Inherited IRA in 2026? The 10-Year Rule That Could Change Your Entire Distribution Strategy.

Losing a loved one can be a devastating experience. Even if you're in line for a nice inheritance, that doesn't make up for the absence of an important person in your life.

But sometimes, when a loved one passes, you might suddenly find yourself with more money on your hands. Depending on the assets you've inherited, though, there may be certain rules to follow.

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If you lose a parent, for example, and inherit their savings and brokerage account, you can pretty much do whatever you want with that money -- withdraw it, leave it alone, or a combination of both. There's no specific timeframe to worry about.

The rules are different when you inherit an individual retirement account (IRA). It's important to understand the 10-year IRA rule so that you can manage an inheritance strategically.

How the 10-year rule works for traditional IRAs

The 10-year rule applies to IRAs inherited after 2019, and it's pretty simple. Generally, you're required to liquidate the IRA by the end of the 10th year following the death of the original IRA holder.

This assumes that the person whose IRA you've inherited wasn't your spouse. Surviving spouses do not have to follow the 10-year rule. In that case, you can roll an inherited IRA into your own retirement account rather than empty it over a decade.

Whether you're a surviving spouse or not, when you inherit a traditional IRA, you may be subject to required minimum distributions (RMDs). Whether that's the case depends on the age of the IRA holder at the time of their passing.

Let's say you inherit a parent's IRA, and they were 78 when they passed. This means they were subject to RMDs. As such, you'll need to take RMDs every year until the account is empty.

If you're a surviving spouse in this situation and you're not yet old enough to be subject to RMDs, you could roll the IRA into your own retirement account and delay RMDs. However, if your spouse didn't take their RMD the year they passed, you'd be required to take that RMD by Dec. 31 of the year of their death.

How the 10-year rule works for Roth IRAs

Roth IRAs are subject to the same 10-year rule when the beneficiary isn't a spouse (meaning, you get 10 years to clear out the account). But you get a lot more flexibility with a Roth.

Roth IRAs are not subject to RMDs. Therefore, if you inherit a Roth, you don't have to worry about taking mandatory distributions.

How to manage an inherited IRA under the 10-year rule

Your strategy for emptying an inherited IRA under the 10-year rule should hinge on the type of plan it is -- traditional versus Roth. And for the sake of reviewing strategies, let's assume you're not a surviving spouse.

With a traditional IRA, it often makes sense to take withdrawals over multiple years rather than take a lump sum in a single year. The reason? Traditional IRA withdrawals are taxable.

Taking a huge traditional IRA withdrawal in a single year could lead to a very large tax bill. Depending on your age, it could have other consequences, too.

If you take a large inherited IRA withdrawal at 63 and enroll in Medicare at 65, you could end up paying more for your Part B premiums if your income is very high. If you take a large inherited IRA withdrawal the year you begin collecting Social Security, it could push your income high enough to the point where you're subject to taxes on those benefits.

On the other hand, it could very much pay to empty out a Roth IRA in a single lump sum at the end of the 10-year period. Since Roth IRA withdrawals aren't taxable, you don't have to worry about a large distribution driving up your tax bill.

Roth IRAs also get to grow tax-free. So, let's say you inherit a $300,000 Roth IRA. If that money earns an annual 7% return over 10 years, which is below the stock market's average, the balance could grow to about $590,000 by the time you're forced to take that money out. That $590,000 is then yours to enjoy tax-free.

You may want to get help exploring your options

An inherited IRA needs to be managed carefully. That's why it's often a good idea to consult a financial advisor when you come into a large sum of money at once.

A professional can help explain the rules of an inherited IRA so that you know what options you have. They can also help you maximize whatever tax benefits you may be entitled to.

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