The Inheritance That Comes With a Deadline

Thanks for having me in on this one. And I want to say upfront, he frames it really well because he writes from a personal vantage point. He sits in on meetings his father, who is the advisor, has with families. So he's not describing this from a textbook. He's watching real people get surprised in real time, and that's exactly the perspective that makes this worth paying attention to.

That 'sort of' is doing a lot of work in this article, and it's worth unpacking slowly. The ten-year rule itself is real. It came in with the SECURE Act in twenty nineteen. If you're an adult child inheriting a traditional IRA from a parent, you don't get to stretch withdrawals across your own lifetime the way your parents' generation could. The account has to be at zero by the end of year ten. That part most people have heard.

Right, and that assumption is what Ian Schaeffer calls the trap. Whether you can coast for nine years and decide at the end depends entirely on one question that most people never think to ask: was the person you inherited from already taking required withdrawals from their IRA? Because once someone hits age seventy-three, the government requires them to start drawing down a traditional IRA every year. Those are called required minimum distributions. If your parent was already doing that, the rules say you have to keep the money moving too. You owe a withdrawal in year one, year two, all the way through year nine, and then you still have to empty whatever's left by end of year ten.

It really is, and the people Ian Schaeffer describes walking in to these meetings almost never know that going in. Now, there is a break if the person died before they had started those required withdrawals. In that case, no annual requirement, just the ten-year finish line. But the most common case, an adult child inheriting from a parent who was already in their late seventies or eighties and well into their required distributions, the yearly requirement is absolutely on.

That's a fair way to put it. When the SECURE Act changed things in twenty nineteen, even the tax world wasn't sure exactly how the annual withdrawal requirement worked for inherited IRAs. So the IRS did something unusual. It waived the penalty for missing those yearly withdrawals, and it did that for four consecutive years, twenty twenty-one through twenty twenty-four. That's four years where you could have missed a required annual withdrawal and faced no penalty for it.

Exactly, and Ian Schaeffer is direct about this. He says if this is the first you're hearing of it, you're in good company, and it's not entirely your fault. But the IRS finalized its regulations on this in the summer of twenty twenty-four, and the free pass ended there. Starting with twenty twenty-five, the annual withdrawals are real, and skipping one carries a penalty. The article notes the penalty used to be fifty percent of the amount you should have taken. A recent law softened that to twenty-five percent, and as low as ten percent if you catch it and fix it quickly. Better than fifty, but that's still a meaningful hit on a mistake you might not have even known you were making.

It is, and it's what makes Ian Schaeffer's point about twenty twenty-five feel urgent rather than just informational. If you inherited a traditional IRA in the last few years from a parent who was already in their required distribution phase, you need to be asking right now whether you've been taking annual withdrawals. Because the pass is gone. And if the answer is no, that's a conversation to have with an advisor immediately, because how you handle a missed distribution has its own rules and timelines.

Much friendlier situation. The ten-year deadline still applies, so the account still has to be emptied by year ten. But there are no required annual withdrawals along the way, because Roth accounts never had required minimum distributions to begin with. So if you inherited a Roth, you have real flexibility about when within that window you pull money out. The big tax story is different too, but that's a conversation for another day. The annual-withdrawal trap Ian Schaeffer is describing is really a traditional IRA problem.

Right, the surviving spouse situation in particular is its own category with its own, generally more favorable, choices. Ian Schaeffer flags those groups but doesn't go deep on the specifics, and honestly, the rules there vary enough by circumstance that I'd put that on the list of things to bring directly to one of our advisors at American Retirement Advisors, because the answer really does depend on your individual situation.

This is the heart of the whole piece, in my view. Every dollar that comes out of a traditional inherited IRA counts as ordinary income to you in the year you take it. So if you ignore the account for nine years and then pull the entire balance out in year ten, you're stacking all of that income into a single tax year. You can push yourself into a much higher bracket, you can affect what you pay for Medicare, and you end up handing a portion of that inheritance to the IRS that thoughtful, spread-out planning would have kept for you.

And that's the planning insight that the article is really pointing toward. It's not a question of whether you pay tax on this money. You will. It's a question of when you pay it, how much, and whether the timing collides with other income in a way that makes it worse than it had to be. If you're working and in a high-income year, maybe you take less that year. If you retire and your income drops, maybe that's the year you take more. The ten-year window can be a planning tool if you treat it that way from the beginning.

All of it. The window closes whether you use it well or not. And the people who use it well are the ones who looked at it early, looked at it against the rest of their financial picture, their other income, their tax bracket, when they plan to retire, and built a withdrawal schedule on purpose rather than getting to year ten and just pulling whatever's left in a lump.

The first is to find out whether the original owner had already started their required withdrawals. That single fact determines whether the yearly requirement applies to you. If you don't know the answer to that, find out. Second, if the annual requirement does apply, make sure you've taken this year's distribution. The grace period is over and twenty twenty-five counts. Third, before you decide anything about the rest of the money, look at it alongside your full financial picture. Other income, tax bracket, retirement timeline. That's the work that protects the inheritance.

You might have to ask the financial institution holding the account, or look at your parent's prior tax returns, or talk to whoever was helping them with their finances. The custodian of the IRA should have records of whether distributions were being taken. It's a question worth asking specifically, not just assuming one way or the other. And if you're not sure how to interpret what you find, that's a question for an advisor who handles this regularly. The exact mechanics of confirming distribution status, how that flows into calculating what you owe for the year, that's something our team at American Retirement Advisors works through with families all the time.

That framing matters. Because this isn't an abstract tax question. These are people who just lost a parent. The IRA is the last thing that parent was able to leave them. And walking into a completely avoidable tax penalty or a needlessly large tax bill because of a deadline they never knew existed, that's a real loss on top of a loss. The whole point of understanding this is to protect what was left for you.

That's the whole case for doing this planning deliberately. That obligation exists whether you know about it or not. The penalty applies whether you knew about it or not. But the tax outcome, whether you spread this thoughtfully or stack it all in one year, that's inside your control if you start early. That's the piece that planning changes.