Reducing Taxes on Inherited IRAs: What You Need to Know

19 February 2026

Let’s face it—getting an inheritance should feel like receiving a gift, not a burden. But when it comes to inherited IRAs (Individual Retirement Accounts), Uncle Sam often shows up with his hand out. Inheriting an IRA can quickly go from a blessing to a tax headache if you’re not careful.

Don't worry, though. There are smart moves you can make to minimize taxes and hold on to more of that hard-earned money your loved one left for you. Whether you're new to inherited IRAs or looking to optimize your strategy, this guide will walk you through the ins and outs of reducing taxes on inherited IRAs—without the confusing financial jargon.

🔍 What Is an Inherited IRA Anyway?

An inherited IRA, sometimes called a "beneficiary IRA," is exactly what it sounds like: an IRA that you inherit from someone else, usually a parent, spouse, or relative. There are two primary types:

- Traditional Inherited IRAs: The funds haven’t been taxed yet. You’ll pay taxes when you withdraw.
- Roth Inherited IRAs: The original account holder paid taxes already, so you usually won’t pay taxes on withdrawals.

But here’s the kicker—when you inherit one, you’re required to start taking money out at certain times, and how you do that can massively affect how much you owe in taxes.

🧠 Understanding The SECURE Act (And Why It Matters)

Let’s rewind a bit. In 2020, the SECURE Act changed the rules for inherited IRAs. No more stretching withdrawals (and taxes) over your entire life unless you fall into a few specific categories (we’ll cover those).

Now, most non-spouse beneficiaries must empty the inherited IRA within 10 years of the original owner’s death. That 10-year rule? It can be a tax time bomb if you’re not careful.

Imagine cramming $500,000 of income into a decade. Boom—your tax bracket shoots up. But that’s where planning comes into play.

🙋 Are You an Eligible Designated Beneficiary?

Before we dive deeper, it’s important to figure out which category you fall into, because it changes your tax options.

You’re an Eligible Designated Beneficiary (EDB) if you are:

- A surviving spouse
- A minor child of the deceased (until age 21)
- Someone who is chronically ill or disabled
- Not more than 10 years younger than the deceased (e.g., a sibling)

If you're an EDB, you can still stretch distributions over your lifetime (lucky you). But if you’re not? That 10-year window is your new best frenemy.

⏱️ The 10-Year Rule: Timing Is Everything

Here’s where strategy meets action.

Under the SECURE Act, if you’re subject to the 10-year rule, you must withdraw all the money from the IRA by the end of the 10th year following the account owner's death. But there’s no requirement to take it out annually. You could wait until the 10th year… but should you?

Probably not.

Why? Let’s say you inherit $200,000 and keep it untouched for 9 years. Then in year 10, you yank it all out at once. That could bump you into a much higher tax bracket—maybe even cost you thousands more than necessary.

Instead, spreading the distributions over the 10-year period might avoid that mega tax bill—and that’s the foundation of smart tax planning for inherited IRAs.

📁 Tax-Savvy Strategies to Reduce That Bill

Let’s break down the most effective ways to cut down on taxes when you inherit an IRA. Some of these might feel like tiny tricks, but they add up fast.

1. 🧮 Plan Smart Withdrawals

You’re in control of when you take the money. So if you’re having a low-income year (maybe you’re between jobs or starting a business), that could be the perfect time to take a larger chunk out of the inherited IRA.

Use it like a lever—pull more out when your tax rate is low, ease off when it’s high.

2. 🧾 Convert to a Roth (If You Can)

If the original account was a traditional IRA, you might consider rolling parts of it into a Roth IRA over time—this is called a Roth conversion.

Yes, you’ll pay taxes on the amount you convert now, but future growth and withdrawals can be tax-free (score!). This move can be golden if you’re in a lower tax bracket today compared to what you expect in future years.

Heads up: this only works in specific cases. Talk to a tax pro before jumping in.

3. 💼 Use Charitable Contributions to Your Advantage

Are you inheriting an IRA and feeling charitable? If you're 70½ or older and have your own IRA, you can make Qualified Charitable Distributions (QCDs) directly from the account to a qualified charity—up to $100,000 per year—and it won't count as taxable income.

While this option doesn’t directly apply to inherited IRAs, it’s a worthy move if you’re juggling multiple accounts. It can reduce your overall tax picture.

4. 💡 Combine With Other Tax Deductions

Here’s a sneaky-smart play: time your IRA withdrawals to coincide with high-deduction years. For example, if you're planning a big medical procedure or major charitable donation, pulling money from the inherited IRA in that same year can offset the tax impact.

Tax planning is like a chess game—think a few moves ahead.

5. 🧍 For Spouses Only: Spousal Transfers

If you’re a surviving spouse, good news—you’ve got the most flexibility. You can roll the inherited IRA into your own IRA and treat it like it was always yours.

This sneaky little option means you don’t have to take Required Minimum Distributions (RMDs) until you hit 73 (as of 2024). That gives you more time to let the funds grow and plan your tax strategy.

😕 Common Mistakes to Avoid

Even the most well-intentioned heirs can trip up if they’re not careful. Here are a few bear traps to sidestep:

❌ Waiting Too Long

Procrastination doesn’t pay—especially when the 10-year clock starts ticking. If you wait until year 10 to act, your tax bill could balloon overnight.

❌ Ignoring State Taxes

Federal taxes are just one side of the coin. Some states tax IRA distributions too. Make sure you know what your state laws are so you’re not caught off guard.

❌ Missing RMDs (If Required)

Some inherited IRAs require you to take annual RMDs starting the year after the original owner’s death. Miss one? Boom—penalties up to 25%! Yeah, that’s money down the drain.

📊 A Real-Life Example

Let’s say you inherit a $300,000 traditional IRA as a non-spouse beneficiary. You’re subject to the 10-year rule. You’re currently making $60,000 per year.

If you wait until year 10 and withdraw the full $300,000 at once, that income stacks on top of your regular earnings—potentially pushing you into the 35%+ tax bracket.

But spread it out evenly—$30,000 a year—and you’re likely to keep the money in a much lower bracket. That alone could save you tens of thousands!

🧭 Get Help—It’s Worth It

Inherited IRAs can be a maze, and every situation is different. Your income, tax bracket, age, and even your future goals all play a role in the smartest strategy.

So don’t try to wing it. Talk to a Certified Financial Planner (CFP) or tax advisor who understands the nuances. A little professional guidance today can mean big tax savings tomorrow.

Think of it like this: if you got handed a treasure map, wouldn’t you want a guide to help you avoid the traps and find the gold?

🌟 Final Thoughts: Turn a Tax Burden Into a Financial Opportunity

Inheriting an IRA doesn’t have to be a tax nightmare. With the right game plan, you can reduce your tax liability, keep more in your pocket, and honor your loved one’s legacy by making smart financial moves.

It’s not just about saving a few bucks—it’s about maximizing what you've been given. Every dollar you save in taxes is another dollar you can invest, donate, spend on your family, or stash for your own retirement.

So take a deep breath, learn the rules, and play the game to win.