Inherited an IRA This Year? The 10-Year Clock Already Started — and the IRS Isn't Waiving the Penalty Anymore

You inherit a $257,000 traditional IRA from a parent. Grief aside, the paperwork feels simple: call the custodian, close the account, deposit the check. That instinct — get it over with — just became measurably more expensive than it used to be.

Since 2020, most people who inherit an IRA from someone who isn't their spouse no longer get to stretch withdrawals over their own lifetime. The SECURE Act replaced that option with a flat 10-year rule: the entire account has to be emptied by the end of the tenth year after death. For years, the IRS let that rule sit half-enforced — it waived penalties for missed distributions from 2021 through 2024 while it finalized the details. That grace period ended with the 2025 tax year.

The rule is now fully live. The IRS confirms a 25% excise tax on any required withdrawal you skip, cut to 10% if you fix it within two years. Beneficiaries who inherited from someone already taking required minimum distributions (RMDs) don't get to wait until year 10 either — they owe an RMD every year, starting in year one.

The Flexibility That Creates the Mistake

Here's the part that trips people up: how you empty the account over those 10 years is mostly up to you, as long as you meet each year's minimum. You can take it all in year one. You can spread it evenly. You can front-load it, back-load it, or take nothing until years 9 and 10 catch up to you. The IRS doesn't care about the shape of the withdrawals — only that annual RMDs get met, when they apply, and the account hits zero by the deadline.

That flexibility is exactly where the year-one mistake happens. A traditional inherited IRA is taxed as ordinary income the moment it comes out, on top of whatever else you earned that year. Cash out $257,000 in a single year and you're not paying tax on $257,000 in a vacuum — you're paying tax on your salary plus $257,000, stacked straight into your highest brackets. Spread the same balance over 10 years and each year's withdrawal is a much smaller stack, often taxed entirely inside a lower bracket you were already sitting in.

An inherited Roth IRA works differently, and it's worth knowing which one you actually have before you plan around either. The same 10-year drain deadline applies, but because Roth contributions were already taxed going in, there's no annual RMD requirement forcing a withdrawal in years 1 through 9 — you can legally leave the whole account invested and tax-free until year 10, then pull it all out at once with zero income-tax bill. Confuse the two account types, and you'll either withdraw from a Roth needlessly early, giving up tax-free growth for no reason, or skip a traditional IRA's required annual withdrawal and walk straight into the 25% penalty. Check the account type on your custodian statement before you decide on a withdrawal shape.

What That Actually Costs, in Real Numbers

Run the math on an heir earning $85,000 a year — about $68,900 in 2026 taxable income after the $16,100 standard deduction — using the 2026 federal brackets. Cash out a $257,002 inherited IRA, the exact balance in one widely cited example of this mistake, in year one, and roughly $70,000 of it gets pushed into the 32% and 35% brackets, with the rest taxed at 24%. Total federal tax on that withdrawal: about $72,965. Spread the same $257,002 evenly across 10 years — $25,700 a year — and the whole annual withdrawal stays inside the 22% bracket next to that $68,900 salary. Total federal tax over the decade: about $56,540.

Same account, same eventual total withdrawn, same 10-year window either way — the only difference is the shape of the withdrawals. On a smaller inherited IRA, that shape barely matters. On a six-figure one, it's a five-figure decision made in about the time it takes to sign a distribution form.

Turn the Savings Into a Number That Keeps Growing

That $16,425 gap on the larger balance isn't just a smaller tax bill — it's money that's still yours to put to work, instead of the IRS's. Take that difference and run it through the Compound Interest Calculator: reinvested at a 7% average return, $16,425 grows to roughly $32,300 in 10 years and about $63,600 in 20. Cashing out the inherited IRA all at once doesn't just cost more in tax now — it hands the IRS money that would otherwise have kept compounding for you for decades.

It's the same principle that holds up across every market cycle: time in the market, not a rush to liquidate, is what actually builds the number. Plug in your own inherited balance and see what the spread-it-out difference is worth on your own timeline.

Why the Custodian Won't Withhold Your Tax Bill For You

There's a second trap layered on top of the bracket math: most IRA custodians don't automatically withhold federal tax on a distribution unless you specifically elect it. Skip that election — which plenty of heirs do, because nobody explains it — and your annual RMD arrives as a full, untaxed check. Spend it like it's yours to spend, and the tax bill shows up as a surprise the following April, sometimes with an underpayment penalty riding along.

The fix is mechanical, not complicated. When each year's RMD lands, immediately move the tax-bracket-appropriate share — 22% in the middle-tier example above, about $2,890 — into a High-Yield Savings account instead of a checking account. At a 4.15% APY, parking that $2,890 for the roughly nine months between the distribution and the following April tax deadline earns about $90 in interest on money that was just sitting there waiting to be paid to the IRS anyway — a small bonus for a habit that keeps you from scrambling for cash at filing time.

Run your own withdrawal amount through the calculator to size your own year's tax reserve before the money is anywhere near your checking account.

The Exceptions Worth Knowing Before You Panic

Not everyone is stuck on the 10-year clock. Surviving spouses, minor children of the original owner (until they reach the age of majority), beneficiaries who are chronically ill or disabled, and beneficiaries not more than 10 years younger than the original owner all still qualify for the old stretch-style life-expectancy payout — no forced 10-year drain, no year-one tax trap. If you fall into one of those categories, confirm it with your custodian before assuming the countdown even applies to you; misclassifying yourself into the wrong bucket is its own way to overpay.

For everyone else, the deadline is real, the penalty waiver is gone, and the shape of your withdrawals — not just the total — is now a decision with a dollar figure attached. Don't let the account sit unopened, and don't empty it out of instinct on day one.