Most people never think about inherited IRA rules until the day they actually inherit one. By then, grief and paperwork are already competing for their attention, and a decision with enormous tax consequences has to be made — often within weeks.

We saw this firsthand with Mark, a 60-year-old client whose mother passed away this year and left him her traditional IRA, worth $200,000. Mark wasn’t in bad shape financially. He had a steady income of $80,000 a year and no immediate need for a windfall. But he had no idea what the rules required of him, and “I’ll just take it out and be done with it” was the plan he walked in with.

That plan would have cost him dearly.

The Cost of Guessing

A common mistake is assuming an inherited IRA works like any other account — withdraw what you want, when you want. The problem is that a traditional IRA is fully taxable, and a large withdrawal doesn’t sit off to the side at its own tax rate. It gets added directly on top of your other income for the year.

For Mark, pulling out the full $200,000 in one year would have pushed his taxable income from $80,000 to $280,000. At that level, he would have paid close to 40% of the inheritance in taxes — roughly $80,000 to the IRS — leaving him with just $120,000 instead of $200,000.

That’s not a plan. That’s a guess, and it’s an expensive one.

Building the Right Strategy from the Category Up

Instead of starting with “how much do I withdraw,” the better approach starts with a more fundamental question: which type of beneficiary am I?

Since the Secure Act took effect in 2020, every IRA beneficiary falls into one of three categories, and the category determines the rules.

Non-designated beneficiaries are accounts left to an estate or certain trusts rather than an actual person. This category has the least favorable rules — often requiring the account to be emptied within five years, or forcing continued distributions on the original owner’s schedule.

Non-eligible designated beneficiaries are the largest group, and this is where Mark landed as his mother’s adult son. This category follows the well-known 10-year rule: the account must be fully emptied by the end of the tenth year following the year of death.

Eligible designated beneficiaries get the most favorable treatment. This includes surviving spouses, minor children, disabled or chronically ill beneficiaries, and anyone not more than 10 years younger than the original owner. These beneficiaries can often stretch withdrawals over their own life expectancy — sometimes 20 years or more — rather than being boxed into a 10-year window.

Mark’s mother had not yet started required minimum distributions (RMDs) when she passed, which meant Mark technically had no obligation to withdraw anything until the very end of year 10. That flexibility sounds appealing — until you consider what happens next.

The Hidden Trap of Waiting

If Mark had left the full $200,000 growing untouched for 10 years, and it grew to, say, $320,000, he would have been required to withdraw all of it in a single year. Combined with his income at that point, likely higher after a decade of career growth, that withdrawal could have pushed him into one of the highest tax brackets he’ll ever see.

Instead, we built Mark a smoothing strategy: withdraw roughly $32,000 a year over the 10-year window, spreading the tax impact evenly rather than letting it detonate all at once in year 10. In years where his income happened to be lower, we increased the withdrawal slightly to take advantage of a lower bracket. In years where he had other income spikes, we reduced it.

This is the same principle we use in retirement income planning generally: the goal isn’t just to follow the rules, it’s to sequence withdrawals in a way that minimizes the total tax paid over time.

What This Means If You’re the One Leaving an IRA Behind

Mark’s situation also raised a question his mother could have addressed while she was still alive: was an IRA even the right account to leave to an adult child? A surviving spouse receives far more favorable treatment than an adult child — including the ability to roll the inherited IRA into their own account and delay taxation even further. If Mark’s mother had instead considered a partial Roth conversion during her lifetime, some of that tax burden could have been eliminated for Mark entirely, since Roth IRAs pass to beneficiaries tax-free. This is a decision every current IRA owner should revisit: not just who inherits the account, but what condition that account is in when it transfers.

A Plan Is a Starting Point, Not a One-Time Decision

Just as with retirement income planning, an inherited IRA strategy isn’t something you set once and forget. Tax brackets shift. Income changes. Life circumstances change. We review Mark’s withdrawal plan annually, adjusting the amount based on what actually happened that year rather than what we projected five years earlier.

For Mark, the outcome is straightforward. He knows exactly how much to withdraw each year, why that amount makes sense for his tax situation, and that by year 10, the account will be fully and efficiently distributed — without a six-figure tax surprise waiting for him at the finish line.

That is what a good inherited IRA strategy is supposed to do: turn a confusing, high-stakes deadline into a plan you understand and can live with.

If you’ve inherited an IRA, or you’re planning your own estate and want to leave retirement accounts to the next generation as efficiently as possible, reach out to Cardinal Advisors. We work with clients in all 50 states and the District of Columbia, and we’re happy to walk you through your specific situation.