If you’ve recently inherited an IRA—or if you’re 65 or older and thinking about how your IRA will be passed down to your children—this is a critical topic to understand. The IRS has made significant changes in recent years that affect how inherited IRAs must be distributed, and failing to follow the rules could lead to a massive, unexpected tax bill for your heirs.
We created this video to walk through the most important concepts and real-life examples so you can plan wisely—whether you’re the account owner or the beneficiary.
Why This Matters
Many of our clients come to us after inheriting IRA funds and feeling completely overwhelmed. They’ve heard about the “10-year rule,” but they don’t know what it really means or how to apply it to their situation. Others are just beginning to think about their estate planning and want to avoid saddling their kids with a tax bomb.
Here’s the short version: if you inherit a traditional IRA and you’re not a spouse or a special class of beneficiary, you’ll likely fall under the 10-year rule—meaning the entire account must be emptied within 10 years of the original owner’s death. And every dollar withdrawn is fully taxable.
Two Key Groups to Know
We break beneficiaries into two main categories:
- Eligible Designated Beneficiaries (EDBs) – These include spouses, minor children of the account owner, disabled or chronically ill individuals, and those close in age to the deceased. They may still stretch distributions over their lifetime.
- Non-Eligible Designated Beneficiaries (NEDBs) – This is most adult children and other relatives. These folks fall under the 10-year rule.
If you’re a NEDB, you can’t just leave the money in the IRA forever—you’ll have to withdraw it all by the end of the 10th year. And if the original owner had already started their Required Minimum Distributions (RMDs), you’ll have to take yearly RMDs during the first 9 years too.
What You Shouldn’t Do
One of the biggest mistakes we see? People wait until the 10th year and withdraw the entire IRA balance in one lump sum. This can push your income into the highest tax brackets, especially if you’re still working. In some states, you could lose nearly half the account to taxes.
Others only take the minimum RMDs required, thinking it’s a smart move—until they realize there’s still a huge amount left in the account by year 10.
Smart Strategies We Recommend
We walk through several examples in the video, including:
A woman who inherited nearly $1 million and used a 10-year immediate annuity to evenly spread out withdrawals, reducing tax surprises.
Another client who plans to delay larger withdrawals until she retires—minimizing her tax liability during her highest income years.
A retiree who used inherited IRA funds to purchase a life long-term care policy, using her parents’ gift to protect herself and her spouse.
Each case is different. That’s why a customized plan is essential.
Planning While You’re Still Alive
The best time to plan is while you’re still living. If you own a traditional IRA or 401(k), there are steps you can take now—like Roth conversions, naming the right beneficiaries, or purchasing life insurance—to make the inheritance process smoother and more tax-efficient for your loved ones.
At Cardinal Advisors, we’ve spent years studying the ins and outs of these rules through our affiliation with Ed Slott’s Elite IRA Advisor Group. We’re committed to helping clients make informed, intentional decisions with their retirement and legacy planning.
