In the discussion above, Financial Enhancement Group advisors Aaron Rheaume, CKA® and Grant Soliven, AIF® walk through the fundamentals of inherited IRAs — and why this topic is becoming more urgent for families across the country.
As Aaron explains:
“An inherited IRA is a type of retirement account that is passed to a beneficiary when someone passes away. That is the most simplistic form of the account type… But there are a lot, a lot, a lot of decisions that have to go around planning for leaving IRA assets and also receiving inherited IRA funds.”
This article expands on that conversation — covering tax law changes, strategic planning considerations, common mistakes, and what most inherited IRA articles fail to address.
If you’ve inherited an IRA — or expect to — here’s what you need to know.
What Is an Inherited IRA?
An inherited IRA (also called a beneficiary IRA) is a retirement account you receive when the original owner passes away.
It is not your own IRA. It has special rules.
Key characteristics:
- You cannot make new contributions.
- Distribution rules differ depending on whether you’re a spouse or non-spouse beneficiary.
- Tax treatment depends on whether the account is traditional or Roth.
- Required distribution timelines changed significantly under the SECURE Act.
And those rule changes are where many costly mistakes occur.
The SECURE Act Changed Everything
Prior to 2020, many non-spouse beneficiaries could “stretch” distributions over their lifetime — reducing annual tax impact.
That changed.
Aaron explains:
“What changed in 2020 is that it is now a 10 year window. Lemme say that one more time. A 10 year window.”
What This Means
If you inherit a traditional IRA as a non-spouse beneficiary, you generally must fully distribute the account within 10 years.
No lifetime stretch.
No indefinite deferral.
And here’s why that matters.
As Grant notes:
“The IRS knows what they’re doing… They’re coming after the money, and they want it as fast as possible.”
Why? Because beneficiaries often inherit during their peak earning years — meaning distributions are taxed at higher marginal tax rates.
Spouse vs. Non-Spouse Rules
If You’re a Surviving Spouse
You typically have more flexibility:
- You can roll the IRA into your own IRA.
- You can treat it as your own and delay RMDs until your required age.
- You may also elect to keep it as an inherited IRA in certain situations (for example, if you are under age 59½ and need access).
If You’re a Non-Spouse Beneficiary
You generally must:
- Establish an inherited IRA.
- Withdraw the full balance within 10 years.
- Potentially take annual RMDs if the original owner had already begun RMDs.
And missing those rules can result in penalties.
Aaron highlights:
“Sometimes the distributions are often missed because they didn’t know that they were supposed to take a required minimum distribution.”
That’s where compliance risk becomes real.
The Tax Impact Most Families Underestimate
Inherited IRA withdrawals from traditional IRAs are taxed as ordinary income.
That means:
- They stack on top of your salary.
- They can push you into a higher bracket.
- They may increase Medicare premiums (IRMAA).
- They may impact taxation of Social Security benefits.
- They can phase out deductions and credits.
The Peak Earnings Problem
Grant explains the demographic reality:
“They receive these dollars later in life… they’re making the most money they’ve ever made.”
If you’re 52 years old earning $180,000 and inherit a $600,000 IRA, spreading withdrawals evenly over 10 years could significantly increase your tax burden.
Without planning, the IRS often becomes the largest beneficiary.
Required Minimum Distributions: What Adds Complexity
If the original IRA owner had already begun RMDs:
- The beneficiary may need to continue annual RMDs during the 10-year window.
- Failure to withdraw the required amount can result in penalties.
Complicating factor: RMD ages have shifted higher under recent legislation.
Aaron explains:
“RMD age has been pushed back, not because the IRS is doing it in your favor… it’s because when your spouse passes away, your tax bracket gets cut in half.”
Losing married filing jointly status can dramatically increase tax rates for a surviving spouse.
That’s why inherited IRA planning must connect to broader retirement tax strategy.
Strategic Planning Considerations
Inherited IRAs are not just about compliance with the 10-year rule. The real opportunity — and risk — lies in how those withdrawals interact with your broader financial life.
Here are the most important planning considerations.
1. Tax Bracket Management
Instead of evenly withdrawing over 10 years, consider:
- Lower withdrawals during high-income years
- Larger withdrawals in years with reduced income
- Coordinating distributions with retirement timing
- Managing income thresholds that affect deductions and credits
If you’re in your peak earning years, inherited IRA withdrawals can stack on top of your salary and significantly increase your marginal tax rate.
Why this matters: Thoughtful distribution timing can reduce total lifetime taxes rather than simply satisfying the 10-year requirement.
2. Filing Status Changes for Surviving Spouses
If you inherit an IRA as a surviving spouse, your tax situation may change dramatically after your spouse’s passing.
As Aaron explains:
“RMD age has been pushed back, not because the IRS is doing it in your favor… it’s because when your spouse passes away, your tax bracket gets cut in half.”
Losing married filing jointly status can move you into higher marginal brackets sooner than expected.
Why this matters: Income that once fit comfortably within a lower bracket may now be taxed more aggressively, making coordinated withdrawal planning even more important.
3. Medicare IRMAA Impact
Large inherited IRA withdrawals can increase:
- Medicare Part B premiums
- Medicare Part D premiums
- IRMAA surcharges tied to income thresholds
These surcharges are based on income levels and can affect premiums for multiple years.
Why this matters: A poorly timed distribution can increase healthcare costs beyond the tax year in which the withdrawal occurs.
4. Social Security Taxation
For retirees already receiving Social Security:
- IRA withdrawals increase provisional income
- Up to 85% of Social Security benefits may become taxable
Why this matters: Coordinating inherited IRA withdrawals with Social Security income can help avoid unintended tax ripple effects.
5. Investment Sequencing Risk
If markets decline during the 10-year window, forced withdrawals may require liquidating investments at unfavorable prices.
Why this matters: Distribution timing should be coordinated with investment positioning, not treated as a purely tax-driven decision.
6. Emotional Timing and Decision-Making
Inherited IRAs are often received during periods of grief. Financial decisions made under emotional stress can feel urgent — even when they don’t need to be.
As Grant notes:
“Start unpacking something that seems simple, but yet is very, very complicated.”
Why this matters: Giving yourself time — and seeking objective guidance — can help prevent long-term regret from short-term decisions.
7. Planning Before Death Matters Just as Much
Many inherited IRA challenges are created before the original account owner passes away.
As Aaron explains:
“We do that through concentrated Roth conversions, moving money out of IRAs into Roth IRAs so that we’re avoiding future taxation.”
If parents convert strategically during lower-income years, heirs may inherit Roth IRAs instead — often reducing the future tax burden.
Why this matters: Proactive planning can significantly reduce multigenerational tax impact and preserve more wealth for beneficiaries.
Frequently Asked Questions About Inherited IRAs
1. What is an inherited IRA?
An inherited IRA is a retirement account you receive as a beneficiary after the original owner passes away. It has special withdrawal rules and tax requirements.
2. Can I contribute to an inherited IRA?
No. You cannot make new contributions to an inherited IRA.
3. What is the 10-year rule for inherited IRAs?
Most non-spouse beneficiaries must fully withdraw the account within 10 years of the original owner’s death.
4. Do I have to take RMDs each year during the 10 years?
Possibly. If the original owner had begun RMDs, annual distributions may be required in addition to the 10-year rule.
5. Are inherited IRA withdrawals taxable?
Traditional inherited IRA withdrawals are taxed as ordinary income. Roth inherited IRA withdrawals are generally tax-free if the 5-year rule has been met.
6. Can a spouse roll an inherited IRA into their own?
Yes. A surviving spouse can typically roll the inherited IRA into their own IRA and treat it as their own account.
7. What happens if I miss a required distribution?
You may face IRS penalties. Recent legislation reduced penalties, but they can still be significant.
8. Does an inherited IRA affect Medicare premiums?
Yes. Large withdrawals can increase income and trigger higher Medicare Part B and Part D premiums.
9. Does an inherited IRA affect Social Security taxation?
Yes. Withdrawals increase taxable income and can cause more of your Social Security benefits to become taxable.
10. Can I disclaim an inherited IRA?
Yes, under certain conditions and within specific time limits. This allows the inheritance to pass to contingent beneficiaries.
11. How are inherited Roth IRAs different?
Inherited Roth IRAs must generally follow the 10-year rule, but qualified withdrawals are typically tax-free.
12. Should I withdraw everything immediately?
Not necessarily. Strategic timing often reduces overall tax impact.
Before You Make a Decision
Inherited IRAs may look straightforward — but the tax ripple effects can last decades.
As Grant summarizes:
“Start unpacking something that seems simple, but yet is very, very complicated.”
If you’re within five years of retirement, already receiving RMDs, or managing inherited assets, a short fiduciary conversation now can prevent costly mistakes later.
At Financial Enhancement Group, we approach inherited IRA planning through comprehensive tax coordination — not product sales.
You can schedule a conversation at YourLifeAfterWork.com or contact the team to review your specific situation before acting.
Small tax decisions today can compound over decades.
Financial Enhancement Group is an SEC Registered Investment Advisor.
