Inherited a Traditional IRA? How the 10-Year Rule Could Affect Your Taxes

You inherited a traditional IRA. Does that mean you have to cash it out right away?

Nope. And rushing to withdraw the money could leave you with a bigger tax bill than you expected.

Maybe you're thinking, "The money's mine now. Why not take it all and be done?"

Because the IRS still wants its share.

An inherited traditional IRA generally comes with a deadline, some withdrawal rules, and income taxes you'll need to account for.

The good news? You may have up to 10 years to empty the account. And how you handle those withdrawals could make a real difference in what you keep.

Here's what you need to know before you touch the money.

Do You Have to Pay Taxes on an Inherited Traditional IRA?

Yes, in most cases. But the tax works a little differently than you might expect.

There's no federal inheritance tax simply because you received an IRA. However, when you withdraw money from an inherited traditional IRA, the taxable portion generally counts as ordinary income.

Why?

Because traditional IRAs are generally funded with pre-tax dollars. The original owner typically received a tax break when contributing, so income taxes are generally due when the money comes out.

And when the owner passes away, that tax obligation doesn't disappear.

It passes along with the account.

If your state taxes retirement distributions, you may owe state income tax too.

One important exception: If the IRA contains nondeductible contributions, part of your withdrawals may be tax-free.

You can read more in IRS Publication 590-B.

How Does the Inherited IRA 10-Year Rule Work?

Here's where people get tripped up.

If you inherited a traditional IRA from someone other than your spouse, you may fall under the 10-year rule.

For many non-spouse beneficiaries, that means the entire inherited IRA must be emptied by December 31 of the tenth year following the original owner's death.

Let's say the owner passed away in 2026.

Your deadline would generally be December 31, 2036.

But here's what matters: You may have to take withdrawals before that deadline.

It depends on whether the original owner had reached the point when required minimum distributions (RMDs) had to begin.

If the Original Owner Died Before Their Required Beginning Date

If you're subject to the standard 10-year rule, you generally don't have to take annual withdrawals during years one through nine.

You can decide when to withdraw the money, as long as the account is fully emptied by the end of year ten.

That gives you some flexibility to consider how those withdrawals fit into your taxable income.

If the Original Owner Died On or After Their Required Beginning Date

The rules change.

You generally must continue taking annual required minimum distributions and still empty the account by the end of the tenth year.

So waiting until year ten to withdraw everything may violate the rules.

And missing a required distribution can lead to an IRS penalty.

Certain beneficiaries, including surviving spouses, minor children of the original owner, disabled or chronically ill individuals, and beneficiaries no more than 10 years younger than the owner, may qualify for different rules.

Before making a withdrawal, find out which rules apply to you.

Your IRA custodian can help identify the account details, and a qualified tax professional can help determine your distribution requirements.

For more information, see the IRS guidance on required minimum distributions.

Why Cashing Out an Inherited IRA All at Once Could Cost You More

Let's talk about the tax bill.

Say your regular income already puts you near the top of the 12% federal income tax bracket.

Now imagine withdrawing another $48,000 from your inherited traditional IRA in one year.

That extra income could push part of your taxable income into the 22% bracket.

And here's the part worth remembering.

You don't pay 22% on all your income just because you've entered the 22% bracket.

Only the portion that falls into the higher bracket is taxed at that rate.

Still, taking a large withdrawal in one year could mean paying more in taxes than you would by spreading withdrawals across several years.

For example, if you have room in a lower tax bracket over multiple years, smaller withdrawals may help you avoid pushing as much income into a higher bracket.

Of course, your income could change. Tax brackets could change. And if you're required to take annual distributions, you'll need to account for those too.

The point?

Don't assume taking everything today is your best option just because the money is available.

Look at the numbers first.

Can You Split an Inherited IRA With Your Sister?

Let's say you inherited your parent's traditional IRA, and you want to share it with your sister.

Can you just split the money?

That depends on who was named as a beneficiary.

If You're Both Named Beneficiaries

You can generally divide the inherited IRA into separate inherited accounts for each beneficiary, following the applicable rules and deadlines.

Each of you would then be responsible for the taxes on your own taxable withdrawals.

If You're the Only Named Beneficiary

Things get more complicated.

You generally can't simply transfer part of your inherited IRA to your sister and have her take over the income tax obligation.

If you withdraw money and give it to her, the taxable distribution is still reported as your income.

And depending on the amount, gift tax reporting rules may come into play.

Here's another detail people miss: The IRA beneficiary designation generally controls who inherits the account, even if the will says something different.

So before you promise anyone a share, check the beneficiary paperwork and speak with a qualified professional about your options.

Three Things to Check Before You Withdraw a Dollar

You don't need to figure out your entire financial future this week.

But you do need to get a few important facts straight.

1. Write Down Your Withdrawal Deadline

Start with the original owner's date of death.

If the 10-year rule applies, calculate the deadline as December 31 of the tenth year after death.

For an owner who died in 2026, that generally means December 31, 2036.

Write it down. Put it somewhere you won't lose it.

And remember, your final deadline doesn't necessarily mean you can skip annual withdrawals.

2. Find Out Whether Annual RMDs Apply

Ask the IRA custodian about the original owner's age, required beginning date, and any distributions already taken in the year of death.

Then confirm your specific requirements with a tax professional.

This matters because some beneficiaries must take annual distributions, while others have more flexibility.

You don't want to discover a missed withdrawal after the deadline has passed.

3. Check Your Tax Bracket Before Taking Money Out

Look at your expected taxable income for the year.

Then consider how much additional income an inherited IRA withdrawal would create.

Could the withdrawal push part of your income into a higher tax bracket? Are you expecting a higher or lower income next year?

Also, remember that larger withdrawals can affect other parts of your tax situation, including Medicare premiums or the taxation of Social Security benefits.

If you decide to withdraw money, ask about federal and state tax withholding.

A little planning now could help you avoid an unpleasant surprise when you file your taxes.

One More Thing: Don't Take a Check Without Understanding the Consequences

This is important.

If you're a non-spouse beneficiary, you generally can't roll an inherited IRA into your own IRA.

Instead, the account should typically be maintained as a properly titled inherited IRA, with the deceased owner's information and your beneficiary status reflected in the account title.

You can generally arrange a direct trustee-to-trustee transfer to another properly titled inherited IRA.

But if the money is distributed directly to you, you generally can't put it back through a rollover.

That could turn an avoidable paperwork mistake into a taxable withdrawal.

Before moving the account, ask the custodian to explain the transfer process.

The Bottom Line: You Have a Deadline. Make Sure You Have a Plan.

Inheriting an IRA can bring up a lot of questions, especially when you're already dealing with the loss of someone you love.

And suddenly, everybody has an opinion about what you should do with the money.

Cash it out. Invest it. Share it. Leave it alone.

Here's mine: Don't rush into a withdrawal before you understand the tax consequences.

Start with three things:

1. Know your deadline. Find out when the inherited IRA must be emptied.

2. Know your withdrawal requirements. Confirm whether annual RMDs apply.

3. Know your tax situation. Understand how withdrawals could affect your taxable income.

Then talk with a qualified tax professional before making a major decision.

The money may be yours now, but the IRS rules still apply.

And the more you understand those rules, the better prepared you'll be to decide what to do next.

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