Austin Stuhr Financial Advice: “How Do Inherited IRAs Work?”

Austin Stuhr, OLP Financial Advisor with Cornerstone Investments

What Is an Inherited IRA?

When an IRA owner passes away, their account doesn’t simply transfer to you the way a bank account might. It becomes an Inherited IRA (also called a beneficiary IRA), a specially titled account held in the deceased owner’s name for your benefit.¹

You cannot make new contributions to this account, and in most cases, you cannot roll it into your own IRA. What you must do is take distributions, but how and when depends on your relationship to the original owner and the rules that now govern these accounts.

The Big Rule Change: The End of the “Stretch IRA”

For decades, a strategy called the Stretch IRA allowed most beneficiaries to spread withdrawals over their entire lifetime. That option is largely gone.

The SECURE Act of 2019 replaced it with a 10-year rule for most non-spouse beneficiaries: the entire inherited IRA must be fully distributed within 10 years of the original owner’s death.² The SECURE Act 2.0 of 2022 reinforced this framework, and IRS final regulations issued in July 2024 made one more important clarification: if your parent or loved one had already begun taking Required Minimum Distributions (RMDs) before they died, you must also take annual distributions in Years 1 through 9, not just a lump sum in Year 10.³

Who Is Exempt From the 10-Year Rule?

Not everyone falls under the 10-year rule. Eligible Designated Beneficiaries (EDBs), including surviving spouses, minor children of the account owner, disabled or chronically ill individuals, and those no more than 10 years younger than the original owner, may still stretch distributions over their lifetime.⁵

Most adult children, grandchildren, and other non-spouse heirs, however, are considered Non-Eligible Designated Beneficiaries and must follow the 10-year rule.

Why This Especially Matters During Your Peak Earning Years

Here’s what many younger beneficiaries don’t realize: research shows that Americans most commonly inherit between the ages of 50 and 59, usually right in the middle of their peak earning years.⁶

That timing creates a real tax problem. If you’re already earning a solid income and you’re now required to withdraw $30,000–$40,000 per year from a traditional inherited IRA on top of that, those distributions that are taxed as ordinary income can push you into a higher federal tax bracket. A thoughtful withdrawal strategy, developed early and in coordination through your financial advisor and your tax advisor, can make a meaningful difference in how much of that inheritance you actually keep.

One bright spot: Inherited Roth IRAs follow the same 10-year timeline, but qualified distributions are generally tax-free if the account has been open for at least 5 years.⁷ Many beneficiaries of Roth IRAs choose to let the account grow and take a tax-free lump sum in Year 10.

Final Thoughts

Inheriting an IRA is both a financial opportunity and a responsibility. The rules are more complex than most people expect, and the tax stakes are real. Working with a financial advisor alongside your CPA or tax attorney gives you the best chance of honoring what your loved one built while preserving or safeguarding as much of it as possible for your own future.

References

1. IRS Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs). https://www.irs.gov/publications/p590b
2. IRS, Retirement Plan and IRA Required Minimum Distributions FAQs. https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
3. Kiplinger (2026). The IRS 10-Year Rule for Inherited IRAs: What You Need to Know. https://www.kiplinger.com/taxes/irs-10-year-rule-for-inherited-iras-kiplinger-tax-letter
4. Charles Schwab. Inherited IRA Rules & SECURE Act 2.0 Changes. https://www.schwab.com/learn/story/inherited-ira-rules-secure-act-20-changes
5. Wolff, E. (2011). Inheritances and the Distribution of Wealth. U.S. Bureau of Labor Statistics Working Paper. https://www.bls.gov/osmr/research-papers/2011/pdf/ec110030.pdf
6. Vanguard. Inherited IRA Rules: RMD Rules for IRA Beneficiaries. https://investor.vanguard.com/investor-resources-education/retirement/rmd-rules-for-inherited-iras

This article is intended for educational purposes only and does not constitute personalized investment, tax, or legal advice. IRS rules and tax laws are subject to change. Always consult with a qualified financial advisor, CPA, or estate attorney regarding your specific situation.