The 10-Year Rule That Quietly Hands A Third Of Your Inheritance To The IRS

What high earners get wrong about inherited IRAs

Two weeks ago I wrote about my grandparents and what good estate planning actually does. If you missed it, here’s that piece: Estate Planning Isn’t About Your Death. The short version: they did the work, and the family got to grieve instead of untangle.

This is what comes next.

When the planning is done right, the inheritance lands clean. Beneficiaries named. Accounts titled. Documents signed. Nothing to fight over.

But for an inherited IRA, that’s where the easy part ends. The IRS gives you ten years to empty the account. For a high earner already stacking W-2, bonus, and equity comp, those withdrawals land on top of everything you already make. Handled lazily, the tax drag runs into six figures. A third of the inheritance, gone to avoidable mistakes.

Handled well, you keep most of it.

Six decisions separate the two outcomes—here they are.

The 10-year rule is the constraint

If you’re an adult child, sibling, or named non-spouse beneficiary, the rule is the same. The account has to be empty by December 31st of Year 10. That’s the box you’re working inside.

It applies to both Traditional and Roth IRAs, but the strategies inside the box are completely different—and confusing the two is the most expensive mistake in this entire piece.

One more wrinkle: if the original owner had already started taking required distributions before they died, you also have to take annual distributions during the 10-year window. Not just a final cleanup at year ten.

Confirm both of these before you do anything else. The custodian won’t tell you. Your CPA might miss it. The IRS won’t.

Traditional and Roth demand opposite strategies

A Traditional IRA inherited by a high earner is a tax problem.

Every dollar you withdraw stacks on top of your W-2, your bonus, your RSU vesting. If you’re already in the 32% or 35% bracket, those distributions push you into 37%. They can trigger the 3.8% Net Investment Income Tax surtax on your other investment income.

The play is tax-bracket engineering. You spread distributions across ten years to keep yourself out of the top brackets. You time withdrawals around equity vesting, sabbaticals, job changes, low-income years. You treat the 10-year window as a planning horizon, not a deadline.

Lump sum is almost never right.

A Roth IRA is the opposite problem, which is to say barely a problem. Distributions come out tax-free. There’s no urgency to touch it. The default move for a high earner is to let it compound tax-free for the full ten years, then take it all in Year 10. You only break that rule if you genuinely need the liquidity earlier. Otherwise, leave it alone.

Pacing and residency are where the real money is

Two levers do most of the work over a 10-year window.

The first is withdrawal pacing. There’s no default answer here. Your strategy depends on what your income looks like over the next decade. Even distributions smooth your tax exposure. Front-loading makes sense if your income is dropping (a sabbatical, a career pivot, a slower-earning spouse). Back-loading makes sense if you’re peaking now and expect lower-earning years ahead.

If you don’t model this, you’re guessing. And guessing on a six-figure inheritance with a 37% bracket on the table is expensive.

The second lever is state residency. Inherited IRA distributions are taxed where you live when you take them. California adds up to 13.3% on top of federal. New York stacks state (10.9%) and city tax. New Jersey tops out at 10.75%. Texas, Florida, and Tennessee charge zero state income tax on the distribution.

If a move is on the table for other reasons—a job change, a downsize, a relocation closer to family—the timing of that move against your withdrawal schedule can save tens of thousands. Sometimes more.

This isn’t about gaming the system. It’s about not paying tax in two states when you only need to pay it in one.

Six decisions, in order

Here’s the full sequence:

1. Confirm you’re subject to the 10-year rule

2. Confirm whether annual distributions are required

3. Map Traditional vs. Roth strategy separately—they’re opposite

4. Model your 10-year withdrawal pacing against projected income

5. Factor state residency into the timing of major distributions

6. Avoid the four execution mistakes that destroy value

The fourth point is where most planning ends and most money is left on the table. The fifth is where most people don’t know there’s a lever to pull.

The sixth is its own category. Miss an annual RMD and the penalty is 25% of what you should have withdrawn. Empty the account a year late and 25% of what’s left.

The mistakes that destroy value

Four common ones. Each one is avoidable.

Taking a lump sum to “simplify.” The single most expensive mistake. A $500K Traditional IRA taken in one year by a high earner can hand 40%+ to federal and state combined. Spread over ten years, that number drops dramatically.

Letting the custodian auto-distribute. Custodians default to whatever’s easiest for them, not what’s optimal for you. Their job is to move money out of the account. Yours is to time it.

Forgetting the inherited IRA titling rules. An inherited IRA must stay titled as an inherited IRA, with the original owner’s name in the title. You can’t roll it into your own. You can’t combine it with your existing accounts. Get the titling wrong and the entire balance becomes taxable in the year of the error.

Assuming your CPA and custodian are coordinating. They’re not. The custodian processes transactions. The CPA files the return. Neither is modeling your 10-year tax picture against your projected income, your equity vesting, or your potential move to a lower-tax state.

That coordination is your job. Or your advisor’s. But it doesn’t happen on its own.

That’s it.

My grandparents did the planning. They protected the family during the worst weeks of our lives, and the inheritance landed clean. Exactly the way they intended.

The execution sits with us now.

That’s the part no estate plan can do for you. The 10-year window doesn’t care that you’re grieving. The IRS doesn’t adjust for it. The custodian won’t model it. Whether the work they did gets honored, or quietly undone by avoidable tax drag, comes down to the decisions made in the years after they’re gone.

This weekend: pull the statement. Confirm the titling. Block an hour to map the next ten years against your income.

That’s where this starts.

Thanks for reading. See you next week.

— Ryan

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