Inherited IRA beneficiaries face a December 31 deadline to understand their withdrawal rules and plan their tax strategy over the full payout period, not just this year.
Most adult children who inherit an IRA from someone who died in 2020 or later must empty the account by December 31 of the 10th year after the owner's death. If a parent died in 2021, the inherited IRA must be emptied by December 31, 2031. Spouses, disabled or chronically ill beneficiaries, minor children, and beneficiaries close in age to the deceased may follow different rules.
Whether you must take annual required minimum distributions (RMDs) depends on whether the original owner had reached their required beginning date before death. If they had, you generally must continue taking annual RMDs while emptying the account by year 10. If they had not, annual withdrawals typically are not required during years one through nine, though the account still must be gone by the deadline. The IRS ended temporary penalty relief for missed inherited IRA RMDs. A missed distribution now carries a 25% penalty on the amount owed, dropping to 10% if corrected promptly.
The timing of withdrawals matters because they count as taxable income. Waiting until near the end of year 10 to withdraw a large balance could force that money into higher tax brackets. A financial planner described a client earning $200,000 annually who inherited a $900,000 IRA. Instead of withdrawing $90,000 yearly (which would be taxed at 32% or 35%), the strategy was to take only minimum withdrawals while working, then liquidate the IRA over three years after retirement, resulting in lower overall taxes.
Low-income years such as retirement, job changes, or business downturns offer opportunities to withdraw more from the inherited IRA at lower tax rates. Planning should consider pensions, Social Security, your own retirement account withdrawals, Medicare premiums, and health insurance costs.