Inherited IRAs: How to Manage Withdrawals and Tax Brackets Under the 10-Year Rule

By Sara V. Solano, CRPC®, BFA™

LodeStar Advisory Group LLC

Turning a Compliance Requirement Into a Planning Opportunity

When a beneficiary inherits an IRA, the IRS rules may feel rigid, but the real impact is determined by how distributions are handled. Under the 10-year rule, most non-spouse beneficiaries must fully withdraw inherited IRA assets within a decade. On the surface, this seems like a simple deadline. In practice, it opens the door to a wide range of strategic decisions—particularly around taxes.

Every dollar withdrawn from a traditional inherited IRA is taxed as ordinary income. That means the timing, size, and sequence of distributions can either preserve value or unintentionally erode it. For many beneficiaries, the difference comes down to being intentional rather than reactive.

The goal is not merely to comply. The goal is to shape a distribution plan that supports long-term efficiency.

Why Withdrawal Timing Matters More Than Ever

Unlike the old “stretch IRA” rules, where withdrawals could be taken over a lifetime, the modern 10-year window requires beneficiaries to think ahead. The core challenge is simple:

All income recognized within the 10-year period becomes part of your taxable picture.

That means:

• Large withdrawals in high-income years may push you into a higher bracket.

• Minimal withdrawals early on may lead to a concentrated—and costly—tax event at the end.

• Inconsistent, ad-hoc distributions can complicate planning for other goals.

In other words, timing is not just an administrative decision; it is a tax-management strategy.

Strategic Considerations for Managing Withdrawals

Below are key strategies beneficiaries might consider when planning how to distribute inherited IRA assets over the decade-long period.

1. Use Lower-Income Years to Your Advantage

Income often fluctuates—due to retirement, sabbatical, job changes, business transitions, or years with lower bonuses or overtime. These moments can create a “tax window,” where intentional withdrawals may be taxed at a lower marginal rate.

Beneficiaries might consider accelerating distributions in years when:

• Employment income is temporarily reduced

• They transition into part-time work

• They expect higher income in future years

• They temporarily fall into a lower tax bracket due to life changes

A lower-income year can turn a required distribution into an opportunity.

2. Avoid the Pitfall of Year-Ten Accumulation

It is tempting to delay withdrawals—especially when the inherited IRA remains invested and continues to grow. But postponing too much can compress the tax hit into a single year.

A large lump-sum distribution in Year Ten may:

• Trigger higher federal tax brackets

• Realize additional state income taxes

• Affect Medicare premiums (IRMAA surcharges)

• Reduce deductions or credits due to income thresholds

The compounding benefit of waiting must be weighed carefully against the tax cost of concentrating income.

3. Coordinate Withdrawals With Other Sources of Income

Inherited IRA distributions do not exist in isolation. They interact with other financial elements such as:

• Salary or business income

• Required Minimum Distributions (RMDs) from your own retirement accounts

• Social Security benefits

• Capital gains or dividends from taxable accounts

• Roth conversions

• Real estate sales or other one-time income events

Beneficiaries who integrate inherited IRA withdrawals into their broader income picture often preserve more of what they inherit.

A structured, year-by-year plan helps beneficiaries avoid common pitfalls and provides clarity. Such a plan may include:

• A consistent annual distribution amount

• A tapered approach (smaller withdrawals early, larger later)

• A bracket-aware strategy that adjusts each year

• A hybrid approach that allocates withdrawals to low-income years

The right framework depends on the beneficiary’s goals, income trajectory, and household tax situation.

A Behavioral Perspective: Why Many Beneficiaries Delay

Even when the math is clear, beneficiaries often postpone decisions. This is normal—and understandable.

The period after an inheritance can be emotional. The account itself represents a life, a relationship, and a transition. Reacting quickly can feel uncomfortable.

The result? Present bias often leads beneficiaries to delay early distributions, even when doing so may not serve their long-term interests. Naming these tendencies can help create space for more intentional choices.

Common Mistakes to Avoid

Just as in Part 1, several missteps tend to repeat:

1. Waiting too long to begin withdrawals This increases the likelihood of higher taxes later.

2. Ignoring the beneficiary’s own retirement timeline As personal RMDs begin, income layering becomes more complex.

3. Focusing solely on investment performance Growth matters—but so does tax efficiency.

4. Attempting to self-manage without guidance Even well-informed beneficiaries may overlook nuances in sequencing, timing, or IRS rules.

Each of these can reduce the overall value of the inheritance, but each is preventable.

A Framework for Intentional Planning

To bring clarity to a complex process, beneficiaries can begin with a few guiding questions:

• What income range do I expect over the next decade?

• How will upcoming life events affect my tax picture?

• Does my current plan avoid unnecessary concentration in Year Ten?

• Am I making decisions based on strategy—or habit?

Thoughtful withdrawal timing can significantly influence what is ultimately retained.

Looking Ahead

This article is the second in a three-part series on inherited IRAs.

In the final installment, we will explore the behavioral side of inheritance—how emotions, identity, and human tendencies shape financial decisions, and why a thoughtful mindset can make all the difference when navigating an inherited account.

Because even in the most technical matters of tax and timing, clarity and intention remain essential to preserving what matters.

 _________________________________________________________________________________Sara V. Solano, CRPC®,  BFA™  is a Wealth Advisor who specializes in providing behavioral financial advice.

Disclosure: LodeStar Advisory Group LLC is an independent Registered Investment Adviser (RIA) headquartered in Naples, Florida. The above commentary does not constitute individual investment advice. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.