An inherited traditional IRA is taxed as ordinary income at the heir’s marginal federal rate of 10% to 37% in 2026, and most non-spouse beneficiaries must empty the account within 10 years under the SECURE Act.
Key Takeaways
- Inherited traditional IRA withdrawals are taxed as ordinary income at 10% to 37% federally in 2026, plus state tax of roughly 0% to 13%.
- The SECURE Act 10-year rule requires most non-spouse beneficiaries who inherited after January 1, 2020 to empty the account by December 31 of the tenth year after the owner’s death.
- If the owner died on or after their required beginning date (age 73 for most, age 75 for those born in 1960 or later), annual RMDs apply in years 1 through 9, which the IRS began enforcing in 2025.
- An inherited Roth IRA is generally tax-free, provided the account met the 5-year holding rule before the owner’s death.
- Beneficiaries are exempt from the 10% early-withdrawal penalty that normally applies to distributions before age 59.5.
- Missing a required distribution triggers a 25% excise tax under SECURE 2.0, reduced to 10% if the shortfall is corrected within the two-year window and reported on IRS Form 5329.
- Five categories of eligible designated beneficiaries (surviving spouse, minor child, disabled, chronically ill, and anyone less than 10 years younger than the owner) may still stretch withdrawals over their life expectancy.
Inherited IRA By The Numbers (2026)
Figures reflect 2026 federal rules as stated in this article. State income tax and individual circumstances vary; consult a qualified professional.
Taxes on an inherited IRA can quietly claim a large share of the wealth a parent spent decades building. A traditional IRA passes to heirs with its full deferred income tax still attached, and under the SECURE Act most beneficiaries must withdraw the entire balance within 10 years, often during their highest-earning years. This guide explains whether, how much, and when your heirs are taxed, plus the planning moves that may reduce the bill.
Taxes on an inherited IRA depend on the account type. Withdrawals from an inherited traditional IRA are taxed as ordinary income at the beneficiary’s marginal federal rate (10% to 37% in 2026), plus any state tax. An inherited Roth IRA is generally tax-free. Most non-spouse heirs must also empty the account within 10 years under the SECURE Act.
Are inherited IRAs taxable?
Inherited traditional IRAs are taxable: every dollar a beneficiary withdraws counts as ordinary income in the year of withdrawal. Inherited Roth IRAs are generally not taxable, provided the account met the 5-year holding rule before the owner’s death. The transfer itself is never taxed; income tax applies only when money leaves the account.
A traditional IRA is different from most inherited assets because the money inside it has never been taxed. Every dollar represents income the original owner deferred during their working years, and that deferral does not disappear at death. It transfers to whoever inherits the account, along with the tax bill.
A Roth IRA works the opposite way. The original owner already paid income tax on the contributed dollars, so qualified withdrawals by the heir come out tax-free. That single difference, taxable versus tax-free, is why account type matters far more than the size of the balance when you are estimating what heirs will actually keep.
| Feature | Inherited traditional IRA | Inherited Roth IRA |
|---|---|---|
| Tax on withdrawals | Ordinary income (10% to 37% federal in 2026, plus state) | Generally tax-free (5-year rule on earnings) |
| 10-year rule | Applies to most non-spouse heirs | Applies to most non-spouse heirs |
| Annual RMDs in years 1 to 9 | Required if owner died on or after their required beginning date | Not required (Roth owners have no lifetime RMDs) |
| Step-up in basis | None | Not applicable (already after-tax) |
| 10% early-withdrawal penalty | Does not apply to beneficiaries | Does not apply to beneficiaries |
How much tax will your heirs pay on an inherited IRA?
Heirs pay tax on inherited traditional IRA withdrawals at their own marginal rate, which reaches 37% federally in 2026 for taxable income above $640,600 (single) or $768,700 (married filing jointly), plus state income tax of roughly 0% to 13%. Because the withdrawal stacks on top of existing wages, large distributions frequently push a beneficiary’s top dollars into a higher bracket.
The withdrawal is added to the beneficiary’s other income for the year, so the rate depends on what that person already earns. A child in the 12% bracket keeps far more of an inherited IRA than a sibling in the 32% bracket, even though the estate plan may name them for equal shares. Here are the 2026 federal brackets that determine where those inherited dollars land.
| 2026 marginal rate | Single taxable income | Married filing jointly |
|---|---|---|
| 22% | Over $50,400 | Over $100,800 |
| 24% | Up to $201,775 | Up to $403,550 |
| 32% | Over $201,775 | Over $403,550 |
| 35% | Over $256,225 | Over $512,450 |
| 37% | Over $640,600 | Over $768,700 |
Consider a married couple, both age 65, with a combined $2 million in traditional IRAs. They live another 15 years on modest income and let the accounts grow, so the balance reaches roughly $4 million by the second death. Their two adult children must distribute that $4 million within 10 years. Split evenly, that is about $200,000 of extra taxable income per child, per year, for a decade.
These heirs are often in their 50s with household income already above $200,000. Layering $200,000 of inherited IRA income on top pushes their top dollars into the 35% and 37% brackets. Add state tax, and the effective rate on those dollars can exceed 45% in high-tax states. High earners may also cross the 3.8% net investment income tax threshold on their other income, a point covered in Q3’s overview of the net investment income tax for 2026. Spreading withdrawals evenly, rather than bunching them, is the simplest way many beneficiaries manage the bracket stacking.
What is the 10-year rule for inherited IRAs?
The 10-year rule requires most non-spouse beneficiaries who inherited an IRA after January 1, 2020 to withdraw the entire balance by December 31 of the tenth year after the owner’s death. It came from the SECURE Act and replaced the old stretch IRA, which had let heirs spread withdrawals across their own lifetimes and much lower yearly amounts.
The compressed timeline is what turns an inheritance into a tax problem. Instead of stretching small withdrawals over 30 or 40 years, the heir must draw down the whole account in one decade, frequently the decade of their peak earnings. The larger the IRA, the more of each withdrawal is exposed to the top brackets.
Do you have to take annual RMDs during the 10 years?
It depends on when the owner died. If the owner died on or after their required beginning date (age 73 for most, age 75 for those born in 1960 or later), the beneficiary must take annual required minimum distributions in years 1 through 9, then empty the account in year 10. The IRS began enforcing these annual RMDs in 2025 under its final regulations.
If the owner died before their required beginning date, no annual RMD is required during the window. The heir can withdraw nothing for nine years and then take the full balance in year 10, though concentrating a large withdrawal into a single year usually produces a bigger tax bill than spreading it. Q3’s guide to required minimum distributions for 2026 explains how these ages are set.
Who is exempt from the 10-year rule?
Five categories of eligible designated beneficiaries are exempt from the 10-year rule and may still stretch withdrawals over their life expectancy: a surviving spouse, a minor child of the owner (until the age of majority), a disabled beneficiary, a chronically ill beneficiary, and any beneficiary less than 10 years younger than the owner. Everyone else follows the 10-year rule.
A surviving spouse has the most flexibility. A spouse can roll the inherited IRA into their own account and treat it as their own, deferring withdrawals until their own RMD age. That option disappears at the second death, when the children inherit under the 10-year rule with no rollover available, which is why planning that stops at the first death often leaves the larger tax problem unaddressed.
Is there a penalty for not withdrawing on time?
Yes. If a beneficiary misses a required distribution from an inherited IRA, the IRS charges an excise tax on the amount that should have been withdrawn. SECURE 2.0 reduced that penalty from 50% to 25% starting in 2023, and it drops to 10% if the shortfall is corrected within the two-year correction window. Filing IRS Form 5329 reports and, where allowed, requests a waiver of the tax.
The excise tax applies to a missed annual RMD during the 10-year window and to any balance still sitting in the account after the tenth year. Tracking the deadline matters: the penalty is charged on the shortfall, not on the whole account, but for a large IRA even a single missed year can be costly.
Do beneficiaries pay a 10% early-withdrawal penalty?
No. Beneficiaries of an inherited IRA are exempt from the 10% early-withdrawal penalty that normally applies to distributions before age 59.5. Because the account passed at the original owner’s death, a 45-year-old heir can withdraw from an inherited IRA without that extra 10% charge. Ordinary income tax still applies to every inherited traditional IRA withdrawal.
This exemption is easy to miss and often reassures younger heirs. The concern with an inherited traditional IRA is the ordinary income tax, not an early-distribution penalty. That distinction is worth confirming with a tax professional, because the rules for an inherited IRA differ from the rules that apply to a person’s own retirement account.
Why estate planning alone doesn’t disarm the tax
Estate planning documents direct who receives an IRA; they do not change how much tax the recipient owes. Wills and trusts govern ownership, but the income tax on an inherited traditional IRA is a function of timing and tax brackets, not ownership. For estate-tax planning that runs alongside this income-tax timing, some couples use a spousal lifetime access trust. Two children named for equal shares can keep very different amounts after tax.
Wills and trusts are governance documents. They prevent probate disputes, name guardians, and distribute assets on clear instructions. None of those functions touch the income tax an inherited IRA generates. Naming a trust as beneficiary can even accelerate the problem: generic trust language may force faster distributions than the 10-year rule requires, which can compress the taxable income further rather than easing it.
Why inherited IRAs get no step-up in basis
Inherited traditional IRAs receive no step-up in basis. Stocks, real estate, and other appreciated assets reset to fair market value at death, passing decades of gains free of capital gains tax. A traditional IRA does not: the full deferred income tax follows the account to the heir, who owes ordinary income tax on every dollar withdrawn.
This asymmetry makes IRA inheritance fundamentally different from other inherited wealth. A $1 million brokerage account of appreciated stock can pass to heirs with almost no tax on the appreciation. A $1 million traditional IRA passes with its entire deferred-tax liability intact. On paper the two accounts look equal; after tax, they are not.
How Roth conversions protect your heirs from the tax trap
A Roth conversion moves money from a traditional IRA to a Roth IRA and pays the income tax now, at the owner’s rate, instead of later at the heirs’ rate. Heirs still follow the 10-year rule on an inherited Roth, but their withdrawals are generally tax-free, so the balance passes intact rather than arriving with a tax bill attached.
By systematically converting during their lifetime, an owner can shift the tax from a future moment when heirs face compressed timing and high brackets to a present moment when conversions fit the owner’s own bracket and deductions. A conversion is uncapped, counts as taxable ordinary income in the year it happens, and must be completed by December 31, so planning around the Roth conversion deadline for 2026 matters. For families focused on the next generation specifically, Q3 covers the mechanics in Roth conversion bracket arbitrage with your heirs.
The conversion tax is real, but paid strategically across several years it is often less than what heirs would owe across the post-inheritance decade. A Roth conversion break-even analysis can help estimate whether and when the trade-off works for a given household.
When to start your conversion strategy
The most valuable conversion window often opens between age 60 and age 73: earned income has dropped and required minimum distributions have not yet begun, leaving room to convert into lower brackets. Starting earlier widens that window. Once RMDs begin at 73 (or 75 for those born in 1960 or later), RMD income fills bracket space first and tightens the math.
Conversions compound when started early, because tax-free growth inside the Roth accrues over decades rather than years. Starting later compresses the window, sometimes to the point where the numbers no longer favor aggressive conversion. Deciding how much to move in any single year is its own question, addressed in Q3’s guide on how much to convert to Roth and the firm’s broader Roth conversion planning.
Common mistakes that magnify the tax bomb
The costliest inherited IRA mistakes are avoidable: leaving a large traditional IRA untouched so the deferred tax keeps compounding, treating RMDs as a complete plan, naming a trust without specialized drafting, assuming the surviving spouse’s rollover solves the second-death problem, and delaying conversions while the low-bracket window closes.
- Treating the IRA as a leave-it-alone asset. Drawing from taxable accounts first to preserve tax-deferred growth can maximize the inherited tax burden, because the IRA and its deferred tax both grow larger.
- Confusing RMDs with planning. Required minimum distributions are a legal minimum, not a strategy. They rarely make a meaningful dent in the balance heirs will inherit.
- Naming a trust without specialized drafting. Generic trust language can force distributions faster than the 10-year rule requires, accelerating the taxable income instead of smoothing it.
- Assuming the spouse’s plan is enough. A surviving spouse can defer through a rollover, but the children inherit at the second death under the 10-year rule with no rollover option.
- Waiting for tax-law clarity. The 10-year rule has applied since 2020. Each year of delay can cost a conversion window that does not return.
Work with Q3 Advisors
Q3 Advisors is a registered investment adviser focused on retirement tax planning. This page is educational and is not advice; consult a qualified professional.
Frequently asked questions
How do I avoid paying taxes on an inherited IRA?
You generally cannot avoid all tax on an inherited traditional IRA, but you can often reduce it. Approaches many beneficiaries consider include spreading withdrawals evenly across the 10-year window to limit bracket stacking, timing larger withdrawals in lower-income years, and (for the original owner) converting to a Roth during their lifetime so heirs inherit tax-free dollars. A qualified professional can model your specific situation.
How much tax will I pay on an inherited IRA?
You pay tax on inherited traditional IRA withdrawals at your ordinary income rate, which ranges from 10% to 37% federally in 2026, plus any state tax. The withdrawal adds to your other income for the year, so a beneficiary already earning six figures may see the distribution taxed at 32% to 37%. Inherited Roth IRA withdrawals are generally tax-free.
Do beneficiaries have to pay taxes on an inherited IRA?
Beneficiaries of an inherited traditional IRA pay ordinary income tax on every withdrawal, because the account holds pre-tax dollars that were never taxed. Beneficiaries of an inherited Roth IRA generally owe no income tax, provided the account satisfied the 5-year holding rule. In neither case is the transfer itself taxed; income tax applies only when money is withdrawn.
What is the 10-year rule for inherited IRAs?
The 10-year rule, created by the SECURE Act for deaths after January 1, 2020, requires most non-spouse beneficiaries to empty an inherited IRA by December 31 of the tenth year following the owner’s death. If the owner had already reached their required beginning date, the heir must also take annual RMDs in years 1 through 9, which the IRS began enforcing in 2025.
Do I have to take a required minimum distribution (RMD) from an inherited IRA?
Often, yes. If the original owner died on or after their required beginning date (age 73 for most, age 75 for those born in 1960 or later), the beneficiary must take annual RMDs in years 1 through 9 of the 10-year window. If the owner died before that date, no annual RMD is required, but the account must still be empty by the end of year 10.
Is an inherited Roth IRA taxable?
An inherited Roth IRA is generally not taxable. Qualified withdrawals of contributions and earnings pass to the beneficiary tax-free, as long as the account was open at least 5 years before earnings are distributed. The 10-year rule still applies to most non-spouse Roth beneficiaries, so the account must be emptied within a decade, but those distributions come out tax-free.
Is there a penalty for withdrawing from an inherited IRA?
Beneficiaries are exempt from the 10% early-withdrawal penalty, so an heir under age 59.5 can withdraw without that charge, though ordinary income tax still applies to traditional IRA withdrawals. The penalty that does apply is for missing a required distribution: an excise tax of 25% under SECURE 2.0, reduced to 10% if the shortfall is corrected within the two-year window.
