Inherited IRA Tax Strategy Under SECURE Act's 10-Year Rule

A 45-year-old beneficiary inheriting a $1 million pretax traditional IRA must empty the account within 10 years, with every dollar withdrawn taxed as ordinary income. This inherited IRA tax strategy under the SECURE Act's 10-year rule transfers both the account balance and a significant deferred tax liability to the heir, who must handle federal and state taxes to avoid costly penalties.

If the account owner died in 2026, the beneficiary must fully distribute the IRA by December 31, 2036. The IRS's share of such an account typically amounts to about a quarter of the total for a mid-career earner. The beneficiary is 45 years old.

How the 10-year rule works and what happens if you miss it

For non-spouse beneficiaries who are not chronically ill, disabled, minor children, or within 10 years of the decedent's age, the SECURE Act requires the IRA to be fully distributed by December 31 of the tenth year after the year of death. If the original account holder had started required minimum distributions before death, the beneficiary must take annual RMDs in years one through nine and then empty the account in year 10.

Missing an RMD triggers a 25% excise tax on the amount that should have been withdrawn. This penalty can be reduced to 10% if corrected promptly and Form 5329 is filed. The IRS finalized this RMD rule for inherited IRAs in 2024 after years of confusion.

Tax brackets and the cost of poor timing

Adding large IRA distributions to existing wages can quickly push income into higher tax brackets. Under 2025 single-filer tax brackets, the 24% rate applies to income from $103,351 to $197,300, and the 32% bracket begins at $197,301. The 35% tax bracket for single filers in 2025 begins at $250,526.

Assuming the beneficiary is a single filer earning $120,000 in wages and takes $100,000 annually from the IRA for 10 years, taxable income reaches about $220,000 per year. Most of the $100,000 annual IRA distribution falls in the 24% bracket, with the remainder taxed at 32%. Federal tax on the inherited $100,000 distribution is roughly $25,000 per year, totaling about $250,000 over 10 years before state taxes. Adding state taxes, such as those in California or New York, could increase the total tax burden by $70,000 to $90,000 over the decade.

Strategies to minimize the tax hit

Three core strategies can reduce the tax impact. The first is smoothing withdrawals to stay within a target tax bracket, like the 24% bracket. The second involves timing deductions, such as charitable gifts via donor-advised funds, to coincide with distribution years. The third is front-loading distributions during low-income years, such as during a sabbatical, layoff, or business loss.

Taking the entire $1 million IRA balance in year 10 would push most of the distribution into the 32% and 35% tax brackets. A lump-sum withdrawal in year 10 could cost $80,000 to $100,000 more in federal tax than spreading withdrawals evenly over 10 years to stay within the 24% bracket. Smoothing $100,000 annual distributions results in roughly $250,000 in federal taxes over the decade.

Special risks: trusts and excise taxes

Beneficiaries who inherit through a trust without an eligible designated beneficiary may face a compressed payout window of five years instead of 10. Failing to take required minimum distributions risks the 25% excise tax, a costly error for non-spouse heirs. Suze Orman's Women & Money podcast provided a plain-language explanation of these rules, noting that non-eligible designated beneficiaries have "10 years to wipe it clean."

Beneficiaries should model their withdrawals to stay within lower tax brackets, use deductions strategically, and avoid lump-sum distributions to prevent paying tens of thousands in unnecessary taxes. The IRS 2025 federal income tax brackets were used to calculate the marginal tax impact of the IRA distributions.