Inherited an IRA: Check Your Investment Strategy
August 17, 2026
Key Takeaways
An inherited IRA should become part of your financial plan—not simply remain invested the way it was before. Your goals, risk tolerance, tax situation, and timeline may be very different from those of the original account owner.
Know the distribution rules that apply to your specific situation. Many beneficiaries who inherited an IRA after 2019 generally face a 10-year distribution window, but exceptions and additional requirements may apply.
Your investment strategy should match when you expect to need the money. A beneficiary who needs funds within a few years may prioritize liquidity and lower volatility, while someone with a longer time horizon may have more flexibility to pursue growth.
Taxes matter when deciding when to take distributions. Large withdrawals from a traditional inherited IRA can increase taxable income, so spreading distributions across multiple years may be worth considering depending on your circumstances.
Look at the inherited IRA as part of your entire financial picture. Consider your other retirement accounts, investments, income, cash needs, and financial goals before making investment or withdrawal decisions.
An inheritance can be an opportunity to revisit your bigger financial plan. The assets may create new possibilities, such as retiring earlier, paying down debt, increasing charitable giving, or funding another long-term goal.
Receiving an inherited IRA can be both a meaningful financial opportunity and an emotional experience. Whether the account belonged to a parent, spouse, grandparent, or another loved one, inheriting retirement assets can bring a new set of financial decisions—and those decisions may look very different from the strategy that was appropriate for the original account owner.
That's because your financial goals, tax situation, risk tolerance, and timeline may not be the same as the person who left you the account.
An inherited IRA shouldn't necessarily be treated as "set it and forget it." Once the account is part of your finances, take a fresh look at how the assets are invested. Consider when you may need withdrawals. Also think about how distributions could affect your taxes and overall financial plan.
The Rules for Inherited IRAs Have Changed
For many beneficiaries who inherited an IRA after 2019, the rules usually require emptying the account within 10 years. Additional rules may apply depending on when the original owner died, whether the owner had reached their required beginning date, and the beneficiary's relationship to the original account owner.
Spouses generally have additional options when they inherit an IRA, and certain eligible beneficiaries may qualify for different distribution rules.
Because inherited IRA rules can be complicated—and because the consequences of making the wrong decision can be significant—it's important to understand the rules that apply to your specific situation before making withdrawals or investment changes.
Your Inherited IRA Is Now Part of Your Financial Plan
It can be tempting to leave an inherited IRA invested exactly as it was when you received it. After all, the investments were presumably selected for a reason.
But the original account owner's circumstances aren't necessarily yours.
Consider the differences that may exist:
● You may have a different tolerance for investment risk.
● You may need the money sooner—or not at all.
● Your income and tax bracket may be different.
● You may have other retirement assets available.
● You may intend to use the inheritance for a specific financial goal.
● You may need to take distributions over several years.
● You may plan to reinvest the money after taking distributions.
The investment strategy should ultimately reflect what you need the money to accomplish, rather than simply continuing the strategy that was appropriate for someone else.
Start With Your Time Horizon
One of the most important questions to ask is: When will I actually need this money?
The answer can have a major influence on how much investment risk may be appropriate.
For example, someone who expects to withdraw most or all of an inherited IRA within the next few years generally has a very different investment horizon from someone who expects to keep the assets invested for a decade or longer.
A shorter time horizon may favor greater emphasis on liquidity and preservation of principal. A longer time horizon may provide more opportunity to tolerate market fluctuations in pursuit of potential long-term growth.
There isn't one universally correct investment mix for an inherited IRA. The appropriate strategy depends on the beneficiary's individual circumstances.
Scenario #1: You Plan to Take a Lump-Sum Distribution Later
Suppose you don't need the money immediately and plan to withdraw the entire inherited IRA near the end of the applicable distribution window.
With a longer period before the money is needed, you may have more flexibility in how the account is invested.
An investor who is uncomfortable with market volatility might favor a more conservative allocation. Someone with a higher tolerance for risk and a longer investment horizon might choose an allocation with greater exposure to growth-oriented investments.
However, as the withdrawal date approaches, it may make sense to gradually reassess the level of risk in the portfolio—particularly if the money will be spent rather than reinvested.
There's another important consideration: a large distribution from a traditional inherited IRA may create a significant tax bill.
Taking the entire account in one year could increase taxable income and potentially push you into a higher tax bracket. Tax planning should therefore be part of the decision, not an afterthought.
Scenario #2: You Need Distributions Along the Way
Some beneficiaries may be required to take annual distributions during the applicable 10-year period.
If you're withdrawing money periodically, your investment strategy may need to account for those cash-flow requirements.
For example, if the market experiences a significant decline while you're simultaneously selling investments to fund required distributions or personal expenses, you could be selling assets at an unfavorable time.
This is one reason liquidity and investment risk should be considered together.
An investor who is more comfortable with market fluctuations may maintain greater exposure to growth assets. A more risk-averse investor with substantial near-term withdrawal needs may prefer a more conservative approach.
The important point is to coordinate the investment strategy with the withdrawal strategy.
Scenario #3: You Expect to Need the Money Within a Few Years
If you know you'll need a significant portion of the inherited IRA within three years—or another relatively short period—preserving access to the money may be more important than maximizing long-term growth.
In this situation, a portfolio heavily invested in volatile assets could create unnecessary risk.
Imagine needing to withdraw a large amount of money shortly after a substantial market decline. You could be forced to sell investments when their values are temporarily depressed.
For short-term goals, investors may want to consider investments that emphasize liquidity and lower volatility.
Scenario #4: You Qualify for Lifetime Distributions
Not every inherited IRA is subject to the same distribution timeline.
Certain beneficiaries—including qualifying spouses and eligible designated beneficiaries—may have the ability to take distributions over their lifetime rather than being required to completely distribute the account within a 10-year period.
Beneficiaries who inherited retirement accounts before the current rules took effect may also fall under different requirements.
If you qualify for a longer distribution period, your investment horizon may be significantly different from that of someone who must withdraw the account within a much shorter period.
A longer horizon could provide greater flexibility to remain invested through market cycles and potentially maintain more exposure to growth-oriented investments, depending on your risk tolerance and financial objectives.
Don't Forget About Liquidity
Your investment choices should also account for how easily you can access the money when a distribution is required.
Some investments can generally be sold relatively easily. Others may be more difficult or time-consuming to liquidate.
This becomes especially important when you know you'll need to make withdrawals on a particular schedule.
If an inherited IRA contains investments that are difficult to sell quickly, you may have to liquidate other holdings to meet your distribution requirements. That could unexpectedly change your overall portfolio allocation or force you to sell investments during unfavorable market conditions.
Before choosing investments, make sure your portfolio can accommodate your expected cash-flow needs.
Consider Where Your Investments Are Held
Inheriting an IRA can also change the overall structure of your investment portfolio.
You may now have retirement accounts, taxable brokerage accounts, and other investment assets that weren't previously part of your financial picture.
This is where asset location can become an important consideration.
Asset location refers to deciding which types of investments are held in which types of accounts with tax considerations in mind.
For example, certain investments that generate more taxable income may be more appropriate for tax-advantaged accounts, while tax-efficient investments may work well in taxable accounts.
However, asset location shouldn't be considered in isolation. Your overall portfolio allocation still matters.
Adding an inherited IRA to your financial plan means looking at all of your accounts together, rather than evaluating each account independently.
Are Inherited IRA Distributions Taxable?
The tax treatment depends on the type of inherited IRA and the circumstances surrounding the inheritance.
Generally, distributions from a traditional inherited IRA are taxable as ordinary income to the beneficiary, although certain exceptions can apply, including situations involving after-tax contributions.
This is one of the reasons the timing of distributions matters.
For some beneficiaries, spreading withdrawals across multiple tax years may make more sense than taking a large distribution all at once. For others, a different strategy may be appropriate based on their income, tax bracket, charitable goals, retirement needs, or other circumstances.
Because the tax consequences can be substantial, consider coordinating your investment and distribution decisions with a qualified tax professional.
Don't Make Investment Decisions in a Vacuum
An inherited IRA shouldn't be viewed as a standalone account.
Instead, consider how it fits into your entire financial picture.
Ask yourself:
What is the money for
Will you use it for living expenses? A home? Education? Travel? A future retirement? A legacy for your own children? Or do you simply want to preserve and grow it for as long as possible?
When will you need it?
Your expected withdrawal schedule can help determine how much investment risk may be appropriate.
What other assets do you have?
Your inherited IRA may represent only one piece of your overall portfolio. Your other retirement accounts, savings, investments, real estate, and income sources should all be considered together.
What are the tax consequences?
The amount and timing of inherited IRA distributions can affect your taxable income. Coordinating withdrawals with your broader tax strategy may help you avoid unnecessary surprises.
An Inheritance Is an Opportunity to Revisit Your Bigger Financial Picture
An inherited IRA can change your financial circumstances overnight.
That makes it a natural opportunity to revisit your broader financial plan.
Perhaps the inheritance means you can retire earlier. Maybe it allows you to pay off debt, increase charitable giving, fund an education account, or invest more toward a long-term goal.
Or perhaps the inheritance creates new tax, estate, or investment considerations that weren't previously relevant.
Rather than simply asking, "How should I invest this inherited IRA?", consider asking a bigger question:
"How does this inheritance change my overall financial plan?"
That perspective can lead to better decisions.
The Bottom Line
There is no one-size-fits-all investment strategy for an inherited IRA.
The right approach depends on several factors, including:
● Your relationship to the original account owner
● The rules governing your inherited IRA
● Your withdrawal requirements
● Your investment time horizon
● Your risk tolerance
● Your tax situation
● Your other financial assets
● Your short- and long-term goals
● Whether you plan to spend or reinvest the distributions
Most importantly, remember that the account is now part of your financial life.
The investment strategy that made sense for the person who originally owned the IRA may not make sense for you.
An inherited IRA can be an important part of building your financial future—but making the most of it requires looking beyond the account itself. Coordinating your investment strategy, withdrawal schedule, tax considerations, and broader financial goals can help turn an inheritance into a thoughtful part of your overall financial plan.
If you've recently inherited an IRA, don't feel pressured to make every decision at once. Start by understanding the rules, identifying your goals, and evaluating how the account fits into your bigger financial picture.
Sources:
https://www.fidelity.com/learning-center/personal-finance/retirement/how-to-invest-an-inherited-ira
Disclosures:
Past performance is not indicative of future results. The material above has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed, and Olde Raleigh Financial Group makes no representation or warranty as to the accuracy or completeness of the information, which should not be used as the basis of any investment decision. Information contained on third-party websites that Olde Raleigh Financial Group may link to are not reviewed in their entirety for accuracy and Olde Raleigh Financial Group assumes no liability for the information contained on these websites. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Olde Raleigh Financial Group.