As Baby Boomers begin passing more of their wealth to the next generation, inherited IRAs are becoming increasingly common. Unlike previous generations, many boomers built much of their retirement wealth through 401(k)s and IRAs rather than relying primarily on traditional pensions. Those retirement accounts are now becoming part of the largest intergenerational wealth transfer in U.S. history, bringing tax rules and planning decisions that many families haven’t faced before.
Most people start by asking what the IRS requires. That’s important, but it’s only the beginning. The IRS sets the distribution rules. Your planning determines how those distributions fit into the rest of your financial life.
Know the Rules Before You Make Distribution Decisions
The IRS establishes deadlines for distributions, but in many cases, it leaves room to decide when those withdrawals happen. Understanding that timeline is the first step toward coordinating distributions with your tax plan instead of reacting to annual deadlines.
For most non-spouse beneficiaries who inherit an IRA from someone who died after 2019, the account must be fully distributed by the end of the tenth year following the owner’s death. This is commonly known as the 10-year rule. There are exceptions for certain eligible designated beneficiaries, including surviving spouses, certain disabled or chronically ill individuals, minor children of the account owner, and beneficiaries who are not more than 10 years younger than the original owner.
The timing of your withdrawals also depends on whether the original owner had already begun taking required minimum distributions (RMDs). If they had, annual RMDs are generally required during years one through nine, with any remaining balance distributed by the end of year ten. If they had not yet reached their required beginning date, annual RMDs generally are not required, but the account still must be emptied by the end of the tenth year.
Every Distribution Is a Planning Decision
Many beneficiaries simply take the required minimum each year. That satisfies the IRS, but it isn’t automatically the most tax-efficient approach. The 10-year rule gives many beneficiaries flexibility in when they recognize taxable income. Looking across the entire distribution period lets you decide when those withdrawals fit best within your broader tax plan instead of defaulting to the minimum every year or waiting until the final deadline.
For some families, that means spreading distributions relatively evenly over the entire 10-year period to smooth taxable income. Others may choose to take larger withdrawals during years with lower income, such as after retirement or during a career transition. In other situations, allowing the account to continue growing for several years before taking larger distributions later may make sense. The right approach depends on your tax situation over the entire 10-year window, not just this year’s tax return.
Just as important is deciding where the money goes next.
Depending on your goals, that could mean contributing to your own Roth IRA or using a backdoor Roth strategy if you’re eligible. It might mean reinvesting the proceeds in a taxable brokerage account so the assets remain part of your long-term investment strategy. Some families choose to use a portion of the inheritance to fund a child’s education, support charitable giving, or accomplish another important financial goal.
Market conditions also deserve attention. If a required distribution coincides with a market decline, the withdrawal still has to happen. Reinvesting the distribution in a taxable account may allow you to stay invested, with future appreciation potentially taxed at capital gains rates rather than as ordinary income.
Start Planning Before the Inheritance Happens
Families who want to maximize the amount of wealth passed to the next generation begin planning long before an inheritance occurs. Some of the most valuable inherited IRA decisions happen while the original owner is still living, when there are more options available to shape the family’s overall tax picture.
One strategy families may consider is a Roth IRA conversion. Converting part of a traditional IRA means paying taxes today so future qualified withdrawals from the Roth IRA are tax-free. If heirs are expected to inherit the account during their highest earning years, paying taxes at the original owner’s lower rate may improve the family’s overall after-tax outcome. A Roth conversion isn’t appropriate for every situation, but for the right family, it can shift more wealth to the next generation instead of the IRS.
That decision reaches well beyond today’s tax bracket. It also affects questions such as:
- How will future RMDs affect the original owner’s tax situation?
- Will additional income trigger Medicare IRMAA surcharges?
- How will a surviving spouse’s future filing status affect the family’s tax picture?
- Is there enough cash outside the IRA to pay the taxes generated by a Roth conversion?
Every family’s circumstances are different, which is why inherited IRA planning works best as part of a broader tax and estate planning strategy rather than as a standalone tax decision.
Get the Administrative Details Right
The right strategy only works if the account is set up correctly.
An inherited IRA should be established and titled as a beneficiary IRA. Accidentally transferring assets into the wrong type of account can eliminate planning opportunities and create unnecessary tax consequences.
It’s also important to determine whether the original owner already satisfied their required minimum distribution for the year they passed away. If not, that remaining distribution generally must be completed before year-end before the beneficiary’s distribution schedule begins.
Taking care of these administrative details early preserves flexibility so you can focus on the decisions that have the greatest impact on taxes, investments, and long-term family goals.
The Bottom Line
The IRS sets the timeline, but the real planning begins after that.
Every distribution is an opportunity to coordinate taxes, investments, and family goals. Looking at those decisions together, instead of one withdrawal at a time, creates more opportunities to preserve after-tax wealth.
If you’ve inherited an IRA or expect to in the future, now is a good time to review how those assets fit into your broader financial plan. We’d be happy to help you evaluate your options and build a strategy that fits your goals.
Sean Gerlin, CFP®, CPWA®, ChFC®, CLU®, is the Founder and Principal of Envision Wealth Planners, a fee-only financial advisory firm serving clients across Central Florida, including Orlando, Winter Park, Maitland, and nearby communities. In 2025, he was honored with both the Wealthtender Voice of the Client Award and the Best of BusinessRate 2025 award, recognizing his commitment to exceptional client experience and long-term relationship-focused planning. Sean specializes in helping high-income families, business owners, and commercial real estate executives align their wealth with their values through a comprehensive Financial Life Planning approach. Learn more about EWP at envisionplanners.com.
This material has been edited with the assistance of artificial intelligence tools. The information presented is based on sources believed to be reliable and accurate at the time of publication. This material is for educational purposes only and does not necessarily reflect the views of the author, presenter, or affiliated organizations. It should not be construed as investment, tax, legal, or other professional advice. Always consult a qualified professional regarding your specific situation before making any decisions.