The Inherited IRA 10-Year Rule: How to Draw Down a $1.2 Million IRA When You Are Still Earning $400,000

Written by Hazel Secco, CFP®, CDFA®

Estimated reading time: 15 minutes

“Inherited IRA RMDs = High Tax Bracket.” That is a Bogleheads thread title, and it is the whole problem in five words. The people who inherit large IRAs are usually in their late forties and fifties, at the top of their earning years, and the tax code now requires them to pull the entire account into their income within ten years. The old option, stretching withdrawals over a lifetime, ended for most beneficiaries in 2020. This is the kind of decision we work through in tax planning.

The inherited IRA 10-year rule is short, and getting it wrong is expensive. A woman earning $400,000 who inherits $1.2 million from a parent will pay federal tax at 35 or 37 percent on every dollar she takes while she is working, and the difference between a thoughtless drawdown and a planned one is well into five figures, sometimes six. This article is for the woman who does not need the money yet, is already in a high bracket, and has to decide when to take it anyway.

Below: the 2026 rules as the final regulations now apply them, the annual RMD twist that catches beneficiaries of parents who died after 73, and a worked comparison of four ways to empty a $1.2 million account, with the after-tax result of each.

What is the inherited IRA 10-year rule?

The 10-year rule requires most non-spouse beneficiaries of an IRA owner who died after December 31, 2019 to withdraw the entire account by December 31 of the calendar year that includes the tenth anniversary of the death. Withdrawals from an inherited traditional IRA are ordinary income to the beneficiary in the year taken. The rule replaced the “stretch IRA,” which let a beneficiary spread withdrawals over her own life expectancy, and it applies to adult children, grandchildren, siblings, nieces, and most trusts.

Five kinds of beneficiaries are exempt, and the tax code calls them eligible designated beneficiaries: a surviving spouse, the owner’s own child while under 21, a disabled or chronically ill individual, and anyone not more than ten years younger than the owner. They can still stretch. A minor child switches to the 10-year clock on her 21st birthday. If you are the spouse, this article is not about you; your options are broader and the costly default is a different one, which I cover in inherited 401(k) options for a surviving spouse.

A parent who died in March 2026 leaves a daughter with a deadline of December 31, 2036. The account can sit untouched for years, or be emptied in year one, or anything in between. That flexibility is the planning opportunity, and it is also how people end up with a $1.4 million withdrawal in a single year because they never decided.

Do I have to take RMDs from an inherited IRA every year?

It depends on when the owner died relative to her required beginning date. If the owner died on or after that date (April 1 after the year she turned 73, or 75 for anyone born in 1960 or later), the beneficiary must take an annual required minimum distribution in years one through nine and still empty the account by the end of year ten. If the owner died before that date, there are no annual minimums, only the 10-year deadline. This is the rule Treasury finalized in July 2024, and it has applied since 2025.

The annual amount is small. It is the prior December 31 balance divided by a life expectancy factor from the IRS Single Life Table, looked up once using the beneficiary’s age in the year after death and reduced by one each year after that. A 53-year-old has a factor of 33.4, so a $1.26 million balance produces a first-year minimum of about $37,700, roughly 3 percent. The minimum is a floor, not a plan; it leaves most of the account for the year-ten lump.

Situation (owner died after 2019)	Annual RMD in years 1 to 9?	Deadline to empty
Traditional IRA, owner died on or after her required beginning date	Yes, based on the beneficiary’s single life expectancy	December 31 of the year containing the 10th anniversary of death
Traditional IRA, owner died before her required beginning date	No	Same
Roth IRA (owner is always treated as dying before the required beginning date)	No	Same
Eligible designated beneficiary (spouse, minor child, disabled, chronically ill, within 10 years of age)	Life expectancy payments instead of the 10-year rule	Not applicable

Two details that matter in practice. The IRS waived the penalty for missed annual RMDs in 2021 through 2024 while the rules were unsettled, and the final regulations contain no catch-up requirement, so a beneficiary who took nothing in those years simply computes 2025 and later minimums on the current balance. The 10-year deadline itself was never waived. And the penalty for a missed RMD is 25 percent of the shortfall, reduced to 10 percent if you correct it within two years, so a forgotten $38,000 minimum costs $9,500 before anyone has paid income tax on it.

How is an inherited IRA taxed while you are still working?

Every dollar from an inherited traditional IRA lands on top of your other income, and at $400,000 of salary a single filer is already in the 35 percent federal bracket, which runs from $256,225 to $640,600 of taxable income in 2026. Withdrawals above that line are taxed at 37 percent. New Jersey adds 6.37 percent up to $500,000 of income and 8.97 percent above it; New York adds 5.9 to 6.85 percent at these levels, plus city tax for New York City residents. There is no withholding unless you request it, so estimated tax payments or extra W-4 withholding have to cover the bill.

The net investment income tax works sideways here. IRA distributions are not investment income, so the 3.8 percent tax does not apply to the withdrawal itself. But the withdrawal raises your modified adjusted gross income, and if you were below the $200,000 single threshold, it can push your dividends, interest, and capital gains into the 3.8 percent tax. At $400,000 you are past the threshold already, so the marginal effect is only on what you would otherwise have kept below it.

Medicare IRMAA uses your return from two years earlier. A large withdrawal at 63 sets your Part B premium at 65, and in 2026 the top tier costs $689.90 a month instead of $202.90. For a woman in her early fifties this is a timing question for the last years of the window, not the first ones. State rules add a layer: New Jersey taxes inherited IRA distributions as pension income (a beneficiary under 62 gets no exclusion), and New York lets a beneficiary of any age exclude up to $20,000 a year if the decedent was 59½ or older, shared among all beneficiaries. The full picture of how the three states treat retirement income is in retiring in a high-tax state.

Four ways to empty a $1.2 million inherited IRA

Dana is a hypothetical composite. She is 52, single, a vice president at a pharmaceutical company in New Jersey earning $400,000, and her father died in March 2026 at 81, well past his required beginning date. She inherited his $1.2 million traditional IRA, worth about $1.26 million by the end of 2026. She plans to retire at 60, in 2034, and expects about $40,000 of dividend and interest income once she does. Her window closes December 31, 2036, and because her father died after his required beginning date, she owes an annual minimum in 2027 through 2035, starting at about $37,700.

I ran four drawdown strategies with the same assumptions: 5 percent growth inside the IRA, 4.5 percent after tax on money withdrawn and reinvested, 2026 federal and New Jersey brackets held constant, and no other changes to her income. The numbers are illustrative, not a forecast.

Strategy (2027 to 2036)	Federal + NJ tax on the inherited IRA over 10 years	After-tax value of the money at the end of 2036
A. Minimums only, then the year-10 lump (about $1.43 million in 2036)	About $767,000	About $1,136,000
B. Level withdrawals of about $163,000 a year	About $589,000	About $1,163,000
C. Minimums while working, then three large withdrawals after retiring at 60	About $659,000	About $1,213,000
D. About $148,000 a year while working, then $178,000 a year in retirement to fill the 24% bracket	About $585,000	About $1,185,000

Read the last column. Strategy A, the default for most people, leaves Dana with about $77,000 less than Strategy C. That is the cost of never deciding: a $1.43 million withdrawal in one year, taxed at 37 percent on most of it, with New Jersey’s 10.75 percent bracket in play for the first time in her life. Strategy B, the “just spread it evenly” answer that most articles recommend, sits in the middle. It avoids the lump but pays 35 percent federal on every dollar for seven straight years while she is working.

Why the lowest tax bill is not the best answer

Strategy D has the lowest tax bill and Strategy C has the most money at the end. That is not a mistake in the table. Every dollar left inside the inherited IRA keeps compounding without tax drag, and for Dana the value of that deferral over seven working years outweighs the higher bracket she pays when the money finally comes out in retirement. The goal is the most after-tax wealth on the day the account closes, and that is not always the same as the least tax.

The mechanics behind Strategy C: while she earns $400,000, every inherited dollar is taxed at 35 percent federal plus 6.37 percent state, so she takes only the required minimum. When her salary stops at 60, her other income is $40,000, and the first $200,000 or so of withdrawals each year runs through the 10, 12, 22, and 24 percent brackets before reaching 32 and 35. Three retirement years of large withdrawals are still cheaper than seven working years of moderate ones, even though the retirement-year withdrawals are big enough to touch the 35 percent bracket themselves.

This is the same logic as the Roth conversion window, pointed in the opposite direction. In the years between retirement and Social Security, the low brackets are empty and something has to fill them. An inherited IRA with a deadline goes first; your own Roth conversions wait until the inherited account is gone. Doing both in the same year stacks two decisions into one bracket and defeats the purpose of each.

What if retirement falls outside your 10-year window?

If you are 45 and plan to work until 60, there are no low-income years inside your window, and the retirement-first strategy is not available. The question becomes how to take $1.2 million out over ten years while staying below the lines that cost the most: the 37 percent bracket at $640,600 of taxable income for a single filer, and for anyone within three years of 65, the IRMAA tiers. In that case a level drawdown sized to stay under 37 percent, roughly Strategy B, is close to the best you can do, and the work shifts to offsetting the income.

Offsetting means using every pre-tax deferral you have in the same years. Maximize the 401(k) including catch-up contributions from 50, elect deferred compensation if your employer offers it, fund a donor-advised fund in a high-withdrawal year if you give anyway, and time the withdrawals to years without a large RSU vest or bonus. A mega backdoor Roth does not reduce this year’s taxable income, but it does move future growth out of the taxable column, which matters when an inherited IRA is forcing income onto your return. Trust beneficiaries face a harsher version of this problem: an accumulation trust that keeps the withdrawals reaches the 37 percent bracket at about $16,650 of income, so the trust usually distributes to the beneficiary and lets her pay at her own rate.

What to Do This Week

Find the owner’s date of death and date of birth. Together they tell you whether the owner died before or after her required beginning date, which decides whether you owe annual minimums. If she was 73 or older (75 for anyone born in 1960 or later) and had passed April 1 of the following year, you do.

Confirm the year-of-death RMD was taken. If the owner had not taken her 2026 minimum before she died, it is yours to take. The final regulations waive the penalty if you take it by the later of your extended filing deadline for 2026 or December 31, 2027, but take it now and be done.

Write the window on one page. Year-by-year, 2027 through 2036: your expected salary, the year you plan to retire, any vest or bonus years, and the year you turn 63 (the first IRMAA lookback year). Then mark which years are cheap and which are expensive. The withdrawal plan falls out of that page.

Set up withholding on the first distribution. Custodians default to 10 percent or nothing. At a 35 percent federal and 6 percent state rate you want closer to 40 percent withheld, or a quarterly estimate on the calendar.

Move the account by transfer, not by check. A non-spouse beneficiary cannot roll an inherited IRA over. If you want it at a different custodian, it goes trustee to trustee, titled in the decedent’s name for your benefit. A check made out to you is a full distribution, taxable that year, with no way back.

Frequently Asked Questions

Can I roll an inherited IRA into my own IRA?

Not as a non-spouse beneficiary. The tax code bars rollovers out of an inherited IRA, and you cannot convert it to a Roth. You can move it to another custodian by trustee-to-trustee transfer as long as the receiving account stays titled as an inherited IRA. A non-spouse beneficiary of a 401(k), by contrast, can direct-roll it into an inherited Roth IRA, which is still subject to the 10-year rule.

Does the 10-year rule apply to an inherited Roth IRA?

Yes, but with no annual minimums. A Roth owner is treated as having died before her required beginning date, so the beneficiary owes nothing in years one through nine and must empty the account by the end of year ten. Withdrawals are tax-free if the owner’s Roth had been open at least five years, which makes waiting until year ten the usual answer.

What if my parent died before taking that year’s RMD?

The year-of-death minimum still has to come out, and it goes to the beneficiary. It is due by December 31 of the year of death, but the final regulations automatically waive the penalty if it is taken by the later of your extended tax filing deadline for that year or December 31 of the following year.

What is the penalty for missing an inherited IRA RMD?

An excise tax of 25 percent of the amount you should have taken, reduced to 10 percent if you withdraw the shortfall and file Form 5329 within two years. The IRS can waive it entirely for reasonable error if you have corrected the shortfall, and it waived the annual-RMD penalty for beneficiaries for 2021 through 2024 while the regulations were pending.

Does New Jersey tax inherited IRA distributions?

Yes, as pension income, less any of the decedent’s New Jersey basis (New Jersey never allowed a deduction for traditional IRA contributions). The retirement income exclusion requires the beneficiary to be 62 or older with total income of $150,000 or less, so a working beneficiary gets none of it. An IRA passing from a parent to a child is exempt from New Jersey inheritance tax; one passing to a sibling, niece, or partner is not.

How do I calculate the annual RMD on an inherited IRA?

Divide the account balance on December 31 of the prior year by your life expectancy factor from the IRS Single Life Table, using your age in the year after the owner’s death, then subtract one from that factor each later year. At 53 the factor is 33.4; at 55 it is 31.6; at 60 it is 27.1. Your custodian will usually calculate it, but the responsibility is yours.

Want the full picture?

If you want the complete breakdown, including the three advisor compensation models, why tax preparation isn’t tax planning, and the four questions every high-earner should ask her advisor, download my free guide, 7 Things Nobody Teaches Independent Women About Building Wealth. It’s a 15-minute read.

---

Hazel Secco, CFP®, CDFA®, is the founder of Align Financial Solutions, a fee-only fiduciary firm in Hoboken, New Jersey, that helps high-net-worth women bring retirement, equity compensation, tax, and estate planning into one plan.

Book a free 15-minute Align Call: https://alignfinancialsolutions.com/book-a-call/
Whether we work together or not, you’ll walk away with clarity on your best next step.

🌐 https://alignfinancialsolutions.com
📺 https://www.youtube.com/@AlignYourRetirement
💼 https://linkedin.com/in/hazel-secco

Listen to Align Your Retirement: Apple Podcasts · Spotify · YouTube

Advisory services are offered through Align Financial Solutions LLC, an investment advisor in the State of New Jersey. This article is for educational purposes only and is not personalized tax, legal, or investment advice. Tax figures are for tax year 2026 and subject to change; the drawdown comparison holds 2026 brackets constant and assumes fixed growth rates for illustration. Dana is a hypothetical composite, not a real client, and her figures are illustrative. Consult a qualified tax professional about your own situation.

Sources

1. 26 U.S. Code § 401(a)(9), required distributions, 10-year rule and eligible designated beneficiaries: https://www.law.cornell.edu/uscode/text/26/401
2. Treasury Decision 10001, Required Minimum Distributions, final regulations (July 19, 2024): https://www.federalregister.gov/documents/2024/07/19/2024-14542/required-minimum-distributions
3. 26 CFR § 1.401(a)(9)-5, annual distributions after the required beginning date: https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.401(a)(9)-5
4. 26 CFR § 1.401(a)(9)-3, distributions when the owner dies before the required beginning date: https://www.law.cornell.edu/cfr/text/26/1.401(a)(9)-3
5. 26 CFR § 1.401(a)(9)-9, Single Life Table: https://www.law.cornell.edu/cfr/text/26/1.401(a)(9)-9
6. 26 CFR § 1.408-8, Roth IRA owners treated as dying before the required beginning date: https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.408-8
7. 26 CFR § 54.4974-1, excise tax and the year-of-death waiver: https://www.ecfr.gov/current/title-26/chapter-I/subchapter-D/part-54/section-54.4974-1
8. IRS Notice 2024-35, penalty relief for 2024 and prior years: https://www.irs.gov/pub/irs-drop/n-24-35.pdf
9. 26 U.S. Code § 4974, excise tax on missed required distributions (25 percent, 10 percent if corrected): https://www.law.cornell.edu/uscode/text/26/4974
10. 26 U.S. Code § 408(d)(3)(C), no rollovers from inherited IRAs: https://www.law.cornell.edu/uscode/text/26/408
11. IRS Notice 2008-30, direct rollover by a non-spouse beneficiary of an employer plan to an inherited Roth IRA: https://www.irs.gov/pub/irs-drop/n-08-30.pdf
12. IRS Publication 590-B, Distributions from Individual Retirement Arrangements: https://www.irs.gov/publications/p590b
13. IRS, Retirement plan and IRA required minimum distributions FAQs: https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
14. IRS Rev. Proc. 2025-32, 2026 tax brackets and standard deduction: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
15. 26 U.S. Code § 1411, net investment income tax (retirement distributions excluded from net investment income): https://www.law.cornell.edu/uscode/text/26/1411
16. CMS, 2026 Medicare Parts A and B premiums and deductibles (IRMAA tiers): https://www.cms.gov/newsroom/fact-sheets/2026-medicare-parts-b-premiums-deductibles
17. New Jersey Division of Taxation, GIT-1 and GIT-2, pension and IRA income of survivors and beneficiaries: https://www.nj.gov/treasury/taxation/pdf/pubs/tgi-ee/git1&2.pdf
18. New Jersey Division of Taxation, Tax Rate Schedules, 2020 and after: https://www.nj.gov/treasury/taxation/pdf/current/njtaxratesch.pdf
19. New Jersey Division of Taxation, inheritance tax beneficiary classes: https://www.nj.gov/treasury/taxation/pdf/other_forms/inheritance/transferinheritanceclasses.pdf
20. New York State Department of Taxation and Finance, Form IT-201 instructions, line 29, pension and annuity income exclusion for beneficiaries: https://www.tax.ny.gov/forms/current-forms/it/it201i.htm
21. Bogleheads forum thread, Inherited IRA RMDs = High Tax Bracket: https://www.bogleheads.org/forum/viewtopic.php?t=355549