Inheriting $500,000 in an IRA can seem like a life-changing windfall. But not knowing one important IRS rule could cost you thousands of dollars. The timing and size of your withdrawals can have a major impact on how much inheritance you ultimately keep. Fortunately, you have options to avoid an expensive mistake.
A financial advisor can help you manage taxes on an inheritance and create a plan to invest it.
The 10-Year Clock (and Another Catch)
This is where many beneficiaries get caught off guard: When you inherit an IRA from someone other than your spouse, you generally must withdraw the entire balance by the end of the 10th year after the original owner’s death.
But that’s not the only deadline you may have to worry about. If the original owner had already started taking required minimum distributions (RMDs) before they died, you generally must also take annual RMDs during the 10-year period.
Many beneficiaries missed this detail because the IRS temporarily waived penalties while it finalized guidance. That relief ended in 2025, and missing an RMD now risks a penalty of up to 25%, which could be reduced if corrected promptly. 1
Why Taking Only Your RMD Could Cost You Six Figures
If you’re required to take annual RMDs from an inherited IRA, withdrawing only your RMD each year may not be the most tax-efficient strategy. You still generally must empty the account by the end of the 10th year, and leaving most of the balance until then can create a much larger tax bill.
For example, if you inherit a $500,000 traditional IRA at age 50 and have $100,000 of taxable income each year, your first RMD would be about $13,800. This is based on the IRS Single Life Expectancy Table, which assigns a life expectancy factor of 36.2 to a 50-year-old beneficiary to calculate the first year’s RMD ($500,000 ÷ 36.2 = $13,812). 2
Because those annual RMDs represent only a small portion of the account, you could still have hundreds of thousands of dollars left to withdraw in the final year if you take only annual minimums. And that could create a substantial tax bill.
Here’s what that could look like: Let’s assume your remaining balance is $375,000. Withdrawing that amount in Year 10 would increase your taxable income to about $475,000. Using the 2026 federal income tax brackets for a single filer, the additional IRA income would be taxed approximately as follows:
- 22% on the first $6,625 = $1,458
- 24% on the next $96,075 = $23,058
- 32% on the next $54,450 = $17,424
- 35% on the remaining $217,850 = $76,367
So what is your additional federal tax? About $118,300, before deductions, credits and any applicable state income taxes.
If, instead, you divide that balance into smaller withdrawals over the 10-year period (after taking RMDs), you may be able to keep more of your income in lower tax brackets and potentially save tens of thousands of dollars in taxes.
Exceptions to the 10-Year Clock
Not every inherited IRA is subject to the 10-year rule. Surviving spouses generally have the most flexibility and can often treat the inherited IRA as their own or follow a different distribution schedule. Certain other beneficiaries, known as eligible designated beneficiaries, may also qualify for exceptions.
This group generally includes minor children of the original account owner, disabled or chronically ill individuals, and beneficiaries who are no more than 10 years younger than the person who died. These beneficiaries may be allowed to stretch distributions over a longer period instead of emptying the account within 10 years, although different rules can apply depending on the beneficiary’s circumstances.
A financial advisor can help you qualify for available exceptions and minimize taxes on your inheritance.
Photo credit: ©iStock.com/miniseries, ©iStock.com/Jacob Wackerhausen.
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