Millions of Americans are unaware that the government completely changed inherited IRA rules, turning what used to be a decades-long tax advantage into a potential 10-year tax bomb.
What was intended as a generous financial gift could now trigger tens of thousands in unnecessary taxes if not handled correctly.
📺 Click below to watch our new video where we break it all down!
By: William Hinder, EAÂ |Â April 30th, 2025
Prior to 2020, if you inherited an IRA from someone (who wasn’t your spouse), you could take required minimum distributions (RMDs) over your entire lifetime. This strategy – known as the “stretch IRA” – let you minimize annual tax impacts while maximizing long-term growth.
Then along came the Secure Act, which took effect January 1, 2020.
For most non-spousal beneficiaries who inherit IRAs after this date, there’s now a simple but potentially costly rule: you must completely empty the inherited IRA within 10 years of the original owner’s death.
Let me emphasize this – the account balance must be zero by the end of the 10-years. Period.
This isn’t just a suggestion. The penalty for not fully emptying the account is severe: 50% of whatever amount should have been distributed but wasn’t. That’s one of the heaviest penalties in the tax code.
Within that 10-year window, the IRS gives you total flexibility. You can:
The IRS doesn’t care how you do it as long as the account is empty and the taxes are paid after 10 years.
But there’s another wrinkle: if the original owner was already taking RMDs, you must continue taking those RMDs each year during years 1 through 9, fully depleting the remaining balance by year 10.
Since traditional IRA distributions are taxed as ordinary income, this is where the real planning challenge begins. An inherited IRA is like a ticking tax time bomb.
Imagine you inherit a $500,000 traditional IRA. Sounds great, but if you’re already in the 24% tax bracket from your regular income, taking substantial distributions could easily push you into the 32% or even 35% bracket.
Those inherited IRA distributions don’t just impact your federal income tax bracket. They can also:
This isn’t what most people want to leave behind for their loved ones – a major tax problem disguised as a gift.
There is some good news though. Inherited Roth IRAs are the exception to the rule. While Roth IRAs are still subject to the 10-year emptying rule, the distributions themselves remain tax-free.
This means you can let that money grow for the full 10 years and then withdraw it all at once without tax consequences.
This makes Roth conversions an incredibly powerful estate planning tool – converting traditional IRAs to Roth IRAs during your lifetime could save your beneficiaries from a world of tax headaches.
If You’re an IRA Owner:
It’s time to dust off and revisit your tax and estate planning with these new rules in mind. The beneficiary designations that made sense under the old rules might be a tax disaster under the new ones.
Ask yourself:
If You’ve Inherited an IRA:
You need a distribution strategy that minimizes the tax impact over the full 10-year period.
This might mean taking distributions in years when your income is lower, or spreading the distributions out to avoid jumping into higher tax brackets.
This is complex planning that can have six-figure consequences for larger accounts. Do not leave these decisions to chance.
The government changed inherited IRAs forever, and the decisions you make now will determine whether your inheritance becomes a blessing or a burden.
Although you will pay tax on the IRA distributions, it’s better than the alternative, because the penalty for not taking them is pretty severe. This is not a deadline you want to miss, as you’ll pay taxes AND penalties – the worst of both worlds – if you don’t comply with the 10-year rule.
Have you recently inherited an IRA or are you planning to leave one to your loved ones? Hit the link below to schedule a consultation so we can build a strategy that minimizes the tax impact and maximizes your legacy.
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