Here’s the situation: someone leaves you their traditional IRA when they die. Money sitting there, maybe a lot of it. Feels like a gift, right? It is — but it comes with strings.
For most beneficiaries, the IRS requires you to empty the entire account within 10 years of the original owner’s death. You don’t have to take it all at once, but it all has to be gone by the end of year ten. And here’s the part that stings: in most cases, every dollar you pull out gets counted as ordinary income in the year you take it — taxed at the same rate as your paycheck. (If the original owner made any after-tax contributions to the IRA, a small portion might not be taxable, but that’s uncommon — a tax professional can tell you if it applies.)
Ordinary income means it’s taxed at whatever rate applies to the rest of your earnings that year. So if you’re already making decent money and you pull out a huge chunk of an inherited IRA on top of that, you could push yourself into a much higher tax bracket. That “free” inheritance can quietly turn into a pretty big tax bill.
There are exceptions to the 10-year rule. A surviving spouse, a minor child of the original owner, someone who’s disabled or chronically ill, or a beneficiary who is no more than 10 years younger than the person who died may have different options — including the ability to stretch withdrawals over their lifetime. But for most people — a sibling, a friend, a grown adult child — the 10-year rule applies.
One more thing worth knowing: in some cases, the IRS actually requires you to take money out in years one through nine too, not just let it all sit until year ten. Whether that applies to you depends on whether the original owner had already started taking required minimum distributions before they died. It’s genuinely complicated.
The bottom line is simple though: inheriting a traditional IRA isn’t just a money decision — it’s a tax decision. And the choices you make about timing those withdrawals can make a real difference in how much you actually keep.