The Average Inherited IRA Comes With a 10-Year Fuse. Year One Is When Heirs Make the Big Mistake.
Most heirs look at a six-figure inherited IRA and see a windfall, but the decision made in the first twelve months quietly determines how much of it the IRS eventually claims.
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The SECURE Act rewrote the inheritance rules for retirement accounts in 2019, and the change is now hitting a wave of heirs who never built 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 real weight. Fidelity’s Q4 2025 retirement data show that the average IRA balance across all age groups is $137,095, up 7% from the prior year. A meaningful share of the accounts being passed down carry six-figure balances, which means the tax stakes on the distribution decision are genuine.
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 assume the SECURE Act’s 10-year clock is just a distant deadline. That assumption has become costly. In February 2022, the IRS released proposed regulations clarifying that heirs who inherited from an owner already subject to required minimum distributions must also take annual RMDs during the 10-year window, not simply wait to drain the account in Year 10. Those regulations became final in September 2024 and annual RMDs for affected heirs are now enforced starting in 2025, after a series of IRS notices waived penalties for missed distributions in 2021 through 2024.
Suze Orman has fielded a version of this question repeatedly on her podcast, walking listeners through cases where beneficiaries assumed they could leave the account untouched for a decade only to discover they owed annual distributions as well. That IRS clarification reshaped the distribution math for heirs who inherited from an owner past RMD age. The core issue is that most inherited accounts are traditional IRAs, meaning every distribution is 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 Every dollar pulled stacks on top of wages in the year it is withdrawn.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 fell to 2.8% in Q2 2026, down from 3.9% in Q1, leaving households with thinner cushions than at almost any point in the past two decades. The average annual expenditure per consumer unit reached $78,535 in 2024, a figure that continues to climb alongside housing and food costs.
Debt costs deepen the pull. The average credit card APR across all accounts sits at around 21% as of Q2 2026, according to Federal Reserve data, with the rate on cards actively accruing interest reaching 22.15%. The credit card delinquency rate fell to 2.85% in Q2 2026, the eighth straight quarterly decline after a multi-year climb, but the level still reflects the strain on household budgets. University of Michigan Consumer Sentiment hit a record low of 44.8 in May 2026, recovered to 55.2 in July, then fell again to 51.7 in August and dropped further in September as inflation expectations rose and confidence in the economic outlook eroded. An heir carrying revolving balances near 21% interest, with shaky confidence in 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 full 10-year window rather than bunching them. A $257,002 traditional IRA withdrawal in a single year is taxed entirely as ordinary income on top of wages. The same balance spread over 10 years allows the account to keep growing tax-deferred and keeps each annual distribution in a lower bracket. For Roth inherited IRAs, the tax pressure is different. 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. That single fact determines whether annual withdrawals are required inside the 10-year window because, as of 2025, the IRS now enforces those annual distributions and no further penalty waivers are in place. Second, model the tax cost of each distribution against current income. A large one-time withdrawal during a peak-earning year is the most expensive path available. Third, retitle the account as an inherited IRA in the beneficiary’s name rather than rolling it into a personal IRA. Orman has flagged that rollover error as one of the more common procedural mistakes, because it eliminates the stretch options that do remain.
The 10-year rule sets a deadline, not a distribution schedule. Heirs who treat it as a planning window rather than a lump-sum event consistently keep more of what was left to them.
Editor’s note: This pass updated the personal savings rate from 3.9% in Q1 2026 to 2.8% in Q2 2026 per BEA data, refreshed the credit card delinquency rate to 2.85% in Q2 2026 per Federal Reserve data, added context that IRS annual RMD enforcement for affected inherited IRA heirs began in 2025 after waivers covering 2021 through 2024, and updated University of Michigan Consumer Sentiment to reflect the August 2026 final reading of 51.7 and the further decline in September 2026.
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David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
