Your parent spent decades building a $500,000 IRA. You inherited it, and now the IRS wants a quarter of it back, possibly more, unless you handle the withdrawals correctly. That is the reality facing non-spouse beneficiaries under rules the IRS began enforcing in January 2025. As of May 2026, according to tax practitioners and financial planners working with affected clients, many heirs still have not taken the required steps to protect what they have received.
The gap between a well-planned drawdown and a passive approach can easily exceed $125,000 in federal income taxes on a half-million-dollar account. Here is how the math works, what changed, and what you should do before the end of this year.
The rule change that caught families off guard
Before the SECURE Act of 2019, a non-spouse beneficiary who inherited a traditional IRA could “stretch” distributions over their own life expectancy, sometimes across 30 or 40 years. Annual taxable amounts stayed small, and the remaining balance kept growing tax-deferred.
The SECURE Act replaced the stretch with a 10-year rule: most non-spouse heirs must now empty an inherited retirement account by December 31 of the 10th year after the owner’s death. But the law left a critical question unanswered. Did the heir also have to take annual withdrawals during those 10 years, or could they wait and take one lump sum at the end?
The IRS answered in final regulations published July 19, 2024. The rule: when the original account owner died on or after their required beginning date for minimum distributions (generally April 1 of the year after turning 73 under SECURE 2.0), the beneficiary must take annual required minimum distributions in each of the first nine years and drain whatever remains by the end of year 10.
“The biggest misconception I still hear from clients is that they can just let the inherited IRA sit for 10 years and deal with it later,” said Ed Slott, a CPA and IRA specialist who has been tracking the regulations since they were first proposed. “That was never the intent of the law when the original owner had already started RMDs, and now the IRS has made it official.”
The IRS confirmed in its official bulletin that these regulations apply to distribution calendar years beginning on or after January 1, 2025. During the years the rules were still in proposed form (2021 through 2024), the agency waived penalties for missed annual withdrawals. Those waivers are now over.
Who is affected and who is exempt
The annual-plus-10-year requirement applies to non-spouse designated beneficiaries who inherited from an owner who had already reached their required beginning date. That covers a large share of adult children inheriting a parent’s traditional IRA or 401(k).
Five categories of “eligible designated beneficiaries” can still use the older, more favorable stretch rules:
- Surviving spouses
- Minor children of the account owner (until they reach the age of majority, after which the 10-year clock starts)
- Disabled individuals as defined under IRC Section 72(m)(7)
- Chronically ill individuals
- Beneficiaries not more than 10 years younger than the deceased owner
Everyone else, including most adult children, grandchildren, siblings, and non-family heirs, falls under the new regime.
There is one important distinction worth highlighting: inherited Roth IRAs are still subject to the 10-year emptying deadline, but the IRS does not require annual RMDs during that window, assuming the original owner satisfied the five-year holding period. Because qualified Roth distributions come out tax-free, the bracket-shock problem described below generally does not apply to Roth accounts.
And a common point of confusion: if the original owner died before their required beginning date, the 10-year emptying rule still applies, but the IRS final regulations do not mandate annual distributions during those 10 years. The heir has more flexibility in timing withdrawals, which creates real planning opportunities. However, waiting until year 10 to pull everything out in a single taxable event is almost always a costly mistake.
Where the $125,000 tax hit comes from
Walk through a realistic scenario. A 45-year-old inherits a $500,000 traditional IRA from a parent who died at 78, well past the required beginning date. Under the final regulations, the heir must take annual RMDs based on their own single life expectancy (found in IRS Publication 590-B, Table I) and empty the account by year 10.
At age 45, the IRS life expectancy factor is approximately 38.8 years. The first-year RMD on a $500,000 balance would be roughly $12,900. But that minimum is just the floor. As the account grows at, say, 5% annually and the life expectancy factor shrinks each year, the required withdrawals increase. By year nine, the annual RMD is larger, and the year-10 lump sum to empty the remaining balance can be substantial.
If the heir’s salary and other income already place them in the 24% federal bracket, these forced distributions push a meaningful portion of each year’s withdrawal into the 32% bracket or higher. Over the full 10-year window, the cumulative federal income tax on the inherited funds lands in the range of $125,000 to $140,000, depending on investment returns, bracket thresholds, and filing status. Add state income taxes in places like California (top rate 13.3%) or New York (top rate 10.9%), and the total tax burden climbs further.
“People hear ’10 years’ and think they have plenty of time,” said Jeffrey Levine, a CPA and chief planning officer at Buckingham Wealth Partners. “But when you run the numbers, the difference between spreading withdrawals evenly and back-loading them into the final years can be six figures in extra tax.”
Compare that to the old stretch IRA. A 45-year-old with a 38-year life expectancy could have spread the same $500,000 across nearly four decades of smaller, lower-bracket withdrawals. The annual taxable hit would have been a fraction of what the 10-year rule now demands.
These figures are illustrative, not precise to the penny. But the directional math is clear: compressed mandatory distributions over 10 years generate a far heavier tax bill than the stretch ever did.
The excise tax penalty for missed withdrawals
Skipping a required annual distribution triggers an excise tax under Section 4974 of the Internal Revenue Code. The SECURE 2.0 Act of 2022 reduced this penalty from 50% to 25% of the shortfall amount. If the beneficiary corrects the missed distribution within a defined correction window, the rate drops to 10%.
Even at the reduced rates, the numbers add up fast. An heir who skips a $30,000 required distribution owes a $7,500 excise tax at the 25% rate, on top of the income tax they will eventually owe when they do withdraw the money. Stack two or three missed years and the penalties alone can reach five figures.
And unlike the transition period from 2021 through 2024, there is no blanket waiver in place. The IRS has given no indication it plans to offer one for 2025 or beyond.
Open questions the IRS still has not answered
Several gaps in guidance remain as of spring 2026:
- No official worked examples. The IRS has not published illustrations showing year-by-year RMD calculations for a beneficiary under the dual-obligation scenario (annual RMDs plus the year-10 liquidation). Financial planners are building their own models, and assumptions vary.
- No signal on future penalty relief. During the transition years, the IRS issued notices waiving the excise tax for missed annual distributions. Whether any similar relief will be offered for beneficiaries who misunderstood the rules after the January 2025 effective date remains unknown.
- No published revenue estimates. Neither the Treasury Department nor the IRS has released figures on how much additional revenue the annual-distribution requirement is expected to generate or how many beneficiaries are affected.
Five steps to take before December 31, 2026
If you are a non-spouse beneficiary who inherited a traditional IRA or employer plan from someone who died after their required beginning date, these steps matter right now:
- Confirm whether the annual RMD rule applies to you. Check the original owner’s date of death and whether they had reached their required beginning date. If the owner died before that date, the 10-year rule still applies, but annual distributions may not be required. Even so, voluntary early withdrawals can reduce bracket impact.
- Calculate your 2025 and 2026 RMDs. Use the IRS Single Life Expectancy Table in Publication 590-B and the account balance as of December 31 of the prior year. If you missed the 2025 distribution, consult a tax professional about whether the reduced 10% excise rate is available through a timely correction.
- Model the full 10-year tax impact. A session with a CPA or even a careful spreadsheet can reveal whether accelerating distributions into lower-income years, bunching charitable donations, or using qualified charitable distributions (available to those over 70½) could meaningfully reduce the cumulative tax bill.
- Factor in your state. Nine states impose no broad-based income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Others tax retirement distributions at rates above 9%. The state where you file can shift the total tax burden by tens of thousands of dollars over the 10-year window.
- Treat every annual RMD as a hard deadline. The transition-period waivers are gone. Think of each year’s required distribution the same way you think of April 15: miss it, and you pay a penalty.
The price of waiting rises with every missed distribution
For many families, an inherited IRA represents the single largest wealth transfer they will ever receive. The difference between a planned drawdown strategy and a passive approach of ignoring annual requirements can easily exceed $50,000 in unnecessary taxes and penalties on a $500,000 account, and that gap widens with every year of inaction.
The rules are final. The waivers are gone. The IRS has made clear that compliance is expected starting with the 2025 distribution year. Heirs who act before December 31, 2026, still have room to course-correct, spread out taxable income, and keep more of what their parents intended them to have. Those who wait risk discovering the cost of inaction on a tax return they cannot undo.
Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
