The SECURE Act rewrote the inheritance rules for retirement accounts in 2019, and the change is now hitting a wave of heirs who did not build their plans around it. Most non-spouse beneficiaries who inherit an IRA now have 10 years to fully drain the account. Miss the window and the IRS penalty is steep. Empty it too fast, and the tax bill can consume a meaningful share of the balance. The decision made in Year 1 sets the trajectory for everything that follows.
The average inherited IRA carries a meaningful balance. Fidelity’s Q4 2025 retirement data show that the average IRA balance across all age groups is $146,400. A meaningful share of the accounts being passed down carry six-figure balances, which means the tax stakes on the distribution decision are real.
The Year One Mistake
The most common Year 1 error is treating the inherited IRA like a bank account. Heirs either withdraw the full balance immediately, pushing themselves into a higher marginal bracket for a single year, or they take nothing and forget that the SECURE Act’s 10-year clock is running in the background. Suze Orman has fielded a version of this question repeatedly on her podcast, walking listeners through cases where beneficiaries assumed they could “leave it in there for 10 years and then take it out” only to learn the IRS clarified in February 2022 that heirs who inherited from an owner already subject to required minimum distributions must also take annual RMDs during the 10-year window.
That clarification reshaped the distribution math for heirs who inherited from an owner past RMD age. An heir who inherited in 2020 or 2021 and took nothing may now owe back RMDs. The distinction Orman flags is that most inherited accounts are “traditional IRAs, or retirement accounts where the distributions are taxable as ordinary income”. Every dollar pulled stacks on top of wages in the year it is withdrawn.
Why Heirs Cash Out Early
The pressure to liquidate is concrete. The personal savings rate has fallen to 3.9% in the first quarter of 2026. Households are saving less relative to rising incomes, leaving thinner reserves for emergencies. The average annual expenditure per consumer unit reached $78,535 in 2024.
Debt costs compound the pull. The average credit card APR is roughly 21% as of mid-2026, and the credit card delinquency rate is 2.92%, which the Federal Reserve categorizes as the normalizing range. University of Michigan Consumer Sentiment reached 44.8 in May 2026, a 12-month low and well below the 60 threshold the index treats as recessionary. An heir carrying revolving balances at 21% interest, with weak sentiment about their own finances, has a rational-looking reason to raid the account in Year 1 even when the tax cost outweighs the interest savings.
The Even-Slice Approach
The distribution strategy most planners return to is spreading withdrawals across the 10-year window rather than bunching them. A $257,002 traditional IRA withdrawal in a single year is treated entirely as ordinary income on top of wages. The same balance spread over 10 years allows the account to continue growing tax-deferred and keeps each year’s distribution in a lower bracket. For Roth inherited IRAs, the tax pressure is different, since qualified distributions are not taxable, but the 10-year distribution requirement still applies.
The First-Year Tax Bomb report covers the specific bracket dynamics that make Year 1 decisions so consequential for inherited retirement accounts.
What Year One Actually Requires
Three items belong on the Year 1 checklist. First, confirm whether the original owner had begun taking RMDs, because that determines whether annual withdrawals are required inside the 10-year window. Second, model the tax cost of the distribution relative to current income, since a large one-time withdrawal in a peak-earning year is the most expensive path. Third, retitle the account as an inherited IRA in the beneficiary’s name rather than rolling it into a personal IRA, a step Orman has flagged as one of the more common procedural errors that eliminates the stretch options that do remain.
The 10-year rule sets a deadline rather than a distribution schedule. The heirs who treat it as a planning window rather than a lump-sum event tend to keep more of what was left to them.
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