The Inherited IRA 10-Year Rule: Why Waiting Until Year Ten Is the Expensive Choice

Before 2020, inheriting an IRA meant you could draw it down over your own life expectancy. A forty-year-old could take small distributions for decades while the rest compounded. It was called the stretch, and it was the most valuable thing about inheriting a retirement account.

It is gone for most beneficiaries. In its place is a deadline: empty the account by the end of the tenth year after the death.

The change is well publicised. What is not well publicised is what to do with the ten years — and the default behaviour, which is to leave the money alone as long as possible because it is growing tax-deferred, is frequently the expensive choice.

Not always, though, and the reason is one most articles get wrong. In a flat-rate state the timing makes no state difference whatsoever. In a graduated one it can cost two percentage points on the whole account.

A note before you start. This is general education, not tax advice. The state figures here come from this site's fifty-state income-tax dataset and its retirement tax engine, modelling an $800,000 inherited account growing at 6% for a single beneficiary aged 50 with $110,000 of existing wages, and reporting only the additional state tax the inherited money causes. Federal tax is not modelled, and the federal effect is larger than the state effect in every case — see section 6. Rates are for tax year 2026 and state legislatures revise this area regularly. The rules governing who is subject to the ten-year rule have been the subject of repeated regulatory clarification; confirm your own category with a professional before acting.

1. What the rule actually requires

Empty the account by 31 December of the tenth year following the year of death. That is the deadline, and it is the part everybody knows.

Two further points are less well known and both matter.

Whether annual distributions are also required during those ten years depends on whether the original owner had already started their own required distributions. If they had, the beneficiary generally must take something each year and empty the account by year ten. If they had not, the annual requirement generally does not apply and only the deadline does.

This distinction has been the subject of repeated regulatory clarification, and enforcement of the annual requirement was relieved for several early years while the position was settled. If you inherited an account during that period, the years already behind you may be treated differently from the years ahead. This is a question to ask a professional about your specific account, not one to settle from an article.

And the penalty for missing a required distribution is the same as for any other: 25% of the shortfall, reduced to 10% if corrected within the statutory window. On a large inherited account those are large numbers.

2. Who is exempt

The ten-year rule applies to most beneficiaries but not all. Eligible designated beneficiaries are outside it and may generally use a life-expectancy schedule instead:

• A surviving spouse, who additionally has options no other beneficiary has, including treating the account as their own
• A minor child of the deceased — until majority, at which point a ten-year clock generally begins
• Someone disabled or chronically ill
• Someone not more than ten years younger than the deceased

The last category is broader than it sounds. It covers siblings of similar age and partners of similar age, which is a substantial share of real inheritances.

A minor child of the deceased is the one most often misread. It is a child of the account owner, not any minor — a grandchild does not qualify on age alone.

If you are in one of these categories, most of this article does not apply to you, and the planning question is a different one. Establishing which category you are in is the first thing to do, before any arithmetic.

3. The two strategies

Take an $800,000 inherited account, growing at 6%, and a beneficiary earning $110,000 who is 50 when they inherit.

Spread it evenly. A level withdrawal of roughly $108,694 a year empties the account in ten years, allowing for growth on what remains. Total withdrawn: $1,005,849.

Defer it entirely. Take nothing for nine years, then take everything in year ten. The account has grown untouched the whole time, so the final withdrawal is about $1,351,583.

Notice that the deferral produces $345,734 more money. That is the honest case for deferring and it is rarely stated clearly: nine extra years of tax-deferred growth on the full balance is worth a great deal.

The question is therefore not "which produces more money" — deferral does. The question is what rate the money gets taxed at when it arrives, and whether the rate difference eats the growth advantage.

4. What your state does about it

Here is the additional state tax caused by the inherited money, under each strategy, as an effective rate on the dollars actually withdrawn:

Read the rate column, not the dollar column. The deferred figures are larger in dollars partly because more dollars were withdrawn — that is the growth, not the penalty. The rate is what isolates the cost of concentrating the income.

Three findings.

In a flat-rate state, timing makes no state difference at all. Pennsylvania charges 3.07% on both, which is exactly its flat rate. Ohio charges 2.75% on both. There is no bracket to be pushed into, so concentrating the income into one year changes nothing the state cares about.

In a graduated state, concentration costs one to two points on the entire account. California's 2.08-point difference is $60,228 in extra state tax. New York's 1.65 points is $42,690.

Oregon is the interesting middle case. It has graduated rates but a high top rate reached early, so a beneficiary earning $110,000 with a large distribution is near the top either way — the 0.18-point difference is almost nothing. The lesson is that what matters is not "does my state have brackets" but "how much bracket room is left above my existing income."

5. Why deferral feels right and usually is not

The instinct is defensible. Money inside the account grows without annual tax drag, and nine extra years of that on $800,000 is worth $345,734 in this model. Anyone who defers is capturing something real.

Four things sit on the other side.

Rate concentration. Section 4 measures it at state level. At federal level it is larger, because federal brackets are steeper and a seven-figure single-year distribution passes through nearly all of them.

You still have your own income. The distribution stacks on top of $110,000 of wages here. A beneficiary in their peak earning years — which is exactly who inherits from a parent — is adding this to their highest income, not to a blank slate.

Everything else that keys off income moves with it. A single enormous income year affects far more than the tax on that year, and some of the effects reach forward into years the beneficiary has not thought about.

And you lose all flexibility. A plan that concentrates everything into year ten has no adjustments left. A plan that spreads it can be varied — more in a low-income year, less in a high one, nothing in the year of a bonus.

The balanced version: deferral wins when the beneficiary's rate is genuinely going to fall, and loses when it is flat or rising. Spreading wins by default, not because deferral is irrational but because the rate risk is asymmetric.

6. What this article does not compute

Federal tax, and it is the larger number.

The engine behind this site's state figures answers "what does my state take", deliberately. The federal calculation for a seven-figure single-year distribution involves bracket stacking, the treatment of any other income, and the phase-out of items keyed to adjusted gross income — a materially larger problem than the state one.

Two things can be said without computing it.

Federal brackets are steeper than state brackets almost everywhere, so the concentration penalty measured at 2.08 points in California is smaller than the equivalent federal penalty on the same distribution.

And federal treatment never rewards concentration. There is no flat-rate federal analogue of Pennsylvania. Which means that even in a state where timing makes no state difference, the federal answer still favours spreading — a Pennsylvania beneficiary saves nothing at state level by spreading, and still saves at federal level.

That is the practical takeaway from this section. The state analysis can tell you the extra cost of concentrating; it cannot tell you the whole cost, and the part it cannot tell you points the same direction.

7. A better default than either strategy

Neither "even tenths" nor "all in year ten" is optimal. Both are simplifications.

The better approach is to spread with intent, using the years the way they present themselves.

Take more in years your other income is low. A gap between jobs, a sabbatical, a year with a business loss, the first year of your own retirement — each is bracket room that would otherwise be wasted.

Take less in years your income spikes. A bonus year, a year with a large capital gain, a year you exercise options.

Watch the last few years carefully. The deadline is absolute, and a plan that leaves too much for years nine and ten has recreated the concentration problem in miniature. Front-loading slightly is the safer error, because it preserves the ability to adjust later.

And revisit it annually rather than setting it once. Ten years is long enough that your income, your state, your marital status and the rates themselves can all change. A schedule fixed in year one is a schedule that ignores nine years of information.

8. Two situations that change the arithmetic

A beneficiary planning to move states. If you are in California now and expect to be in Texas in five years, deferring the bulk into the later years converts a 9.30% state rate into 0%. That is a real and legitimate strategy, and it is one of the few cases where deferral clearly wins — but it depends on the move actually happening, and the deadline does not extend if it does not.

A beneficiary approaching their own retirement. Someone who inherits at 58 and retires at 63 has five high-income years and five low-income ones inside the same ten-year window. Weighting the withdrawals toward the second half is straightforwardly better, and the gap between a naive even split and a considered one is large.

Both cases share a structure: the ten-year window is long enough to contain a change in your own rate, and the whole art of this is putting the withdrawals on the right side of that change.

9. Practical mistakes worth avoiding

Rolling an inherited IRA into your own. A non-spouse beneficiary cannot do this. Attempting it generally makes the entire account taxable immediately, which is the single most expensive error available here.

Missing an annual distribution when one is required. Whether one is required depends on section 1's distinction. Getting it wrong costs 25% of the shortfall.

Assuming a Roth inheritance has no deadline. An inherited Roth IRA is generally free of income tax on distributions but is still subject to the ten-year emptying requirement. The deadline applies; the tax does not. Many beneficiaries hear "Roth" and stop reading.

Leaving the account with the original custodian without retitling it. An inherited IRA must be titled correctly, showing the deceased owner and the beneficiary. An incorrectly titled account creates problems that are administrative rather than fatal, but they compound over ten years.

Treating the ten years as nine plus a scramble. The commonest version of the concentration problem is not deliberate deferral. It is inattention for eight years followed by a large forced withdrawal, which is the expensive strategy arrived at by accident.

10. What changed, and why the old advice is still circulating

The stretch was eliminated for most beneficiaries by legislation effective in 2020. Accounts inherited before then generally continue under the old rules, which is the first reason old advice persists — for some readers it is still correct.

The second reason is that the replacement rules were not settled immediately. Whether annual distributions were required inside the ten years was genuinely unclear for several years, guidance was issued and revised, and penalty relief was granted for the intervening period. Material written during that window may be accurate about the law as it then stood and wrong about the law now.

Which produces a specific practical hazard. If you search this subject you will find confident, well-written articles that contradict each other, and the contradiction is frequently about when they were written rather than about who is right.

Two defences. Check the date on anything you read about inherited accounts, and treat the annual-distribution question in particular as one to confirm rather than one to conclude. This article states the shape of the rule and deliberately declines to state its current fine detail for exactly that reason.

The ten-year deadline itself has been stable throughout. It is the part you can plan around with confidence, and it is the part that drives the arithmetic in sections 3 to 6.

11. A ten-year schedule worth writing down

The single most valuable thing you can do with an inherited account is put a schedule on paper in year one.

Not because the schedule will survive unchanged — it will not — but because the failure mode here is inattention, and a document with dates on it is the cheapest available defence against it.

What belongs on it. The deadline date, spelled out. Whether an annual distribution is required. Your expected income for each of the ten years, however rough. A planned withdrawal for each year, weighted toward the years your other income is lowest. And a review date each year, in the same month, to check the plan against reality.

What to revisit at each review. Whether your income assumption for the coming year still holds, whether a move has become likely, whether the account has grown faster or slower than planned, and whether the remaining balance can still be cleared comfortably in the years left.

The commonest correction is upward, late. Someone who under-withdraws for six years discovers the remaining balance is larger than they expected and must clear it in four — which reproduces the concentration problem the schedule existed to avoid. Checking the remaining balance against the remaining years is the whole discipline, and it takes a few minutes annually.

Frequently asked questions

What is the ten-year rule? Most non-spouse beneficiaries of a retirement account must empty it by 31 December of the tenth year following the year of the owner's death. The lifetime stretch that preceded it is no longer available to them.

Do I have to take something every year? It depends on whether the original owner had already started their own required distributions. If they had, annual distributions are generally required as well as the ten-year deadline. If they had not, generally only the deadline applies. This point has been clarified repeatedly and is worth confirming for your specific account.

Who is exempt from the ten-year rule? Eligible designated beneficiaries: a surviving spouse, a minor child of the deceased, someone disabled or chronically ill, and someone not more than ten years younger than the deceased. That last category is broader than most people expect.

Is it better to spread the withdrawals or wait? Spreading, by default. Deferring produces more money — $345,734 more in this model — but concentrates it into one year at a worse rate. In California that concentration costs 2.08 points of state tax on the whole account, and the federal penalty is larger.

Does it matter which state I live in? Substantially. In flat-rate states like Pennsylvania and Ohio, timing makes no state difference at all — 3.07% and 2.75% either way. In graduated states it costs one to two points. Texas charges nothing under either strategy.

How much is the difference worth? On an $800,000 account in California, $60,228 of extra state tax for deferring rather than spreading. In New York, $42,690. In Pennsylvania and Ohio, nothing at state level — though the federal effect still favours spreading.

Does an inherited Roth IRA have the same deadline? Yes. The ten-year emptying requirement generally applies to an inherited Roth as well. What differs is that qualified distributions are free of income tax — the deadline is the same, the tax is not.

Can I roll an inherited IRA into my own IRA? Not as a non-spouse beneficiary. A surviving spouse has options no one else has, including treating the account as their own. For everyone else, attempting it generally makes the whole account immediately taxable.

What happens if I miss the deadline? The penalty is 25% of the shortfall, reduced to 10% if corrected within the statutory window. On a large inherited account those are substantial figures.

Should I take it all in the first year to get it over with? That is the same concentration problem in reverse, and usually worse — you get the bad rate and lose ten years of tax-deferred growth. Spreading with attention to your own income years beats both extremes.

What to do next

Establish which category of beneficiary you are, then whether your state has graduated rates. Those two facts determine almost everything about how to schedule the withdrawals.

• Retirement state tax calculator — what a large distribution costs in your state, cited per state
• RMD calculator — the rules that governed the original owner's account, which determine whether annual distributions are required
• Effective vs. marginal tax rate — where a large distribution actually lands in your brackets
• The Retirement Withdrawal Order Playbook — how an inherited account fits alongside your own