How to Avoid Paying Taxes on an Inherited IRA

You cannot completely avoid paying taxes on an inherited traditional IRA, but you can control when and how the money comes out so that far less of it goes to the IRS. Every dollar withdrawn from an inherited traditional IRA counts as ordinary income in the year you receive it, and the SECURE Act forces most non-spouse beneficiaries to empty the account within ten years of the original owner’s death. The savings come from choosing the right beneficiary treatment at the outset, spreading withdrawals across your lower-income years, using qualified charitable distributions if you’re old enough, and checking whether any portion of the account is already after-tax. An inherited Roth IRA, by contrast, usually comes out federal-income-tax-free.

Check First Whether Any of It Is Already Tax-Free

Before planning a withdrawal strategy, find out what kind of account you actually inherited. Two situations can eliminate the tax on part or all of the distributions.

The first is an inherited Roth IRA. Contributions come out entirely tax-free, and earnings are also tax-free as long as the original owner opened the Roth at least five years before death.¹ Most Roth IRAs have been open well beyond five years by the time the owner passes away, so nearly all inherited Roth distributions escape federal income tax. If the account is less than five years old, only the earnings portion is taxable; the contributions still come out tax-free. Non-spouse beneficiaries still face the 10-year deadline, but because you owe no tax, there is no reason to spread distributions. You can wait until year 10 and withdraw everything at once.

The second is a traditional IRA that includes nondeductible contributions. Those after-tax dollars have already been taxed once and won’t be taxed again when you withdraw them. The original owner should have filed Form 8606 tracking this basis. If you inherit an IRA with basis, you must file your own Form 8606 each year you take distributions to calculate the nontaxable portion. The math is proportional: the tax-free share of each withdrawal depends on the ratio of after-tax contributions to the total account balance. Ask the executor or the IRA custodian whether any nondeductible contributions were made before assuming the entire account is taxable.

One other point worth knowing early: distributions from an inherited IRA are exempt from the 10% early withdrawal penalty regardless of your age.² A 35-year-old can take distributions without the penalty that would normally apply before age 59½. Income tax still applies in full.

If You’re the Surviving Spouse, Roll It Over

Surviving spouses have options no other beneficiary gets. A spouse can roll the inherited IRA into their own existing IRA, or simply retitle the deceased spouse’s account in their own name, effectively treating it as if it had always been theirs.¹ After the rollover, the account follows the spouse’s own required minimum distribution schedule. A 60-year-old surviving spouse won’t need to take any distributions until age 73, giving those assets another 13 years of tax-deferred growth.³ The RMD starting age rises to 75 for anyone who turns 73 after December 31, 2032.

There is one trap. Once the funds sit in your own IRA, they follow standard rules, including the 10% early withdrawal penalty for distributions before age 59½. If you’re a surviving spouse under 59½ and need access to the money now, keeping the account titled as an inherited IRA is often the better short-term move because inherited-IRA distributions are penalty-free at any age. You can always roll the balance into your own IRA later, after you pass 59½. Getting that sequence right can save thousands in penalties that have nothing to do with income tax.

Know Whether the 10-Year Rule Requires Annual Withdrawals

Most non-spouse beneficiaries who inherited after 2019 must withdraw the entire balance by December 31 of the tenth year following the original owner’s death.³ Whether you also have to take distributions in the years between depends on a detail most beneficiaries overlook: whether the original owner had already started taking RMDs before they died.

If the owner died before their required beginning date, you have full flexibility within the 10-year window. Take nothing for nine years and empty the account in year 10, or spread it out. The choice is yours.¹

If the owner died after they had already begun RMDs, the rules tighten. The IRS requires annual distributions in years one through nine based on your own life expectancy, with the remaining balance due by the end of year 10.⁴ Confirm this with the IRA custodian before you plan anything else.

A separate five-year rule applies when the account has no designated beneficiary at all, such as when the estate is named or no beneficiary form was ever filed. In that case, the entire balance must come out by December 31 of the fifth year after death.¹ The compressed timeline makes tax planning much harder.

Check Whether You Qualify to Stretch Distributions

A narrow group of beneficiaries can still take distributions over their own life expectancy rather than emptying the account in 10 years. The IRS calls them eligible designated beneficiaries:¹

Surviving spouses.
Minor children of the account owner, who can use life-expectancy distributions until reaching the age of majority (21 for IRA purposes), at which point the 10-year clock starts. Grandchildren and nieces or nephews do not qualify.
Disabled individuals with a condition that prevents substantial gainful activity.
Chronically ill individuals who cannot perform at least two activities of daily living without substantial assistance for at least 90 days, as certified by a licensed health care practitioner.⁵
Beneficiaries who are not more than 10 years younger than the deceased, such as a sibling, partner, or friend close in age.

Qualifying makes an enormous difference on a large account. A 50-year-old disabled beneficiary inheriting a $1 million IRA can spread distributions over roughly 35 years instead of 10, cutting the annual taxable amount by more than two-thirds. To claim this status you’ll need to provide documentation to the IRA custodian so they can set up a schedule based on IRS life expectancy tables.

Spread Withdrawals Across Your Lower-Tax Years

For most non-spouse beneficiaries, the single most effective way to reduce the tax bill is deliberate timing. Federal income tax is progressive, so only the dollars falling within each bracket are taxed at that bracket’s rate. For 2026, the brackets for a single filer are:⁶

10% up to $12,400
12% from $12,401 to $50,400
22% from $50,401 to $105,700
24% from $105,701 to $201,775
32% from $201,776 to $256,225
35% from $256,226 to $640,600
37% above $640,600

Say you inherit a $600,000 traditional IRA and earn $80,000 in salary. Waiting until year 10 to withdraw the full balance, which may have grown to $750,000 or more by then, stacks that entire amount on top of your salary and pushes a large chunk into the 35% and 37% brackets. Taking about $60,000 per year over 10 years keeps most of each withdrawal in the 22% or 24% bracket. The difference in total federal tax can easily exceed $50,000.

Years when your other income drops (between jobs, in early retirement, during a sabbatical) are ideal for larger inherited-IRA withdrawals. A year with a big bonus or capital gain is the worst time to take an extra distribution. Map projected income for all 10 years before settling on a schedule.

Watch for Medicare Surcharges and the NIIT

Large distributions don’t just push you into a higher income tax bracket. They can also trigger Medicare premium surcharges that catch many retirees off guard. Medicare uses your modified adjusted gross income from two years prior to set your Part B and Part D premiums. For 2026, surcharges begin when income exceeds $109,000 for single filers or $218,000 for joint filers.⁷ At the top tier (above $500,000 single or $750,000 joint), the monthly Part B premium jumps from $202.90 to $689.90, and Part D adds another $91.00 per month on top of your plan’s base premium.

Distributions also raise your adjusted gross income in ways that can expose other investment income to the 3.8% Net Investment Income Tax. The tax doesn’t apply directly to IRA distributions, but the higher AGI can push your investment gains, dividends, and interest above the $200,000 threshold for single filers or $250,000 for joint filers.⁸ Those thresholds aren’t indexed for inflation, so they catch more people every year. Factor them in when picking annual withdrawal amounts.

Use Qualified Charitable Distributions If You’re 70½ or Older

Beneficiaries who are at least 70½ can transfer money directly from an inherited IRA to a qualifying charity, and the transfer is excluded from income entirely. This is called a qualified charitable distribution. For 2026 the annual limit is $111,000 per person, and the limit is now indexed for inflation.⁹

The funds must go directly from the IRA custodian to the charity. If you receive a check and then write your own to the charity, the IRS treats the initial distribution as taxable income. You can claim a charitable deduction to offset it, but deductions are capped as a percentage of AGI and only help if you itemize. A direct transfer avoids all of that. The money never appears on your return as income, which also keeps your AGI lower for Medicare surcharges and other income-based phase-outs.¹⁰

The recipient must be a public charity eligible for tax-deductible contributions. Donor-advised funds and private foundations do not qualify. A separate one-time election allows up to $55,000 to a charitable remainder trust or charitable gift annuity, but that is a lifetime limit, not annual.⁹ For anyone already planning charitable gifts, routing them through the inherited IRA rather than writing a personal check is one of the cleanest tax reduction moves available.

Claim the IRD Deduction if the Estate Paid Estate Tax

When an inherited IRA is part of an estate large enough to owe federal estate tax, the beneficiary gets a partial break that most people have never heard of. Under the income in respect of a decedent rules, a beneficiary who includes inherited IRA distributions in gross income can deduct a portion of the federal estate tax attributable to those IRA funds.¹¹ Without it, the same dollars would effectively be taxed twice.

The federal estate tax exemption for 2026 is $15 million per person, or $30 million for a married couple.¹² If you inherit from someone whose estate fell below the exemption, no estate tax was paid and no IRD deduction is available. When it does apply, the deduction goes on Schedule A as a miscellaneous itemized deduction not subject to the 2% AGI floor. The estate’s executor or tax advisor can calculate the portion of estate tax allocable to the IRA.

Consider Disclaiming the Inheritance

Sometimes the best move is not to inherit the IRA at all. A qualified disclaimer lets you refuse the inheritance so the assets pass to the next person in line, typically a contingent beneficiary named on the account. If you’re already in a high tax bracket and the contingent beneficiary is in a lower one, or if the next person qualifies as an eligible designated beneficiary who can stretch distributions over a lifetime, disclaiming can produce a better overall result for the family.

The disclaimer must be in writing, irrevocable, and delivered to the IRA custodian within nine months of the original owner’s death. You cannot have accepted any benefit from the account before disclaiming; even a single partial distribution or a change to the investments disqualifies you. You also cannot direct where the assets go. They pass to whoever is next under the beneficiary designation or applicable state law, as if you had died before the account owner. Partial disclaimers of an undivided portion (say, 50%) are allowed.¹³

Before disclaiming, verify who the contingent beneficiary actually is. If none was named, the funds could pass to the estate and get stuck under the five-year rule, making the tax situation worse. The nine-month deadline is firm and cannot be extended.

Don’t Miss a Required Distribution

The penalty for failing to take a required distribution from an inherited IRA is 25% of the amount you should have withdrawn but didn’t.¹⁴ On a $40,000 missed distribution, that’s $10,000 in penalties before you even pay income tax on the money. The penalty drops to 10% if you correct the shortfall within the correction window, which generally runs through the end of the second year after the missed year.⁴

The most common trap is a beneficiary who inherits from someone already taking RMDs and assumes they can wait until year 10 to withdraw everything. When the original owner died after their required beginning date, annual distributions are mandatory in years one through nine and the balance is due by the end of year 10. Contact the IRA custodian right after inheriting the account to confirm whether annual distributions are required and, if so, the minimum amount each year.

1
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2
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3
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14
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