If you inherited an IRA in 2020 or later, the rules for withdrawing that money have shifted in ways that can cost you thousands if you don't plan ahead. The SECURE Act 2.0, which fully took effect in 2023 and remains the governing framework in 2026, eliminated the old "stretch IRA" strategy for most non-spouse beneficiaries. For Rockford residents inheriting a retirement account, the difference between a smart withdrawal plan and a haphazard one can easily exceed $50,000 in unnecessary taxes over the next decade.
How the SECURE Act 2.0 Changed Inherited IRA Rules for Rockford Beneficiaries
Before 2020, a beneficiary could stretch distributions from an inherited IRA over their own life expectancy. This allowed the account to continue growing tax deferred for decades, with minimal required annual withdrawals. The SECURE Act ended that for most non-spouse beneficiaries, and the SECURE Act 2.0 (enacted in 2022, effective for deaths after 2019) clarified and tightened the rules.
Under current law, if you inherit an IRA from someone who passed away in 2020 or later and you are not their spouse, you generally must empty the account within 10 years. This is the 10-Year Rule. There are exceptions for disabled individuals, chronically ill beneficiaries, those who are not more than 10 years younger than the deceased, and minor children (until they reach age of majority, then the 10-year clock starts). But for most Rockford residents inheriting a parent's, sibling's, or friend's IRA, you are looking at a decade to withdraw every dollar.
The IRS issued final regulations in 2024 that clarified a major point: if the original account owner had already started taking Required Minimum Distributions (RMDs), you as the beneficiary must continue taking annual RMDs in years 1 through 9, in addition to fully depleting the account by year 10. This is a detail that catches many people off guard. Missing an RMD triggers a penalty, 25% of the amount not withdrawn, though this can be reduced to 10% if corrected promptly.
10-Year Rule vs. Lifetime Stretch: Which Strategy Minimizes Your Tax Bill?
The old lifetime stretch allowed beneficiaries to take only small required distributions each year based on their life expectancy. A 50-year-old inheriting a $500,000 IRA might have had to withdraw only $12,000 to $15,000 annually, letting the rest compound. The 10-Year Rule forces everything out within a decade, which can push you into higher tax brackets if you are not strategic.
The key question becomes: Do you take distributions evenly over 10 years, or do you front-load or back-load them? The answer depends entirely on your current income, your projected income over the next decade, and the size of the inherited account.
For example, if you are in the 12% bracket right now but expect to move into the 32% bracket in five years due to a career shift or business growth, it makes sense to accelerate withdrawals in the early, low income years. Conversely, if you are currently earning $200,000 as a small business owner in Rockford and expect to retire in 2028, you might want to defer larger withdrawals until after retirement when your income drops. This is where a Tax Planning & Strategy engagement with North Park Tax becomes invaluable, they build a year-by-year withdrawal schedule that keeps you in the lowest possible bracket.
Here is a practical framework for deciding your approach:
- Low-income years ahead (under $50,000/year): Take larger distributions early. You may stay in the 10% or 12% bracket, especially if you itemize deductions or have business losses.
- Moderate income ($50,000 to $150,000): Spread distributions evenly. Plan to take roughly 10% of the account each year to smooth out the tax impact.
- High income (over $150,000): Defer withdrawals as late as possible, but watch for the RMD requirement if the original owner had started RMDs. Take the minimum in years 1 through 9, then a lump sum in year 10.
Roth vs. Traditional Inherited IRA: Tax Implications for Rockford Residents
The type of IRA you inherit changes the tax math completely. A Traditional IRA was funded with pre-tax dollars, so every dollar you withdraw is taxed as ordinary income. A Roth IRA was funded with after-tax dollars, so qualified withdrawals (including those by beneficiaries) are tax free, provided the account has been open for at least 5 years.
If you inherit a Roth IRA, the strategy is simple: let the money grow tax free for the full 10 years and withdraw it all at the end. There is no tax penalty for waiting, and the account continues compounding. The only exception is if you need the cash sooner, in which case you can take it without tax consequences.
For a Traditional IRA, the Roth versus Traditional decision is irrelevant (it is what it is), but you have a powerful option: you can convert a Traditional inherited IRA to a Roth IRA. This is not always allowed (spouse beneficiaries have more flexibility), but for non-spouse beneficiaries, you can roll the inherited Traditional IRA into an inherited Roth IRA. You will pay income tax on the conversion amount in the year you do it, but from that point forward, all future growth and withdrawals are tax free. This makes sense if you have a low income year, say you are between jobs, on sabbatical, or have significant business losses. Converting $100,000 while in the 12% bracket costs $12,000 in tax, but saves you $20,000 to $30,000 in taxes on the growth over the remaining years.
Rockford residents should also consider Illinois state tax implications. Illinois taxes IRA distributions as ordinary income (at a flat 4.95% rate as of 2026). Roth conversions are also taxable at the state level. Factoring in both federal and state tax rates is essential for accurate planning.
3 Common Inherited IRA Tax Mistakes Rockford Beneficiaries Should Avoid
Mistake #1: Forgetting the RMD requirement for inherited IRAs where the owner had started RMDs. This is the most common error we see at North Park Tax. If your mother was 73 or older and had been taking RMDs from her Traditional IRA, you as the beneficiary must continue taking annual RMDs based on your own life expectancy. The IRS final regulations from 2024 made this crystal clear. Missing an RMD means a 25% penalty. We have seen clients receive letters from the IRS for amounts ranging from $2,000 to $15,000 in penalties alone.
Mistake #2: Taking a lump sum distribution without considering the tax bracket jump. It is tempting to cash out the entire inherited IRA and be done with it. But if the account is $500,000 and you earn $80,000 from your job, that lump sum pushes your taxable income to $580,000. You will be in the 37% federal bracket plus the 4.95% Illinois rate. That is nearly 42% of the inheritance lost to taxes. Spreading withdrawals over 10 years keeps you in a lower bracket and saves tens of thousands.
Mistake #3: Ignoring the 10-year deadline for Roth IRAs. Even though Roth withdrawals are tax free, if you do not empty the account within 10 years, the IRS imposes a 50% excise tax on the amount that should have been withdrawn. This is a harsh penalty. Set calendar reminders for year 9 and year 10 to ensure you do not miss the deadline.
When to Work with a Rockford Tax Professional: Inherited IRA Planning Checklist
You do not need a professional for every inherited IRA situation. If the account is under $50,000 and you plan to withdraw it evenly over 10 years with no other major income changes, you can handle the math yourself using the IRS Uniform Lifetime Table. But if any of the following apply, it is worth a conversation with a CPA or Enrolled Agent:
- The account is over $100,000
- You have multiple retirement accounts (inherited and your own)
- You are a small business owner with variable income
- The original owner had started RMDs
- You are considering a Roth conversion
- You anticipate a major income change in the next 5 years
- You live in Rockford and want to factor in Illinois state tax effects
Here is a simple checklist to bring to your first meeting with a tax professional:
- Account statements for the inherited IRA, showing the current balance and the date of death value.
- Your most recent tax return (federal and Illinois).
- A projection of your income for the next 3 to 5 years (salary, business income, investment income).
- The original owner's death certificate and the year they passed away.
- Evidence of whether RMDs were being taken (prior year account statements or tax returns).
At North Park Tax, our team, including Ed Grondzki, an Enrolled Agent and CPA with 22 years of experience, and James Davis, an EA with 8 years of specialized focus on retirement account tax implications, can build a multi-year withdrawal strategy. This is not a one-time filing. It is a Tax Planning & Strategy engagement that begins with a Discovery Meeting, reviews your full financial picture, and produces a custom plan that you revisit annually. The cost for a strategy session typically ranges from $300 to $750 depending on complexity, which is a fraction of what you could overpay in taxes without a plan.
Frequently Asked Questions
Do I have to take RMDs from an inherited IRA if I am under 73?
Yes, if you inherited a Traditional IRA from someone who had already started taking RMDs, you must continue taking annual distributions regardless of your age. The 10-Year Rule applies regardless, but the annual RMD requirement is an added obligation for accounts where the original owner was already in distribution phase.
Can I disclaim an inherited IRA to avoid taxes?
Yes, you can disclaim (refuse) an inherited IRA within nine months of the original owner's death. The account then passes to the next contingent beneficiary. This is useful if you are in a high tax bracket and the next beneficiary (like a sibling or child) is in a lower bracket. But you must not have taken any distributions or benefited from the account before disclaiming.
What happens if I miss the 10-year deadline for an inherited Roth IRA?
The IRS imposes a 50% excise tax on the amount that should have been withdrawn but was not. For example, if you were supposed to withdraw $100,000 by year 10 but did not, the penalty is $50,000. This applies even though Roth withdrawals are normally tax free. Set a firm calendar reminder for year 9 to start planning the final withdrawal.
How does Illinois tax an inherited IRA distribution?
Illinois taxes distributions from Traditional inherited IRAs as ordinary income at the state's flat rate of 4.95% (as of 2026). Roth distributions are tax free at the state level if the account met the 5-year rule. There is no special Illinois exemption for inherited IRAs, so factor both federal and state tax into your withdrawal plan.
If you inherited an IRA and are unsure about the withdrawal strategy that minimizes your tax bill, North Park Tax can help. Our Rockford team offers Personal Tax Preparation and strategic tax planning that accounts for both federal and Illinois rules. Call us or schedule a consultation, we will walk through your specific numbers and build a plan that keeps more money in your pocket. No pressure, just straightforward advice from people who handle this every day.
