Inheriting a pre-tax individual retirement account (IRA) since 2020 could result in a significant tax bill without proper planning. Previously, heirs could take withdrawals over their lifetime with the “stretch IRA”. However, the Secure Act of 2019 introduced the “10-year rule”, which requires certain heirs, including adult children, to deplete inherited IRAs within 10 years after the original account owner’s death. Waiting until the 10th year to make IRA withdrawals could result in facing a substantial tax liability, according to certified financial planner Ben Smith of Cove Financial Planning in Milwaukee. Pre-tax IRA withdrawals are subject to regular income taxes, and the 10-year rule may lead to higher yearly taxes for certain heirs, especially for higher earners with larger IRA balances.
Shortening the 10-year withdrawal window can exacerbate the issue, experts warn. Larger withdrawals can significantly increase adjusted gross income, potentially leading to higher capital gains tax rates and phaseouts for other tax benefits. Smith mentioned instances where individuals lost eligibility for tax credits, such as the electric vehicle tax credit, by taking a large inherited IRA withdrawal in a single year. Since 2019, confusion has arisen regarding whether certain heirs needed to take yearly required minimum distributions (RMDs) during the 10-year window. However, the IRS finalized RMD rules for inherited IRAs in July 2025, requiring certain beneficiaries to start taking yearly RMDs from inherited IRAs if the original account owner reached their required beginning date before death.
Even if RMDs are not mandated, experts suggest considering spreading out inherited IRA withdrawals. Not taking a distribution from an inherited IRA in a year can result in increased tax liability as the amount continues to grow. Some heirs may opt for larger inherited IRA withdrawals in lower-income years during the 10-year window or utilize other tax planning strategies. Individuals should also consider future federal income tax brackets, as certain tax provisions, including lower income tax brackets, are set to expire after 2025. IRA expert and certified public accountant Ed Slott advised that failing to use the lower brackets each year is a missed opportunity, as they may revert to higher rates if not extended by Congress.
With the uncertainty surrounding control of the White House and Congress, it is challenging to predict whether federal tax brackets will change after 2025. It is crucial for individuals who have inherited pre-tax IRAs to carefully plan their withdrawals and consider the implications on their tax liability. Taking a strategic approach, such as spreading out withdrawals or making larger distributions during lower-income years, can help minimize the impact of taxes. Additionally, being aware of upcoming changes to federal tax brackets and implementing appropriate planning strategies can help heirs make informed decisions regarding their inherited IRAs and avoid potential tax pitfalls.
