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.
This post may contain links from our sponsors and affiliates, and Flywheel Publishing may receive compensation for actions taken through them.
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 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 that 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 IRS 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 core issue Orman flags 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 Every dollar pulled stacks on top of wages in the year it is withdrawn.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 3.9% in the first quarter of 2026, leaving households with thin cushions for emergencies. 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 sits at roughly 21% as of mid-2026, according to Federal Reserve data, and the credit card delinquency rate of 2.92% reflects what the Fed describes as a normalizing range. University of Michigan Consumer Sentiment hit a record low of 44.8 in May 2026 before partially recovering to 55.2 in July, still well below historical norms. An heir carrying revolving balances at 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. 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 article corrects the average IRA balance figure from $146,400 (which is the average 401(k) balance) to $137,095, the correct average IRA balance from Fidelity’s Q4 2025 data. University of Michigan Consumer Sentiment context was updated to reflect the rebound from the May 2026 record low of 44.8 to a five-month high of 55.2 in July 2026.
Contact [email protected] for any questions or corrections.
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.
