Vanguard spotlights hidden inherited IRA risks

If you inherited an IRA from a parent or loved one after 2019, you may be sitting on a tax obligation you never expected. The IRS has ended years of penalty waivers, and the rules for draining inherited retirement accounts are now fully enforced.

Your next missed withdrawal could cost you 25% of the amount you should have taken out.

Vanguard recently published a detailed breakdown of required minimum distribution rules for inherited IRAs, and the guidance highlights just how consequential these requirements have become. The firm's resource serves as a direct warning to beneficiaries who assumed they had full flexibility over withdrawal timing.

The stakes are high for families navigating the largest wealth transfer in modern American history. Roughly $124 trillion is expected to flow to heirs and charities through 2048, with nearly $100 trillion coming from Baby Boomers and older generations, according to a Cerulli Associates report.

The 10-year rule now requires annual withdrawals for most heirs

The SECURE Act of 2019 eliminated the old "stretch IRA" strategy that allowed non-spouse beneficiaries to spread withdrawals over their lifetimes. Under current rules, most non-spouse heirs who inherited an IRA after Dec. 31, 2019, must fully deplete the account within 10 years, Vanguard's guidance confirms.

The part that caught many heirs off guard is the annual withdrawal requirement during that 10-year window. If the original IRA owner had already begun taking their own RMDs before passing, you must take distributions in years 1 through 9.

The IRS finalized this position in July 2024 through Treasury Decision 10001, and the regulations left little room for interpretation.

If the original owner died before reaching their required beginning date, you face the 10-year depletion deadline but are not required to take annual distributions. You can withdraw funds at any pace, provided the full balance is gone by the end of the 10th year.

The IRS grace period is over, and penalties are now being enforced

From 2021 through 2024, the IRS issued notices waiving penalties for beneficiaries who failed to take required annual distributions from inherited IRAs. The agency acknowledged that its own proposed regulations created widespread confusion about annual withdrawal obligations.

Those waivers gave heirs breathing room while the final rules were being developed and published. That grace period ended on Dec. 31, 2024, and the IRS began full enforcement of penalties starting in 2025.

If you miss a required annual distribution now, you face an excise tax equal to 25% of the amount you failed to withdraw. That penalty drops to 10% if you correct the error within a two-year correction window, IRS Publication 590-B confirms.

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The penalty waiver years still count toward your 10-year clock, and this is a detail many beneficiaries have overlooked entirely. If a parent died in 2021, your 10-year depletion window ends on Dec. 31, 2031, regardless of whether you took distributions from 2021 through 2024.

"Most of our clients fall into that 10-year window, and they have faced years of ambiguity about RMDs," said certified financial planner Kristin McKenna, president of Darrow Wealth Management, CNBC reported.

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Categories of heirs who can still stretch IRS distributions over a lifetime

Not every beneficiary is subject to the 10-year rule. The IRS designates certain individuals as "eligible designated beneficiaries" who can take distributions based on their own life expectancy, Vanguard notes.

Eligible designated beneficiaries include

• Surviving spouses, who can treat the inherited IRA as their own or take distributions based on their life expectancy
• Minor childrenof the original IRA owner, though the 10-year rule kicks in once they reach the age of majority
• Individuals not more than 10 years youngerthan the IRA owner, such as close-in-age siblings or partners
• Individuals classified as disabled, who, under IRS criteria, are unable to engage in substantial gainful activity
• Chronically ill individuals, as defined by IRS standards, who require ongoing medical support or supervision

You should verify your beneficiary classification with a qualified tax advisor before making distribution decisions, because the wrong assumption can cost you thousands.

Inherited Roth IRAs carry their own set of hidden obligations

One common misconception is that inherited Roth IRAs have no withdrawal requirements at all, but that is incorrect. While original Roth IRA owners never take RMDs during their lifetime, beneficiaries who inherit a Roth may face distribution obligations depending on the timing of the owner's death, Vanguard explains.

Non-spouse beneficiaries must still empty a Roth account within 10 years, but qualified distributions are generally tax-free if the five-year aging rule has been met. You can allow the balance to grow tax-free for up to nine years, then withdraw the full amount in year 10.

How to avoid a devastating tax bill in the final year of the 10-year window

Even if annual RMDs do not apply to your inherited IRA, waiting until year 10 to drain the entire balance can trigger a brutal tax outcome. If you inherit a $500,000 traditional IRA and leave $350,000 for the final year, that lump sum gets added to your ordinary income and could push you into the 32% or 35% federal bracket.

"The quicker you do it, the better it is. It's better to start clipping that away earlier," advised Presidio Wealth Partners Partner and Managing Director Scott Bishop, as CNBC reported.

"There might be room to fill up the lower brackets when income is temporarily lower," said Tobias Financial Advisors CEO Marianela Collado, according to CNBC. Spreading larger withdrawals across lower-income years keeps you in more favorable tax brackets throughout the entire 10-year period.

Key tax planning considerations for inherited IRA withdrawals

• Spreading distributions across multiple years can keep you in lower federal brackets and reduce your total tax burden over the decade.
• Large distributions can increase your adjusted gross income, triggering higher Medicare Part B and Part D premiums through IRMAA surcharges.
• If you are age 70-and-a-half or older, you may direct up to $111,000 annually from an inherited IRA to a qualified charity through a qualified charitable distribution.
• State income taxes vary from 0% to more than 13% and can substantially increase your total liability on inherited IRA withdrawals in some states.

Vanguard's research shows missed RMDs are billion-dollar problem nationwide

Vanguard research found that nearly 7% of its IRA investors failed to take their required distribution in 2024, affecting an estimated 585,000 IRA holders nationwide who paid an average penalty exceeding $1,100 each.

"Missed RMDs are a billion-dollar mistake," Aaron Goodman, a Vanguard senior investment strategist, said in a press release. In total, those missed withdrawals are costing investors up to $1.7 billion per year in avoidable penalties.

"It does not surprise me that people who miss RMDs tend to miss them in multiple years," added Sarah Brenner, director of retirement education at Ed Slott and Company.

Steps you should take to protect your inherited retirement account

Vanguard recommends a combination of automation, professional advice, and account consolidation to reduce the risk of missing deadlines. You can use Vanguard's free Inherited RMD Calculator to estimate your required distribution based on your specific situation and account balance.

Your inherited IRA action checklist

• Confirm whether the original IRA owner had already started taking their own RMDs, because this determines your annual withdrawal requirements.
• Verify your beneficiary classification with your custodian to determine if you qualify for more favorable distribution options.
• Set up automatic distributions through your financial institution to avoid accidentally missing the Dec. 31 deadline each year.
• Work with a tax professional to develop a multi-year distribution plan that strategically spreads withdrawals across lower-income years.
• Review IRS Publication 590-B annually for updates to distribution rules, as the IRS may issue additional guidance on edge cases.

The rules surrounding inherited IRAs have become one of the most confusing corners of personal tax planning, and you should not try to navigate them alone.

A qualified financial advisor or tax professional can help you turn a complex obligation into a clear, structured withdrawal strategy that protects your inheritance from unnecessary penalties.

Related: Vanguard debunks a deep-rooted retirement belief

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This story was originally published April 13, 2026 at 1:37 PM.