Educational only. We explain concepts and help you calculate the required distribution. For tax impact in your situation, consult your CPA.
If you've inherited a Traditional IRA, distributions are taxed as ordinary income — the same way they would have been taxed if the original owner had taken them. There's no step-up in basis, no capital gains treatment, and no special inherited IRA tax rate. The money comes out, it's added to your income for the year, and you pay taxes on it at your marginal rate.
Inherited Roth IRAs are different — and more favorable. But they're not entirely tax-free in every case, which catches people off guard.
This page covers how both types are taxed, what the 10-year window means for your tax picture, and what to bring to your CPA.
On this page
- Inherited Traditional IRA: Taxed as Ordinary Income
- There's No Step-Up in Basis
- Inherited Roth IRA: Usually Tax-Free, with a Caveat
- The 10-Year Window and Your Tax Picture
- Worked Example: Kevin's Inherited IRA Tax Situation
- What to Discuss with Your CPA
- Common Misunderstandings
Inherited Traditional IRA: Taxed as Ordinary Income
Every dollar you withdraw from an inherited Traditional IRA is taxed as ordinary income in the year you take it — whether the distribution is a required annual RMD or a voluntary withdrawal.
The distribution is added to your other income for the year — wages, salary, Social Security, pensions, interest — and taxed at whatever federal bracket that total falls into. If you're working full-time and also taking inherited IRA distributions, the combined income can push you into a higher bracket than either source alone would.
This is the same tax treatment described in our sibling page on RMD tax amounts — the mechanics are identical. The difference with inherited IRAs is that you may be receiving this income at a stage of life (working years, peak earning years) when your marginal rate is higher than the original owner's would have been.
State taxes generally apply as well. Most states tax inherited IRA distributions as ordinary income, though a handful offer partial or full exemptions on retirement income. Your CPA can confirm your state's treatment.
For background on the inherited IRA rules themselves: Inherited IRA RMD rules
There's No Step-Up in Basis
This is one of the most common points of confusion. When you inherit most types of assets — a house, stocks, a brokerage account — the cost basis "steps up" to the fair market value at the date of the owner's death. This means you only owe capital gains tax on appreciation that occurs after you inherit the asset.
Inherited IRAs do not receive a step-up in basis.
The money in a Traditional IRA was never taxed. It went in pre-tax, it grew tax-deferred, and the IRS expects to collect ordinary income tax when it comes out — regardless of who takes the distribution. Inheriting the account doesn't change that.
This means the full value of every distribution is taxable, whether the account balance is $50,000 or $500,000. There's no portion that's "already been taxed" — unless the original owner made non-deductible (after-tax) contributions, which would be tracked on their Form 8606. If you're not sure whether the original owner made after-tax contributions, ask the custodian or check with the estate's tax preparer. This is worth investigating — it can meaningfully reduce the taxable amount of your distributions.
Key distinction: Inherited Traditional IRA distributions are fully taxable — no step-up in basis. Inherited Roth IRA distributions are usually tax-free, but the 5-year rule applies to earnings. Both are subject to the 10-year distribution deadline.
Inherited Roth IRA: Usually Tax-Free, with a Caveat
Inherited Roth IRAs get more favorable tax treatment, but they're not automatically tax-free in every scenario.
If the Roth IRA was open for at least 5 years before the original owner died, all qualified distributions are tax-free — both the contributions and the earnings. This is the most common situation, and it's straightforward.
If the Roth IRA was open for less than 5 years, the contributions come out tax-free (they were made with after-tax dollars), but the earnings portion may be taxable. The 5-year clock is based on when the original owner first funded any Roth IRA — not when you inherited the account, and not when this particular Roth was opened. If the owner had a Roth IRA for 20 years but opened a second one last year, the 5-year requirement is already met.
In either case, the 10-year rule still applies. You must empty the inherited Roth IRA by December 31 of the year containing the 10th anniversary of the owner's death. Missing that deadline triggers the same 25% excise tax as any other missed RMD — even though the distributions themselves would have been tax-free.
The key point: the favorable tax treatment doesn't exempt you from the distribution timeline. See: Inherited Roth IRA rules
The 10-Year Window and Your Tax Picture
Under the 10-year rule, you have flexibility in when you take distributions — depending on whether the original owner had started their own RMDs. But regardless of timing requirements, how much you take in any given year directly affects your tax bill for that year.
A few things to understand:
Taking everything in year 10 is legal but may be costly. If you wait until the final year and withdraw the entire balance at once, that full amount is added to your income for that single year. For a large inherited IRA, this could push you into the 32% or 35% bracket — or trigger downstream effects like higher Medicare premiums (IRMAA) and increased Social Security taxation.
Spreading distributions over the 10 years may produce a different tax outcome. Smaller annual withdrawals keep each year's taxable income lower. Whether this matters depends on your income in each year, which is something only your CPA can evaluate.
Your income may change over the 10-year window. If you're currently working but plan to retire in year 6, your tax bracket could drop significantly — which would change the calculus on when to take larger distributions. This is exactly the kind of planning conversation to have with your tax professional.
We're not recommending a distribution strategy — that depends on your full financial picture. But understanding that the timing of distributions affects the tax outcome is the first step in having a productive conversation with your CPA.
Related: The 10-year rule explained
Worked Example: Kevin's Inherited IRA Tax Situation
Kevin is 53 and works full-time as a project manager. He inherited a Traditional IRA from his mother, Linda, who died in 2022 at age 79. The inherited IRA balance on December 31, 2025 was $280,000. His 2026 required RMD is $8,434.
| Income Source | Amount |
|---|---|
| Salary | $95,000 |
| Interest/dividends | $3,000 |
| Inherited IRA RMD | $8,434 |
| Approximate total income | $106,434 |
How Kevin's inherited IRA RMD stacks on top of his income, pushing him from the 22% bracket into the 24% bracket
Based on 2025 single-filer brackets, Kevin's salary and interest income ($98,000) put him solidly in the 22% bracket. His $8,434 inherited IRA RMD pushes his total past the $103,350 threshold — meaning most of the distribution is taxed at 22%, but roughly $3,084 spills into the 24% bracket.
Note: These are 2025 brackets. 2026 brackets will adjust slightly for inflation — check IRS.gov for the latest Revenue Procedure when available.
Even a modest inherited IRA distribution can cross a bracket line when it stacks on top of working income. That's the key difference from a retiree's RMD — inherited IRAs often land on people who are still in their peak earning years.
Now consider what happens if Kevin waits until year 10 and withdraws the remaining balance — potentially $200,000+ — in a single year. That distribution alone could push his total income past $300,000, landing a significant portion in the 32% or even 35% bracket.
This is a simplified illustration. Kevin's actual tax picture involves deductions, credits, and state taxes that only his CPA can compute. The point is that when you take inherited IRA distributions matters as much as how much — and both are worth discussing with a tax professional before December 31.
Want to know your inherited IRA RMD? Run the SimpleRMD inherited IRA calculator — free, no account required. With a SimpleRMD account, you can export a CPA-ready PDF with your inputs, balances, and results.
What to Discuss with Your CPA
SimpleRMD calculates the required distribution. Your CPA handles the tax impact. For inherited IRAs, the conversation is more involved than for standard RMDs because you have more variables — and potentially a decade of planning ahead.
Questions worth raising:
- What's the tax impact of my required annual RMD this year?
- Does it make sense to take more than the minimum in any given year — especially in a low-income year (e.g., between jobs, early retirement)?
- How does the inherited IRA distribution interact with my other income sources?
- Will this affect my Medicare premiums in two years (IRMAA)?
- If I'm planning to retire during the 10-year window, how should that change my approach?
- Did the original owner make any non-deductible contributions (Form 8606)?
Bring your inherited IRA RMD amount, your December 31 balance, and your other income documents. The SimpleRMD calculator can generate the RMD number, and a CPA-ready PDF export can put everything in one document.
Related: Does my accountant calculate my RMD?
Common Misunderstandings
"I inherited this IRA, so the basis stepped up." No. IRAs do not receive a step-up in basis. The full value of Traditional IRA distributions is taxable as ordinary income. We've seen beneficiaries assume the inheritance is "tax-paid" and not plan for the income hit — sometimes across multiple years before a CPA catches it.
"Inherited Roth IRA distributions are always tax-free." Usually, yes — but only if the account meets the 5-year rule (based on when the original owner first funded any Roth IRA). If the account is newer, the earnings portion may be taxable. And regardless of tax treatment, the 10-year deadline still applies — missing it triggers a 25% excise tax even on distributions that would have been tax-free.
"I can just wait until year 10 and take everything." You can if the original owner died before their Required Beginning Date. But a lump-sum withdrawal in year 10 stacks the entire balance on top of that year's income. For a large inherited IRA, this can be dramatically more expensive than spreading distributions over the full window. We've seen beneficiaries trigger five-figure tax surprises by defaulting to the "wait and see" approach without talking to a CPA first.
"The tax rate on inherited IRA distributions is lower because it's inherited." There is no preferential tax rate for inherited IRA distributions. They're taxed as ordinary income at your marginal rate — which may be higher or lower than the original owner's rate, depending on your income.
"I don't need to think about this until year 10." Even if annual RMDs aren't required (because the owner died before their RBD), the tax planning question starts now. Your income, bracket, and life circumstances may change significantly over a decade. An early conversation with your CPA is worth the time.
Get rule-change alerts (inherited IRAs only)
We'll only email you if inherited IRA rules or enforcement materially change.
You can unsubscribe anytime.
What to do next
- Calculate your inherited IRA RMD — free, no account required
- The 10-year rule explained
- How much tax on a standard RMD?
- Back to RMD tax basics
This article is for informational purposes only and does not constitute tax, legal, or financial advice. IRS rules and tax laws are subject to change. Consult a qualified tax professional or financial advisor for guidance specific to your situation. SimpleRMD is a calculation and tracking tool — not a financial advisory service.
Sources: IRS.gov (Publication 590-B · PDF). IRS Final Regulations T.D. 10001 (July 2024). Rules confirmed current as of February 2026.