A $300,000 Inherited IRA Can Turn Into a Year-10 Tax Trap

Inheriting a traditional IRA can look like getting a decade-long tax break. For many nonspouse heirs, the SECURE Act allows the account to remain invested for as long as 10 years after the original owner’s death. That can mean years of tax-deferred growth before the account finally has to be emptied.

There is a catch, and it is a big one. The longer the money stays inside the IRA, the larger the eventual taxable distribution can become. An heir who inherits $300,000 and waits until the end of the 10-year window could eventually be staring at a balance approaching twice that size if investments perform well. Pulling hundreds of thousands of dollars onto one tax return can create a very different problem.

The rules are also more complicated than simply saying every beneficiary gets 10 years to do whatever they want. Whether withdrawals are required during years one through nine depends heavily on when the original owner died relative to their required beginning date for required minimum distributions. This hypothetical assumes a nonspouse beneficiary inherited the IRA after the owner died before that required beginning date.

The 10-Year Rule Does Not Mean Everyone Can Wait 10 Years

The SECURE Act changed inherited retirement accounts for deaths occurring after 2019. Most nonspouse beneficiaries who are not considered eligible designated beneficiaries must empty an inherited traditional IRA by December 31 of the year containing the 10th anniversary of the owner’s death. If an owner dies in 2026, for example, the account generally has to be empty by Dec. 31, 2036.

Where people get tripped up is what happens before that final deadline. If the original owner died before their required beginning date, a beneficiary subject to the 10-year rule generally does not have to take a distribution in years one through nine. In theory, the entire account could remain invested until year 10.

If the owner died on or after their required beginning date, the rules are different. The beneficiary generally must take annual required minimum distributions during the 10-year period and still empty whatever remains by the end of year 10. IRS final regulations published in 2024 apply to RMDs beginning in 2025.

Some Beneficiaries Get Different Rules

The 10-year rule does not apply the same way to everyone. The tax code recognizes a smaller group known as eligible designated beneficiaries. That group includes surviving spouses, the original owner’s minor children, certain disabled or chronically ill beneficiaries, and people who are not more than 10 years younger than the person who died.

Surviving spouses have especially broad options and can often treat an inherited IRA as their own. A minor child of the account owner can generally use life-expectancy distributions until age 21, at which point the 10-year clock begins. Adult children, grandchildren, siblings who are more than 10 years younger, and many other heirs typically fall under the regular 10-year rule instead.

Trusts, estates, charities, and other nonindividual beneficiaries can face another set of rules entirely. That is one reason an IRA beneficiary form deserves considerably more attention than the five minutes people tend to give it when opening an account.

What Happens if $300,000 Sits for Nine Years?

Now consider the hypothetical heir who receives a $300,000 traditional IRA after the owner dies before their required beginning date. The heir takes nothing during the first nine years and leaves the money invested inside the inherited account.

If the balance were to double to roughly $600,000 over those nine years, that would require an annualized return of about 8%. That is useful for illustrating the tax issue, but it is not a forecast. Markets do not hand out an 8% return every year on schedule, and an account could end the period substantially above or below that figure depending on how it is invested.

The important part is that investment gains inside the traditional IRA generally are not taxed each year as they occur. Tax is deferred until money leaves the account. That is powerful, but it also means a beneficiary who keeps postponing distributions may be concentrating a much larger amount of taxable income into the final years of the window.

The Year-10 Withdrawal Can Get Expensive Fast

Suppose that hypothetical account reaches $600,000 and the beneficiary withdraws the entire balance in year 10. If the original owner made only deductible contributions, the distribution would generally be taxable as ordinary income. If the IRA contains nondeductible contributions, some of the withdrawal may instead represent nontaxable basis.

The distribution also stacks on top of the beneficiary’s other taxable income. For 2026, a single filer reaches the 32% federal bracket above $201,775 of taxable income, the 35% bracket above $256,225, and the 37% bracket above $640,600. Those are marginal rates, meaning only the portion of taxable income falling inside each bracket is taxed at that rate.

That distinction matters. A $600,000 IRA withdrawal by itself does not automatically mean the entire distribution is taxed at 37%, or even that the taxpayer reaches the 37% bracket. Add a salary, investment income, bonuses, or other taxable income, however, and part of a large year-10 distribution could cross that threshold. State income taxes can add another layer depending on where the heir lives.

Waiting Until Year 10 Is Not Automatically the Smartest Move

There is a real benefit to keeping money inside a tax-deferred account longer, but that does not mean waiting until the final deadline always produces the most after-tax wealth. The calculation depends on what the account earns, the beneficiary’s tax bracket each year, future tax rates, other income, state taxes, and what happens to money withdrawn earlier.

Someone who temporarily drops into a lower tax bracket might decide that year is a good time to take part of the inherited IRA. Another heir expecting a large promotion several years from now might prefer taking more money before their income rises. Someone retiring during the 10-year window could have an entirely different strategy.

That is why the 10-year rule is better viewed as a planning window than permission to forget the account exists for nine years. Tax deferral is valuable. So is having nine separate chances to pull money out before the deadline arrives.

Inherited IRA Withdrawals Avoid One Familiar Penalty

There is one useful break for heirs. Distributions made to a beneficiary because of the original IRA owner’s death generally are not subject to the usual 10% additional tax on early IRA withdrawals, even if the beneficiary is younger than 59½.

That does not make the withdrawal tax-free. The taxable portion of a traditional inherited IRA distribution still goes into ordinary income. It simply means the heir generally does not have to pile the standard early-withdrawal penalty on top of the income tax bill.

There is an important spouse exception to the exception. A surviving spouse who rolls the inherited IRA into their own IRA and then takes money before age 59½ can potentially face the normal early-distribution rules because the account is now being treated as the spouse’s own.

A Roth IRA Changes the Tax Side of the Equation

A Roth IRA can leave an heir with a very different tax problem. Most nonspouse beneficiaries still face a 10-year deadline for an inherited Roth IRA, but the original Roth owner had no lifetime RMD requirement. That generally means beneficiaries under the 10-year rule do not have annual distributions forced on them during years one through nine.

Qualified Roth distributions are generally tax-free, making a large year-10 withdrawal much less painful from an income-tax standpoint. That is one reason some account owners consider Roth conversions while they are alive, particularly if they expect their heirs to face higher tax rates.

A nonspouse beneficiary generally cannot inherit a traditional IRA and simply convert that inherited account into a Roth. The planning opportunity typically belongs to the original owner before death. That conversion itself creates taxable income, so it still requires an actual tax calculation rather than automatically being the better choice.

A Taxable Brokerage Account Gets Different Treatment Again

Traditional IRAs also differ sharply from many investments held in an ordinary taxable brokerage account. Inherited property generally receives a new tax basis equal to its fair market value on the date of the owner’s death, subject to certain exceptions and estate-tax rules.

That basis adjustment can wipe away much of the unrealized capital gain that accumulated during the original owner’s lifetime. Traditional IRA assets do not receive the same kind of income-tax reset. The tax-deferred income inside the account generally remains taxable to the beneficiary when it is distributed.

That does not make a brokerage account universally better than an IRA. Retirement accounts offer valuable tax advantages while the owner is alive. It does mean that two assets with the same $500,000 account balance can create very different tax consequences for the person who inherits them.

Missing an RMD Can Trigger a 25% Excise Tax

The flexibility of the 10-year rule ends when an actual distribution is required. If a beneficiary fails to take a required minimum distribution, the shortfall can be subject to a 25% excise tax. Under SECURE 2.0, that rate can drop to 10% when the mistake is corrected within the applicable correction window.

The IRS can also waive the excise tax when a taxpayer shows that the shortfall resulted from a reasonable error and that reasonable steps are being taken to fix it. That is not something to build a withdrawal strategy around, though. The cleanest approach is knowing which distributions are required before the deadline arrives.

For someone whose inherited IRA owner died before their required beginning date, the big date is December 31 of year 10. For someone whose benefactor had already reached that point, there may be annual RMD deadlines long before the account reaches its final year.

The Best Withdrawal Year May Be Somewhere in the Middle

The hypothetical $300,000 heir does not have only two choices: empty the account immediately or wait until year 10. She could take nothing during high-income years, withdraw more during a career break, increase distributions after retirement, or spread the balance across several years to manage marginal tax brackets.

Planning can begin before the inheritance, too. An original account owner may consider Roth conversions during lower-income years. Beneficiaries can sometimes make a qualified disclaimer of all or part of an IRA, but strict rules apply. A qualifying disclaimer generally has to be made in writing within nine months and before the beneficiary accepts the interest or its benefits. The person disclaiming the account also cannot decide who gets the money next. It passes according to the beneficiary designation, plan terms, or applicable law.

For the heir who lets $300,000 sit untouched for nine years, the real lesson is not that waiting is automatically wrong. It is that the 10-year rule creates a deadline, not a strategy. Tax-deferred growth can be valuable, but so can using lower-tax years before a large inherited IRA is forced onto one future tax return.

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