Inherited IRA taxes: 10-year rule and strategies

An inherited individual retirement account can be a sizable windfall for some investors — but taxes can take a chunk without proper planning, experts say.

On average, heirs receive inherited IRAs at age 59, and the mean balance of those accounts is $128,000, according to a recent Vanguard report that analyzed nearly 83,000 accounts in 2024.

“Most people inherit an IRA in their 50s, right at the peak of their earning years, and then have to empty it within 10 years,” said certified financial planner Michael Walstedt, founding advisor of Reliant Wealth Advisory in Hoboken, New Jersey.

Since 2020, a “10-year rule” applies to some inherited accounts, requiring certain heirs, including adult children, to generally empty the balance by the 10th year after the original account owner’s death.

If it’s a pretax inherited IRA, the 10-year withdrawal timeline can boost adjusted gross income, potentially triggering higher taxes and reducing eligibility for other tax breaks, experts say.

Inherited IRA planning will continue to be important amid the so-called “great wealth transfer,” with baby boomers expected to pass trillions of dollars to Gen Xers and millennials in the coming decades.

Over the next 20 to 25 years, total transfers between generations could be an estimated $74 trillion, according to a 2025 report from financial services firm UBS.

Whether you’re preparing to leave a future gift or to inherit an IRA, there are some key tax moves to consider, financial experts say.

Since 2025, some adult children who receive an inherited IRA generally must start taking required minimum distributions, or RMDs, over the 10-year period or face an IRS penalty. The yearly RMD requirement applies if the original IRA owner reached RMD age, usually 73, before their death.

But even without yearly RMDs over the 10-year period, experts say, heirs should have a plan for pretax inherited accounts. Otherwise, they may have to take a large distribution in the 10th year, which could trigger a bigger-than-expected tax bill.

“I recommend projecting income over those 10 years and planning withdrawals around it,” said CFP James Mayo, founder of IronFjord Wealth Management in Lakewood, Colorado.

For example, if you’re expecting lower-income years due to retirement or a sabbatical, you could be in a lower tax bracket during those periods. Those years could be an opportunity to take bigger IRA distributions, he said.

Original account owners should also consider each heir’s income tax bracket when choosing IRA beneficiaries, said certified public accountant Tim Steffen, director of advanced planning at financial services firm Baird.

For example, if one child is a law firm partner and the other is a teacher, “their incomes are wildly different,” he said.

In that scenario, you might leave more of your IRA to the teacher because they’ll pay less income tax, and you might leave a tax-free life insurance policy to the higher-earning attorney, Steffen said.

“Be more thoughtful about who actually inherits what, instead of just saying everybody gets an equal share of everything,” he said.

If you’re the original account owner, Roth IRA conversions during life “can make a big difference” for heirs, according to CFP Dinon Hughes, a partner with Nvest Financial in Portsmouth, New Hampshire. 

Roth conversions transfer pretax or nondeductible IRA funds into a Roth IRA, which begins tax-free growth. The move triggers higher income in the year of the conversion, but could provide future heirs with more tax-free funds, experts say.

While certain inherited Roth IRAs are still subject to the 10-year rule, beneficiaries can generally withdraw the proceeds tax-free.

“The sweet spot for Roth conversions” is typically early retirement years, because income is lower before Social Security payments start and required minimum distributions kick in, Hughes said.

However, you’ll need tax projections to see how extra income could affect other tax breaks, such as the $6,000 senior “bonus” deduction.

Plus, boosting adjusted gross income can affect income-related monthly adjustment amounts, or IRMAAs, which increase Medicare Part B and Part D premiums once income exceeds a certain level.