Vladimir Vladimiroffi Plus | Getty Images
For some investors, inheriting a personal retirement account can represent a huge fortune, but without proper planning, it can result in a large tax burden, experts say.
A recent Vanguard report that analyzed nearly 83,000 accounts in 2024 found that the average heir receives an inherited IRA at age 59, and the average balance in those accounts is $128,000.
“Most people inherit an IRA in their 50s, right at their peak earning years, and have to empty it within the next 10 years,” says Michael Walstead, a certified financial planner and founding advisor at Reliant Wealth Advisory in Hoboken, New Jersey.
Starting in 2020, some inherited accounts are subject to a “10-year rule” that requires certain heirs, including adult children, to empty their balances, typically by the 10th year after the original account owner’s death.
If it’s a pre-tax inherited IRA, the 10-year withdrawal schedule can increase your adjusted gross income, triggering higher taxes or reducing your eligibility for other tax breaks, experts say.
Inherited IRA plans will continue to be important amid the so-called “Great Wealth Transfer,” in which baby boomers are expected to pass trillions of dollars to Gen X and millennials over the next few decades.
Over the next 20 to 25 years, total intergenerational transfers could amount to an estimated $74 trillion, according to a 2025 report from financial services firm UBS.
Whether you’re preparing to leave a future gift or inherit an IRA, financial experts say there are some important tax considerations to consider.
Inherited IRA withdrawals require planning
Starting in 2025, some adult children who receive inherited IRAs typically must begin taking required minimum distributions (RMDs) over a 10-year period or face IRS penalties. The annual RMD requirement applies if the original IRA owner reaches the RMD age (usually age 73) before death.
But experts say heirs need to plan for their pre-tax estate accounts even if they don’t pay RMDs every year for 10 years. Otherwise, you may need to take a large distribution in year 10, resulting in a higher-than-expected tax liability.
“I recommend projecting your income for 10 years and planning your withdrawals accordingly,” says James Mayo, CFP, founder of Ironfjord Wealth Management in Lakewood, Colorado.
For example, if you expect your income to be lower due to retirement or a sabbatical, you may be in a lower tax bracket for that period. These years could be an opportunity to take larger IRA distributions, he said.
Comparing and considering the tax amount of the heir
Original account holders should also consider each heir’s income tax bracket when choosing an IRA beneficiary, said Tim Stephan, CPA, director of advanced planning at financial services firm Baird.
For example, if one child is a partner in a law firm and the other a teacher, “their incomes are very different,” he says.
In that scenario, teachers might end up leaving larger IRAs to teachers because they would pay less in income taxes, or leaving tax-free life insurance policies to higher-paying attorneys, Steffen said.
“Instead of saying everyone gets everything equally, think more about who actually inherits what,” he said.
“The Sweet Spot of Los Angeles Conversion”
If you’re the original account owner, a Roth IRA conversion during your lifetime “can make a big difference” to your heirs, says CFP Dinon Hughes, a partner at Nvest Financial in Portsmouth, New Hampshire.
A Roth conversion transfers pre-tax or non-deductible IRA funds to a Roth IRA where they begin to grow tax-free. The move would increase income in the conversion year but could provide future heirs with even more tax-free funds, experts say.
Some inherited Roth IRAs are still subject to the 10-year rule, but beneficiaries can generally withdraw the proceeds tax-free.
Hughes said the year of early retirement is typically the “sweet spot for Roth conversions” because income is lower before Social Security payments begin and required minimum distributions begin.
However, tax projections are required to see how excess income affects other tax breaks, such as the $6,000 senior “bonus” deduction.
Additionally, increases in adjusted gross income can affect the Income-Related Monthly Adjustment Amount (IRMAA), which increases Medicare Part B and Part D premiums when income exceeds a certain level.
