How Can I Invest an Inherited IRA Under the 10-Year Rule?

The account is a vessel with an end date. Investing without mapping that end date can turn a manageable inheritance into one large final-year withdrawal.

Do I have to take annual withdrawals from an inherited IRA?

Not always. Under IRS Publication 590-B for 2025, a designated beneficiary under the 10-year rule must fully distribute the inherited IRA by December 31 of the year containing the tenth anniversary of the owner’s death.

The annual rule turns on the original owner’s status. If the owner died before the required beginning date, the IRS’s 2025 publication says no distribution is required before year ten when the 10-year rule applies. The account can remain invested during those earlier years, subject to the final deadline.

If the owner died after beginning required minimum distributions, annual beneficiary RMDs can apply in years one through nine, followed by a fully empty account in year ten. Fidelity’s inherited-IRA guidance describes this two-part schedule. The year-of-death RMD also needs attention: Vanguard explains that a beneficiary can need to take an unpaid RMD the owner owed for that year.

Not every beneficiary sits under the same rule. The IRS lists surviving spouses, the owner’s child who has not reached majority, disabled or chronically ill people, and people no more than 10 years younger than the owner as eligible designated beneficiaries. Estates and charities follow different paths. Account type, death date, beneficiary type, and whether the owner had begun RMDs decide the schedule.

Should I invest an inherited IRA differently from my own IRA?

Often, the inherited account’s scheduled withdrawals change its role, while the household’s overall allocation remains the frame. An inherited IRA subject to planned distributions has a known demand on its assets. A personal IRA without that payout clock does not.

Fidelity uses a 50% stock and 50% bond inherited traditional IRA illustration to explain asset location. Its point is plain: cash or bonds held in the inherited account can support withdrawals, while higher-growth holdings can sit in accounts not facing the 10-year payout, provided the investor’s whole portfolio retains its intended balance.

This avoids a common mistake. The inherited IRA does not need to carry every job alone. It is one account inside a larger household balance sheet, alongside savings, workplace plans, personal IRAs, and near-term spending.

The trade-off is real. Keeping all planned withdrawals exposed to market swings can force sales after a decline. Holding every dollar in low-volatility assets can leave less room for growth before the distribution deadline. The right mix follows the withdrawal calendar, the taxable income plan, and the total portfolio rather than a single inherited account label. The same whole-portfolio thinking appears in Mum Search’s guide, Can I Retire and Live Off My Investments Without Running Out?.

Administration comes first. For a non-spouse beneficiary, the IRS’s 2025 publication says the account cannot be treated as the beneficiary’s own IRA and funds cannot be rolled into or out of it. A trustee-to-trustee transfer to an inherited IRA titled in the deceased owner’s name for the beneficiary is permitted. That distinction protects the account’s inherited status while changing custodians.

How can I avoid a large tax bill in year 10?

A large year-ten tax bill is avoided by treating the deadline as a sequence of tax years, not one distant event. The IRS states in its 2025 RMD guidance that traditional IRA withdrawals are generally included in taxable income, apart from after-tax basis or amounts eligible for tax-free treatment.

Fidelity presents equal annual withdrawals from a traditional inherited IRA as one way to smooth added taxable income when income is expected to stay steady. Equal withdrawals are not a universal answer. Income can rise, fall, or arrive unevenly. The useful question is whether a planned withdrawal fits alongside that year’s wages, other taxable income, deductions, and existing RMDs.

A written annual map makes the choice visible. It can show the minimum required withdrawal, any additional planned withdrawal, estimated taxable income before the IRA distribution, and the balance still needing distribution before the final year. The map does not set a tax outcome. It reveals where the pile is forming.

RMDs cannot be rolled into another tax-deferred account, according to the IRS’s RMD topic page. Waiting for a future rollover option does not solve the distribution requirement. A taxable distribution that is already required can be invested after withdrawal in a taxable account, subject to the beneficiary’s own circumstances and tax rules.

Missed deadlines have their own cost. The IRS RMD FAQ, updated in 2024, says an insufficient RMD can trigger a 25% excise tax on the amount not withdrawn; it says the rate falls to 10% when the error is corrected within two years. The IRS also states that Form 5329 and a letter describing a reasonable error and corrective action can support a waiver request.

Deadlines create pressure. A calendar turns pressure into a series of decisions.