If you aren’t careful, a 25% penalty could be waiting in the wings if you mishandle your Inherited IRA.
For the last few years, many people who inherited an IRA were essentially in a “holding pattern.” Thanks to confusion following the SECURE Act of 2019, the IRS issued a temporary hall pass on specific penalties.
But as we head into 2026, that grace period is officially over. The rules have crystallized.
A Story of Two Siblings: Sara and Mike
To understand how these rules actually work, let’s look at Sarah and Mike. Their father, Robert, passed away in 2022 at the age of 75. He was already taking his Required Minimum Distributions (RMDs).
- Sarah inherited half the IRA. She heard about a “10-year rule” and figured she could just let the money sit, grow tax-free, and take it all out in a lump sum in 2032.
- Mike also inherited half. He was worried about the tax bill, so he started taking small amounts out immediately.
The 2025/2026 Reality Check: Under the final IRS regulations that took effect in 2025, Sarah was wrong. Because their father had already reached his Required Beginning Date (RBD), the IRS says Sarah can’t wait until Year 10. She—and Mike—must take annual RMDs in years 1 through 9, and then empty the account by the end of the 10th year.
Starting now, the IRS is no longer waiving penalties for skipping these annual payments. If Sarah skips her 2026 RMD, she could owe a 25% excise tax on the amount she should have withdrawn.
Three Types of Inherited IRAs
When you inherit an IRA, the rules depend entirely on your relationship to the deceased.
1. Spousal Beneficiaries
Spouses still have the most “golden” options. A surviving spouse can:
- Treat it as their own: Roll the funds into their own IRA. They don’t have to take RMDs until they reach their own RMD age (currently 73, rising to 75 in 2033).
- Transfer to a Beneficiary Distribution Account (BDA): This is useful if the surviving spouse is younger than 59½ and needs the money now, as they can avoid the 10% early withdrawal penalty.
2. Non-Spousal Beneficiaries (The “10-Year Rule”)
This is where the SECURE Act hit hardest. Most non-spouses (like adult children) can no longer “stretch” the IRA over their whole lifetime.
- The 10-Year Deadline: You must empty the account by December 31 of the 10th year following the owner’s death.
- The “At Least As Rapidly” Rule: * If the owner died before reaching their RMD age (in 2026, it is age 73), you don’t have to take annual RMDs; you just have to empty it by Year 10.
- If the owner died after reaching their RMD age: You must take yearly RMDs in years 1–9 based on your own life expectancy, then empty it in Year 10.
3. Non-Personal Beneficiaries
This includes entities such as charities, estates, and certain types of trusts. Generally, if the owner died before their RBD, these entities must follow the 5-year rule, meaning the account must be emptied much faster.
Key Deadlines to Remember
- April 1: This is the “Required Beginning Date” for the year after you reach RMD age. For example, if you turn 73 in 2025, you must take your first RMD by April 1, 2026.
- December 31: The deadline for all subsequent annual RMDs.
- The “Stretch” Exception: If the original owner died before January 1, 2020, you are likely “grandfathered” in and can still use the old life-expectancy stretch rules.
Why the Change?
The government uses RMDs to ensure it eventually collects taxes on the money that has been growing tax-deferred for decades. By eliminating the “Stretch IRA” for most heirs, the SECURE Act speeds up that tax collection.
Next Steps
If you’ve recently inherited an IRA, the first thing you should do is set up a Beneficiary Distribution Account (BDA) with a financial institution. This keeps the assets separate and allows for proper tracking of those mandatory 10-year distributions.
*Sarah and Mike are not real clients. Their story is provided for purposes of illustration only and any resemblance to actual persons, living or dead, is purely coincidental.
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