Inherited an IRA From a Parent? How the 10-Year Rule Works and How to Minimize Taxes
Of all the assets people inherit from a parent, an IRA is one of the easiest to misunderstand. Unlike a house or taxable brokerage account, an inherited IRA comes with its own distribution rules, deadlines, and tax consequences, and those rules have changed significantly in recent years.
I've seen situations where someone takes a distribution without realizing how it will interact with the rest of their income for the year. Others assume they can simply leave the account untouched for ten years. Depending on the circumstances, neither approach may produce the outcome they expected.
If you've inherited an IRA from a parent, you may have some flexibility over when the money comes out, but that flexibility has boundaries. For many adult children, the account must be completely distributed within ten years. In some circumstances, distributions are also required during that ten-year period.
Understanding those rules is the first step. From there, the timing of distributions becomes part of a broader tax and financial planning conversation.
What Is the 10-Year Rule for an Inherited IRA From a Parent?
For many years, a child who inherited an IRA from a parent could take distributions based on the child's own life expectancy. That allowed inherited retirement money to remain tax-deferred for decades.
The SECURE Act largely eliminated that option for most adult children inheriting retirement accounts from parents who died after 2019.
Today, most adult children are considered non-spouse designated beneficiaries who are subject to the 10-year rule. Generally, that means the inherited IRA must be completely distributed by December 31 of the year containing the tenth anniversary of the original owner's death.
The important planning question is what happens between the date of death and that final deadline.
With a traditional inherited IRA, taxable distributions are generally treated as ordinary income to the beneficiary. If someone inherits a meaningful account during their peak earning years, the timing of that additional taxable income can affect the overall tax cost of the inheritance. This is one reason tax and financial planning often need to be considered together. I discuss that relationship more broadly in why clients need integrated tax and financial planning.
Do You Have to Take Money From an Inherited IRA Every Year?
Sometimes. This is one of the most confusing parts of the inherited IRA rules.
For many adult children subject to the 10-year rule, the answer depends in part on whether the parent died before or after reaching their required beginning date for required minimum distributions.
If the parent died before their required beginning date and the 10-year rule applies, annual distributions generally aren't required during years one through nine. The account still needs to be fully distributed by the applicable deadline.
If the parent died on or after their required beginning date, annual required minimum distributions may apply during the ten-year period, in addition to the requirement that the account be completely distributed by the end of year ten.
This distinction matters because "you have ten years to empty the account" can easily be interpreted as "you don't have to do anything for ten years." Depending on the circumstances, that may not be correct. Before deciding when to take distributions, it's important to determine which inherited IRA rules apply to the particular beneficiary and account.
How Are Withdrawals From an Inherited Traditional IRA Taxed?
Withdrawals from an inherited traditional IRA are generally included in the beneficiary's taxable income in the year they're received.
That means an inherited IRA distribution can be added to salary, business income, investment income, and other taxable income for the year. As a result, the same distribution can have a different tax impact depending on what else is happening financially during that particular year.
Consider a hypothetical beneficiary who inherits a $650,000 traditional IRA from a parent while she's in her peak earning years.
She could take substantial distributions early in the ten-year period, potentially take larger distributions toward the end, or spread distributions across multiple years. Each approach can produce a different tax result depending on her income, future earnings, applicable distribution requirements, investment performance, and tax law at the time. This is why the 10-year rule shouldn't necessarily be viewed as simply a deadline. It creates a period during which several tax and financial variables may need to be considered together.
How Can You Minimize Taxes on an Inherited IRA?
There isn't one inherited IRA withdrawal strategy that minimizes taxes for everyone.
The tax impact depends on the beneficiary's income, other assets, applicable distribution requirements, expected future income, state of residence, investment performance inside the account, and other financial circumstances.
One factor to evaluate is how inherited IRA distributions interact with income from other sources. For example, a beneficiary may have years when income is unusually high because of a bonus, business income, stock compensation, or another taxable event. Other years may involve lower income because of retirement, a career transition, a sabbatical, or normal fluctuations in earnings.
When the inherited IRA rules provide flexibility over distributions, those differences in taxable income can affect the tax cost of taking additional money from the account in a particular year.
That doesn't necessarily mean the goal should be to take as much as possible during every lower-income year or as little as possible during every higher-income year. Future tax rates, investment growth, the remaining inherited IRA balance, and the approaching ten-year deadline can all affect the analysis. For a meaningful inherited IRA, it can therefore be useful to revisit the distribution plan as circumstances change rather than assuming the same withdrawal amount will make sense every year.
Should You Wait Until Year 10 to Empty an Inherited IRA?
Waiting until the final year isn't automatically the most tax-efficient approach, even in situations where annual distributions aren't otherwise required.
Keeping money inside a traditional inherited IRA allows the assets to continue growing tax-deferred. That can be valuable. At the same time, additional growth can leave the beneficiary with a larger taxable balance that eventually needs to be distributed.
Consider someone who inherits a sizable traditional IRA in their forties and leaves most of the account invested for nine years. If the investments appreciate substantially during that period, the beneficiary could reach the final years of the ten-year window with a much larger amount that still needs to be distributed.
Whether that is beneficial depends on the beneficiary's circumstances at the time. Rather than assuming distributions should be taken immediately or postponed as long as possible, the more useful analysis is how the inherited IRA fits into expected taxable income over the entire distribution period.
How Is an Inherited Roth IRA Different From an Inherited Traditional IRA?
Inherited Roth IRAs have different income-tax characteristics from inherited traditional IRAs.
Most distributions from an inherited Roth IRA are tax-free. However, the Roth five-year rule can affect the treatment of earnings in certain circumstances, so the account's history still matters.
Most adult children who inherit Roth IRAs are also subject to the 10-year distribution requirement. However, Roth IRAs are treated differently for purposes of the original owner's required minimum distributions, which can provide beneficiaries subject to the 10-year rule with greater flexibility over when distributions occur.
When someone inherits both traditional and Roth retirement accounts, the different tax treatment can create additional planning considerations around the timing of distributions. This is also an example of how Roth conversion decisions made during a parent's lifetime can eventually affect the accounts inherited by the next generation. I discuss Roth conversions more broadly in Roth conversion strategy for high earners in California.
Can You Roll an Inherited IRA Into Your Own IRA?
Generally, an adult child who inherits an IRA from a parent cannot simply roll the inherited IRA into their own IRA.
The inherited account generally needs to remain properly titled and treated as an inherited IRA. This differs significantly from the options available to a surviving spouse.
Special rules can also apply when a non-spouse beneficiary inherits assets from an employer-sponsored retirement plan rather than directly from an IRA. In certain circumstances, a direct trustee-to-trustee transfer can move those assets into a properly established inherited IRA. Because the mechanics matter, beneficiaries should understand the applicable rules before moving inherited retirement assets. An incorrect distribution or rollover can create unintended tax consequences.
How Are the Rules Different When a Spouse Inherits an IRA?
Surviving spouses generally have more options than adult children who inherit retirement accounts.
Depending on the circumstances, a surviving spouse may be able to maintain the account as an inherited IRA or elect to treat an inherited IRA as their own. The available choices and their tax consequences can depend on factors including the ages of the surviving and deceased spouses and the timing of distributions.
The rules discussed throughout this article are primarily focused on an adult child inheriting an IRA from a parent, rather than a surviving spouse. Exceptions to the standard 10-year treatment can also apply to certain other beneficiaries, including some minor children of the account owner, disabled or chronically ill beneficiaries, and beneficiaries who aren't more than ten years younger than the original account owner.
How Do Tax Withholding and Estimated Payments Work on Inherited IRA Distributions?
Deciding how much to distribute is only part of the tax calculation. The beneficiary also needs to consider how the resulting tax liability will be paid.
Federal income tax can generally be withheld from IRA distributions, and beneficiaries can typically make withholding elections. The amount withheld, however, may not necessarily match the beneficiary's ultimate tax liability, particularly when a large inherited IRA distribution is combined with substantial income from other sources.
Depending on the beneficiary's overall tax situation, additional withholding or estimated tax payments may be appropriate. For California residents, state income taxes also need to be considered when evaluating the potential tax impact of a distribution. I explain estimated payments more broadly in quarterly estimated taxes in California.
When Can Financial and Tax Planning Help With an Inherited IRA?
An inherited IRA can become more complicated when the account is large relative to the beneficiary's income or when the ten-year distribution window overlaps with other major financial changes.
Someone planning to retire several years after inheriting an IRA, for example, may have a very different tax picture over the ten-year period than someone whose income is expected to increase substantially.
Other events can also affect the analysis, including the sale of a business, stock compensation, large investment gains, a move between states, or changes in retirement income.
This is where looking at the tax return and financial plan together can be particularly useful. The tax analysis helps determine how a distribution affects taxable income in a particular year, while the financial plan provides context for how the inherited assets fit into the beneficiary's broader finances. Neither piece necessarily provides the full picture on its own.
Frequently Asked Questions About Inherited IRAs From a Parent
How long do I have to withdraw money from an inherited IRA?
Most adult children who inherit an IRA from a parent are generally required to fully distribute the account by the end of the tenth year following the parent's death. Different rules can apply to surviving spouses and certain other eligible designated beneficiaries.
Do I have to take an RMD every year from an inherited IRA?
It depends on the circumstances. If a parent died before their required beginning date and the beneficiary is subject to the 10-year rule, annual distributions generally aren't required before the final year. If the parent died on or after their required beginning date, annual required minimum distributions may apply during the ten-year period.
Is an inherited IRA taxed as income?
Withdrawals from an inherited traditional IRA are generally taxable as ordinary income in the year they're received. Most distributions from an inherited Roth IRA are tax-free, although the five-year rule can affect the treatment of Roth earnings in some circumstances.
What happens when an adult child inherits an IRA from a parent?
Most adult children are non-spouse beneficiaries and are generally subject to the 10-year distribution rule. The account typically remains an inherited IRA rather than being combined with the child's own IRA. Whether annual distributions are also required can depend on the circumstances of the original account owner.
Can I roll an inherited IRA from my parent into my own IRA?
Generally, no. A non-spouse beneficiary normally cannot combine an inherited IRA with their own IRA. Different rules apply to surviving spouses, and certain employer retirement accounts may be eligible for a direct transfer into a properly established inherited IRA.
What's the best way to withdraw from an inherited IRA to minimize taxes?
There isn't one withdrawal strategy that is best for every beneficiary. The tax impact can depend on current and expected income, applicable RMD requirements, investment growth, state taxes, the remaining distribution period, and other financial circumstances. Comparing distributions across multiple tax years can help illustrate the potential tradeoffs.
Should I take equal inherited IRA distributions every year?
Not necessarily. Equal withdrawals are simple, but taxable income and other circumstances may change from year to year. Depending on the applicable distribution requirements, different withdrawal patterns can produce different tax outcomes.
Do I need to pay estimated taxes on inherited IRA distributions?
Possibly. Federal income tax can generally be withheld from IRA distributions, but the withholding may not fully cover the beneficiary's actual tax liability. Depending on other income, withholding, and the size of the distribution, estimated tax payments may need to be considered.
What if I inherited both a traditional IRA and a Roth IRA?
Having both account types can create additional planning considerations because their tax treatment differs. Traditional inherited IRA distributions are generally taxable, while most inherited Roth IRA distributions are tax-free. The distribution rules applicable to each account should also be considered.
Does an inherited IRA affect my own retirement contribution limits?
Receiving an inherited IRA does not by itself reduce the amount you're otherwise eligible to contribute to your own IRA or employer-sponsored retirement plan. The inherited IRA remains separate from your own retirement savings.
What happens if I miss a required distribution from an inherited IRA?
A missed required minimum distribution can potentially result in an excise tax. Because inherited IRA rules have changed substantially and transitional relief has applied in some prior years, the applicable rules should be reviewed before determining whether a penalty is actually owed.
Summary
Most adult children who inherit an IRA from a parent are generally subject to a 10-year rule requiring the account to be fully distributed by the applicable deadline.
Whether annual inherited IRA distributions are required during that ten-year period can depend on whether the parent died before or after their required beginning date.
Traditional inherited IRA distributions generally create taxable ordinary income, so the timing of distributions can affect the beneficiary's overall tax picture.
Waiting until year ten isn't automatically the most tax-efficient approach, particularly if a significant taxable balance remains near the end of the distribution window.
Most inherited Roth IRA distributions are tax-free, although the 10-year distribution requirement generally still applies to adult children and the Roth five-year rule can matter in some circumstances.
Non-spouse beneficiaries generally can't roll an inherited IRA into their own IRA, while surviving spouses have different and more flexible options.
Evaluating an inherited IRA across the entire ten-year period can provide a clearer picture than making each distribution decision in isolation.
An inherited IRA isn't something you need to optimize perfectly in the first year, but it does deserve attention before the final years of the distribution window arrive. The most useful question usually isn't simply how quickly the money should be withdrawn. It's how the inherited account interacts with income, taxes, investments, and other financial decisions over the period in which it must be distributed.
If you've inherited an IRA and want help understanding how the tax and financial pieces fit together, visit KCL Wealth Management to request an intro call.
Author Bio
Katherine Leonard, CPA, CFP®, is the founder of KCL Wealth Management, a Newport Beach advisory firm specializing in tax-efficient financial planning and investment management. She began her career in tax at PricewaterhouseCoopers before becoming a Certified Financial Planner™ at a national RIA. Today, she helps clients build and preserve wealth by bringing their tax strategy, investments, and financial plan together into one coordinated approach. Many of her clients find her when they are going through one of life's major transitions, such as a divorce, the sale of a business, or the loss of a spouse. Read more about Katherine.
This article is for general educational purposes only and is not intended as individualized tax, legal, or investment advice. Tax rules are complex and can change, and the appropriate strategy depends on individual circumstances.