CPA Warns: The 10-Year Rule Can Turn an Inherited IRA Into a Big Tax Hit

Leaving a $500,000 IRA to your children can trigger taxes sooner than expected. Here’s how the rule works and what you can do now.

I’ve worked as a CPA since 1981, and few tax rules have affected families as quietly as this one. When adult children inherit a traditional IRA, they usually have 10 years to empty the account. Every withdrawal is taxed as ordinary income, on top of any income they already earn.

With a $500,000 IRA, that could mean about $50,000 a year in additional taxable income if the money is taken out evenly, before any investment growth. If the account is left until the final year, the full amount — or more, if it has grown — could land in a single tax year.

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What the 10-year rule requires

The SECURE Act changed the rules for IRA owners who died after 2019. Before that, many heirs could stretch withdrawals across their own life expectancy and keep annual taxes lower. Now most non-spouse beneficiaries, including adult children and grandchildren, must drain the account by the end of the 10th year after the year the owner died.

Some beneficiaries can still stretch withdrawals: a surviving spouse, a minor child of the owner until age 21, someone who is disabled or chronically ill, and anyone no more than 10 years younger than the original owner.

The rule many heirs miss: annual withdrawals may still apply

Under final IRS regulations issued in 2024, if the original owner had already begun required minimum distributions, the heir generally must take withdrawals each year during the 10-year period and still empty the account by the deadline. The IRS waived penalties for missed annual withdrawals from 2021 through 2024, but that relief is no longer available.

Missing a required withdrawal can trigger a 25% excise tax on the amount that should have been distributed, reduced to 10% if corrected in time. On a six-figure account, that can turn a simple filing error into a costly mistake.

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Why timing matters as much as the total amount

Your children will often inherit in their 50s or 60s, which is frequently when their earnings are highest. IRA withdrawals can stack on top of salary income and push them into higher tax brackets for years. If the money is taken all at once in the final year, much of it may be taxed at the top federal rate of 37%, plus any state income tax.

The same $500,000 can produce very different tax outcomes depending on when and how the withdrawals are taken. That’s why this is a planning issue best addressed before the account changes hands.

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Steps to consider while you still control the account

Consider Roth conversions in lower-tax years. If your current tax rate is lower than your heirs’ likely rate, converting part of a traditional IRA to a Roth lets you pay the tax now at your rate. Heirs still face the 10-year deadline on an inherited Roth, but qualified withdrawals are generally tax-free, and there are no yearly withdrawal requirements along the way.

Choose beneficiaries carefully. A spouse can treat an inherited IRA as their own. A child in a lower tax bracket may owe less on the same withdrawal than a child in a higher bracket. Review the beneficiary form, not just the will, because the form controls the account.

Use the IRA for charitable giving if that fits your goals. At age 70½ or older, qualified charitable distributions can go directly from an IRA to a charity and are not counted as taxable income. Leaving pre-tax money to charity and Roth or taxable assets to family can reduce the household’s overall tax burden.

Make sure heirs know the plan. Even a well-designed strategy can fail if the person inheriting the account doesn’t know a yearly withdrawal is required.

None of these strategies is right for every family. A move that saves your heirs money could increase your own Medicare premiums or tax bill, which is why it helps to run the numbers with a professional.

Talk to a fiduciary before your heirs inherit the tax bill. SmartAsset’s free matching service connects you with vetted fiduciary financial advisors who are legally required to act in your best interest. More than 2 million people have used it, and nearly all matched advisors offer a free first meeting.

What to expect: a questionnaire of about 10 minutes covering your age, savings and goals, plus a phone number near the end. You decide whether and when to respond. There’s no cost and no obligation.

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The bottom line

A $500,000 IRA can leave your children with a tax bill of more than $100,000, depending on their tax brackets and when they take the money out. The families that keep more of the account usually have one thing in common: they planned the withdrawals and tax impact before anyone inherited it. Having the conversation now costs nothing.

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