If you inherited an IRA, the rules today are very different than they used to be. For most non-spouse beneficiaries, the account must now be fully distributed within 10 years. And if the original account owner had already started Required Minimum Distributions (RMDs), beneficiaries must also take annual distributions during years one through nine.
Understanding these rules is critical, because this is where a potential tax trap can occur.
The Tax Trap of Waiting Until Year 10
Some beneficiaries assume they can simply leave the inherited IRA untouched and withdraw everything in the final year.
But waiting until year 10 to take the full distribution could push you into a much higher tax bracket, creating a larger tax bill than expected.
How Inherited IRAs Differ From Other Assets
There is an important contrast between retirement accounts and other inherited assets.
If you inherit a brokerage account or real estate, those assets typically receive a step-up in basis. This means the cost basis resets to the asset’s value at the time of death. If you sell shortly afterward, you may owe little or no capital gains tax.
Retirement accounts do not receive this benefit.
Why Tax Strategy Matters for Inherited IRAs
Because inherited IRAs are taxed differently, thoughtful planning becomes important.
In many cases, that can mean:
- Spreading IRA withdrawals across multiple years
- Leveraging stepped-up assets first
- Managing income and tax brackets intentionally
Key Takeaway
Inheritance planning today is about more than transferring assets. It’s about understanding the rules and approaching distributions with a clear tax strategy.
Have a question or want help understanding your options? Contact us today to schedule a complimentary Q&A with one of our team members.
