Losing a parent is emotionally devastating. But while you are grieving, the IRS is calculating.
If you recently inherited a Traditional IRA or 401(k) from a parent, you might assume you can leave the money growing tax-deferred for decades, just like the old days.
Wrong.
Thanks to the SECURE Act 2.0, the "Stretch IRA" is dead for most adult children.
Now, you have a ticking time bomb called the "10-Year Rule."
If you mismanage this, you could hand over nearly half of your inheritance to the government.
Disclaimer: Tax laws are complex. This applies to "Non-Eligible Designated Beneficiaries" (most adult children). Consult a CPA immediately.
Inherited an IRA from Mom or Dad? Stop!
1. What Is the "10-Year Rule"?
Before 2020, if you inherited an IRA, you could withdraw the money slowly over your own life expectancy (30-40 years). This kept your annual tax bill low.
The New Reality (2026 Update):
Unless you are a spouse, disabled, or a minor child, you generally must empty the ENTIRE account by December 31 of the 10th year following the owner's death.
- Example: Your father died in 2025. You must withdraw 100% of the funds by December 31, 2035.
2. The "Lump Sum" Trap (Do Not Do This)
Many heirs think: "I'll just wait until Year 10 and take it all out then."
This is financial suicide.
💣 The Tax Bomb Scenario
- Inheritance: $1 Million IRA.
- Growth: In 10 years, it grows to $1.6 Million (at ~5% return).
- Year 10 Withdrawal: You take out $1.6 Million in one year.
- Result: This income is added to your salary. You instantly shoot up to the highest federal tax bracket (37%) plus state taxes (e.g., 13.3% in CA). You lose ~50% of the money.
3. The Smart Strategy: "Bracket Filling"
To save money, you must smooth out the withdrawals over the 10-year window.
How it works:
Look at your current tax bracket. Withdraw just enough from the Inherited IRA to "fill up" your current bracket without jumping to the next higher one.
- Scenario: You are in the 22% bracket (Single income up to ~$105k in 2026) and have $20,000 of "room" left before hitting the 24% bracket.
- Action: Withdraw exactly $20,000 from the Inherited IRA this year.
- Repeat: Do this every year. You pay 22% tax on the money instead of 37%.
4. CRITICAL: Do You Need to Take Annual RMDs?
This is where people get sued by the IRS.
If your parent died AFTER they had already started taking their RMDs (Required Minimum Distributions):
- The Rule: You MUST take a small RMD every single year (Years 1-9) based on your life expectancy.
- The End Game: You still must empty the remaining balance in Year 10.
Warning: The IRS waived penalties for 2021-2024, but that waiver is OVER. Starting 2025, if you miss an RMD, you owe a penalty.
The Penalty: It is 25% of the amount you failed to withdraw.
(Pro Tip: If you correct the mistake within 2 years, the penalty drops to 10% under SECURE 2.0).
5. What If It Is a Roth IRA?
Inherited Roth IRAs also fall under the 10-Year Rule, but with a beautiful twist:
Withdrawals are Tax-Free (provided the account was open for 5+ years).
Strategy:
Since you don't pay taxes on withdrawals, let the money grow for the full 10 years!
Unless you need the cash, don't touch a dime until December 31 of Year 10. Let it compound tax-free as long as possible, then take the massive lump sum at the very end.
Don't Let the IRS Be Your Main Heir
Your parents worked hard to leave you this legacy. Don't let laziness or ignorance destroy it.
You have a 10-year window to act.
Action Plan: Log in to your brokerage account today. Check if the IRA is "Traditional" or "Roth." Then, schedule a meeting with a CPA to calculate your "Bracket Filling" amount for 2026.
Helpful Resources:
IRS.gov: Beneficiary Rules Explained
Charles Schwab: Guide to the 10-Year Rule
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