Navigating Inherited IRA Withdrawals for Non-Spouse Beneficiaries

When you inherit an IRA from someone other than your spouse, you face decisions that can shape your tax bill for a decade or more. The SECURE Act and subsequent IRS regulations significantly changed the options, so understanding the rules is essential if you want to keep more of what you inherit and avoid penalties.

Understanding the 10‑Year Rule

For most non‑spouse "designated beneficiaries" of IRAs inherited after 2019, the general rule is that the inherited IRA must be fully emptied by December 31 of the 10th year following the original owner's death. This largely replaced the old "stretch" approach that allowed many beneficiaries to take required distributions over their life expectancy.

There is an important distinction:

• If the original owner died on or after their required beginning date (RBD) for RMDs, non‑eligible designated beneficiaries must generally take annual RMDs in years 1–9 based on their life expectancy and still have the account emptied by the end of year 10.
• If the owner died before their RBD, there is no annual‑RMD requirement for years 1–9; you just have to meet the 10‑year clean‑out deadline.

Key Strategic Considerations

1. Traditional vs. Roth Inherited IRAs

Traditional Inherited IRAs:
Distributions are usually fully taxable as ordinary income in the year withdrawn. Your strategy should focus on managing how those withdrawals interact with your other income and tax brackets over the 10‑year window.

Roth Inherited IRAs:
For non‑eligible designated beneficiaries, an inherited Roth IRA is usually also subject to the 10‑year rule, but annual RMDs are generally not required in years 1–9. In many cases, the best use of a Roth inheritance is to leave it invested as long as possible, then take distributions later in the 10th year following death.

2. Your Current and Projected Tax Situation

The "right" withdrawal pattern depends heavily on your broader tax picture. Think through:

• Expected career trajectory and income growth.
• Other retirement distributions that may start (e.g., your own RMDs in later years).
• Possible tax law changes or bracket shifts.
• Major life events such as retirement for you or your spouse, business sales, or years with unusually low or high income.

Withdrawal Strategies to Consider

The "Smooth Distribution" Approach

Divide the inherited IRA balance by 10 and withdraw roughly that amount each year, adjusting as the account value changes. This can keep the impact on your taxes relatively steady and provide predictable supplemental income.

Best for:

• Beneficiaries with stable income who value predictability.
• Situations where your tax bracket is unlikely to change materially.

The "Tax‑Bracket Management" Strategy

Instead of fixed amounts, you determine each year's withdrawal by how much you can add to your income before spilling into the next tax bracket or triggering other thresholds (such as higher Medicare premiums).

Best for:

• Beneficiaries with variable income from bonuses, self‑employment, or business ownership.
• Those approaching or in retirement who want to "fill up" lower brackets deliberately.

The "Back‑Loading" Approach

You take smaller distributions early (and if required, at least the annual RMDs in years 1–9) and larger withdrawals in later years, as long as the account is fully distributed by year 10.

Best for:

• Inherited Roth IRAs, where delaying withdrawals maximizes tax‑free compounding.
• Beneficiaries who expect to be in the same or lower tax brackets in the future.
• High‑earners today who anticipate much lower income later in the 10‑year period.

The "Front‑Loading" Strategy

You intentionally take larger withdrawals in the early years and taper down later, again staying within what you consider acceptable tax brackets.

Best for:

• Beneficiaries who expect significantly higher income or tax rates in future years.
• Those who want to use the proceeds to accelerate funding of their own tax‑advantaged accounts (401(k), 403(b), HSA, backdoor Roth, etc.), or to pay down high‑interest debt.
• Situations where current tax law offers unusually favorable brackets or deductions.

Special Situations and Exceptions

Eligible Designated Beneficiaries

A limited group called "eligible designated beneficiaries" (EDBs) still has access to more flexible payout options, including life‑expectancy ("stretch") distributions in many cases. EDBs include:

• Surviving spouses.
• The decedent's own minor children (until a specified age, typically 21, after which a 10‑year clock usually begins).
• Individuals who meet IRS definitions of disabled or chronically ill.
• Individuals who are not more than 10 years younger than the decedent (often siblings or close‑in‑age friends).

If you qualify as an EDB, your choices and timelines may be significantly different from the standard 10‑year rule.

Multiple Beneficiaries

When multiple individuals inherit the same IRA, it is often possible to split the account into separate inherited IRAs (properly titled) by December 31 of the year following death. Doing so lets each beneficiary choose their own distribution strategy and manage their own tax situation rather than being forced into a one‑size‑fits‑all payout.

Tax Planning Integration

An inherited IRA strategy works best when it's integrated with your broader financial and tax plan:

• Retirement savings: You might use distributions to fund your own IRA or Roth IRA (if eligible).
• Other investments: Coordinate withdrawals with tax‑loss harvesting, asset‑location decisions, and rebalancing across taxable, tax‑deferred, and tax‑free accounts.
• Estate planning: Consider whether inherited IRA withdrawals will affect your own estate size, potential estate tax exposure, or your plans for leaving assets to the next generation.
• Medicare premiums and other thresholds: Large withdrawals can push your modified adjusted gross income above IRMAA thresholds for Medicare Part B and D, or trigger phase‑outs and surtaxes.

Common Mistakes to Avoid

1. Ignoring state tax rules: States vary in how they tax retirement plan distributions. Some follow federal rules closely, others exempt certain retirement income, and some tax it fully. Always model both federal and state consequences.
2. Missing required distributions: If you are subject to annual RMDs from an inherited IRA and fail to take them, an excise tax of up to 25% applies to the shortfall, though this can often be reduced to 10% if the error is corrected within the allowed "correction window" and properly reported.
3. Waiting until the last minute without a plan: Taking a very large lump sum in year 10 can create an unexpectedly high tax bill and affect other areas such as credits, deductions, and Medicare premiums. If you plan to back‑load, make sure the math still works in your tax projections.
4. Not coordinating with your own Roth strategy: You cannot directly convert a non‑spouse inherited IRA into a Roth IRA in your own name. However, you can use the cash flow from inherited‑IRA withdrawals to support contributions or conversions in your own accounts, thereby shifting long‑term growth into a tax‑free Roth environment.

A Practical Example

Consider Sarah, a 45‑year‑old teacher who inherits a $300,000 traditional IRA from her 75‑year‑old aunt. The aunt had already begun taking RMDs, so Sarah, as a non‑eligible designated beneficiary, must take annual life‑expectancy RMDs in years 1–9 and fully distribute the account by the end of year 10. Sarah earns $65,000 annually and expects gradual raises.

A possible strategy for Sarah might be:

• Years 1–5: Take only the required RMDs calculated from the IRS beneficiary life‑expectancy table, recognizing that the actual dollar amount will depend on the year‑end balance and the applicable factor.
• Years 6–8: Increase withdrawals above the RMD to "fill up" a target tax bracket each year (for example, staying near the top of a middle bracket without spilling into the next one).
• Years 9–10: Finish distributing whatever remains, ideally timing larger withdrawals in years when other income is lower (for example, if she cuts back on work or has unusually high deductions).

This type of plan lets her spread the tax burden, stay within manageable tax brackets, and avoid last‑minute surprises in year 10.

The Bottom Line

Inheriting an IRA can be a meaningful financial opportunity, but the 10‑year rules and evolving regulations make it a complex asset to manage. With thoughtful planning, you can balance tax efficiency, cash‑flow needs, and long‑term goals rather than simply defaulting to a lump‑sum withdrawal or equal payments.

Because the "right" approach depends on your income level, other assets, age, health, and family goals, it often makes sense to work with a financial planner or tax professional who understands the SECURE rules and current IRS guidance. Early decisions—especially in the first few years after inheritance—can lock in or limit options later in the 10‑year window. Hence, taking the time to model different scenarios is usually well worth the effort. Reach out to me on the contact page below to see how inherited IRAs fit into your financial picture.

Disclaimer: This article is for educational purposes only and should not be considered personalized tax or investment advice. Tax laws are complex and change frequently. Please consult with qualified tax and financial professionals regarding your specific situation.