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Many of us spend decades building our retirement savings — contributing to IRAs, diversifying investments, and planning for long-term security. While leaving behind a financial legacy is a meaningful gift, inheriting an IRA today comes with important tax considerations.
Recent changes under the SECURE Act of 2019 significantly altered the rules for inherited IRAs, and understanding how these changes affect you is critical for proper financial planning.
How the SECURE Act Changed Inherited IRA Rules
Before 2020, most non-spouse beneficiaries could “stretch” distributions from an inherited IRA over their lifetime. This strategy allowed smaller annual withdrawals, spreading the tax impact over decades.
Under the current rules, most non-spouse beneficiaries must withdraw the full balance of an inherited IRA within 10 years of the original owner’s death.
In certain situations:
- Annual Required Minimum Distributions (RMDs) may also be required during those 10 years if the original account holder had already reached their Required Beginning Date.
- Eligible Designated Beneficiaries (such as spouses or certain qualifying individuals) may still qualify for life expectancy distributions.
Because of these complexities, inherited IRA planning is no longer a passive process — it requires coordination and strategy.
What Is Asset Location — and Why It Matters
Asset location refers to how investments are positioned across different types of accounts, such as:
- Tax-deferred accounts (Traditional IRA, 401(k))
- Tax-free accounts (Roth IRA)
- Taxable brokerage accounts
Most investors focus on asset allocation — how much is invested in stocks, bonds, and other assets. Asset location, however, focuses on where those assets are held to improve tax efficiency.
When you inherit a large traditional IRA, the required withdrawals can create:
- Increased taxable income
- Higher marginal tax brackets
- Reduced eligibility for credits or deductions
- Potential Medicare premium surcharges (IRMAA)
Without proper planning, the 10-year rule can result in significant tax acceleration.
Strategic Planning for an Inherited IRA
Working with a financial planner can help you:
- Develop a tax-efficient withdrawal strategy across the 10-year window
- Coordinate inherited IRA withdrawals with other income sources
- Optimize asset location between inherited IRAs, Roth accounts, and taxable accounts
- Manage investment risk while meeting distribution requirements
- Reduce unnecessary tax drag on long-term growth
For example, it may make sense to withdraw more in lower-income years or align distributions with business income fluctuations, retirement timing, or Roth conversion strategies.
Every situation is different, which is why inherited IRA planning should be integrated into your broader financial plan.
Bringing It All Together
An inherited IRA can be both a blessing and a tax challenge. With thoughtful planning, it can support long-term wealth building rather than create avoidable tax strain.
At PecuSavvy Financial, we help business owners, professionals, retirees, and families navigate inherited IRA rules, tax-efficient distribution planning, and comprehensive wealth management strategies. As an independent fiduciary financial planning firm, our focus is on building a strategy aligned with your goals and long-term financial freedom.
If you’ve recently inherited an IRA — or expect to — we invite you to review your plan and explore proactive distribution strategies.
