For many investors, the past few years have brought unexpected financial windfalls in the form of inherited retirement accounts—IRAs, 401(k)s, and other pre-tax assets passed down from parents or loved ones.
What hasn’t been as obvious is the tax bill quietly building in the background.
If you inherited one of these accounts in 2020 or later, there’s a good chance you’re on a timeline that could lead to a significant—and potentially avoidable—tax burden by the end of this decade.
The Rule Change That Shifted Everything
Prior to 2020, beneficiaries of inherited retirement accounts could “stretch” distributions over their lifetime, spreading the tax impact across decades.
The SECURE Act changed that.
Now, most non-spouse beneficiaries are required to fully distribute inherited retirement accounts within 10 years. While that may sound manageable, there’s a catch—especially for those who inherited accounts from individuals already taking Required Minimum Distributions (RMDs).
In many cases, beneficiaries must take annual distributions during the 10-year window, not just empty the account at the end. And whether taken gradually or deferred, the entire account must be distributed—and taxed—by year ten.
For those who inherited assets in 2020, that deadline is fast approaching: December 31, 2030.
Why This Matters More Than You Think
At first glance, ten years may seem like plenty of time. But without a proactive strategy, many beneficiaries may unintentionally set themselves up for a tax spike later on.
Here’s how it tends to happen:
- Distributions are delayed in the early years
- Account balances continue to grow
- Larger withdrawals are forced in later years
- Income stacks on top of peak earning years
The result? Distributions that push beneficiaries into higher tax brackets, increase Medicare premiums, and reduce the overall value of what they inherited.
And because this rule is still relatively new, many people simply aren’t aware of the implications yet.
A Planning Opportunity—Not Just a Tax Problem
The good news is that this isn’t just a looming issue—it’s a planning opportunity.
With the right approach, inherited accounts can be distributed in a way that aligns with your broader financial picture. That might mean:
- Strategically spreading distributions over lower-income years
- Coordinating withdrawals with retirement timing
- Offsetting income through tax planning strategies
- Integrating distributions into an overall investment plan
The key is being intentional—rather than reactive.
Why This Is Showing Up on Our Radar Now
We’re beginning to see a growing number of individuals who inherited retirement assets in the early years of the SECURE Act and haven’t yet revisited their strategy.
In many cases, these accounts have been left largely untouched—not out of neglect, but simply because the urgency hasn’t been clear.
That’s starting to change.
As we move closer to the end of the 10-year window, the consequences of inaction become more pronounced—and the opportunity for thoughtful planning becomes more valuable.
Where Professional Guidance Fits In
This is one of those areas where coordination matters.
Financial advisors and CPAs each play an important role, but without alignment, opportunities can be missed. A well-structured distribution strategy should consider both the investment side and the tax implications year by year.
For individuals who aren’t sure how their inherited accounts fit into their broader plan, even a second opinion can bring clarity.
The Bottom Line
If you inherited a retirement account in 2020 or later, the clock is already ticking—whether you’ve acted on it or not.
The difference between a well-managed strategy and a last-minute scramble could be measured in thousands of dollars in taxes.
A thoughtful review today can help ensure that what was intended as a legacy doesn’t become an unnecessary tax burden tomorrow. A proactive review now can help you avoid unnecessary taxes later.
If you’ve inherited a retirement account and aren’t sure how it fits into your plan, the team at Phronesis Wealth Management is here to help. Schedule an appointment today by calling our office at 410-647-6762 or requesting one online.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.