy: since the money grows tax-free, the optimal move is usually to leave the entire account untouched until the final deadline and withdraw everything in year 10, capturing a full decade of tax-free compounding. A $200,000 inherited Roth growing at 7% becomes roughly $393,000 by year 10 — and every dollar of that growth comes out tax-free. Draining it early throws away free compounding for no benefit.

Your inherited-IRA checklist

1. Determine your beneficiary category: spouse, eligible designated beneficiary, or standard 10-year beneficiary.
2. Find out whether the original owner had started RMDs — this decides whether you owe annual withdrawals in years 1–9.
3. Retitle the account correctly as an inherited IRA via direct transfer; never accept a check.
4. If you're a spouse under 59½, weigh keeping the inherited title against rolling it into your own IRA.
5. Build a 10-year withdrawal map: project your income each year and fill low-bracket space first.
6. For an inherited Roth, plan to wait until year 10 unless you need the money sooner.
7. Run the plan past a CPA if the account is over $200,000 — one hour of advice is cheap against a five-figure bracket mistake.

The bottom line

An inherited IRA is a 10-year tax project, not a windfall to cash or a problem to ignore. Confirm your beneficiary category, honor the annual RMDs when they apply, spread traditional-IRA withdrawals to manage your bracket, and let an inherited Roth ride to the deadline. The rules are rigid, but within them the timing is yours — and timing is where the thousands are won or lost.