When you inherit a retirement account from a parent, it’s more than just a financial transaction it’s a moment filled with emotion, responsibility, and the need to make thoughtful decisions.
That’s exactly the position one client recently found herself in. She wrote:
“Dear FineMark, My mother passed away earlier this year, and I inherited her traditional IRA. I’m 45, and I don’t need the money right now, but I’ve heard there’s something called a 10-year rule. Do I have to take all the money out by then? And what are the tax consequences?”
Signed, Trying to Plan Ahead
Today’s “Dear FineMark…” question was answered by
Private Wealth Advisor, Brooke Benzio
FineMark National Bank & Trust, Naples
Losing a parent is never easy, and navigating finances afterward can feel overwhelming. But asking the right questions early is the best first step and the short answer is: yes, there are rules and timelines you’ll want to follow.
Understanding the 10-Year Rule
Under the SECURE Act, passed in 2019, non-spouse beneficiaries (like adult children) who inherit a retirement account must follow what’s known as the 10-year rule. That means you’re required to withdraw 100% of the account balance within 10 years of your mother’s passing.
You have flexibility in how you do that:
- You can withdraw a little bit each year
- Take larger distributions in lower-income years
- Or wait until year 10 and take it all at once
But one way or another, the account must be emptied by the end of that 10-year window.
Tax Implications: Don’t Get Caught Off Guard
Since this is a traditional IRA, all distributions are taxed as ordinary income. That means every dollar you withdraw will count toward your taxable income for the year.
Taking a large distribution in a single year, especially if you’re already earning a healthy income, could push you into a higher tax bracket and result in a bigger tax bill.
That’s why it’s important to work with your financial advisor and tax professional to create a strategy. By spreading withdrawals over multiple years, you may be able to minimize taxes and keep more of what you inherit.
Special Considerations
If your mother had already started taking Required Minimum Distributions (RMDs) before she passed away, you may be required to take a distribution in the year of her death. After that, the 10-year clock starts ticking.
And if you had inherited a Roth IRA instead? The 10-year rule still applies, but the distributions would likely be tax-free, assuming the account was open for at least five years.
Honor Their Legacy, Protect Your Future
An inherited IRA is a powerful gift, but like most things in finance, how you use it can make all the difference.
Whether you use the funds to invest, pay off debt, or secure your retirement, a well-thought-out plan can help you make the most of what you’ve been given — and ensure your choices reflect the legacy they left behind.
If you have any questions, our team at FineMark is here to help you plan wisely and walk this road with confidence.
