Inherited an IRA? Investing & the 10-Year Withdrawal Rule
April 8, 2026
When you inherit an IRA, one important reality to keep in mind is that the original account owner’s financial goals may not align with your own. The investment strategy they followed was designed for their circumstances, timeline, and income needs. Once the account becomes yours, however, it’s worth reassessing whether the investments and withdrawal approach still make sense for your financial situation.
This is particularly relevant today because updated regulations that began taking effect in 2025 require many non-spouse beneficiaries to withdraw the entire balance of an inherited IRA within 10 years. That limited timeframe can significantly affect how the account should be managed. The need to distribute the funds within a decade—combined with the possibility that your financial priorities differ from those of the original owner—may require adjustments to the investment strategy inside the inherited IRA.
Spouses who inherit IRAs generally have more flexibility. They are not typically subject to the 10-year rule and may have options such as rolling the funds into their own IRA or maintaining the account as an inherited IRA. Even so, their personal goals, income needs, and retirement timeline may differ from the original account holder’s plan, making a review of the portfolio worthwhile.
There is also an emotional component to inheriting retirement assets. Receiving money from a loved one—whether a spouse, parent, or grandparent—can make beneficiaries hesitant to change anything about the account. Yet once the funds pass to you, it becomes important to evaluate them through the lens of your own financial plan. That means considering your investment horizon, tax situation, income needs, and long-term objectives.
Investing an Inherited IRA
Before making changes to the account, it helps to understand some broad investment principles and how they might apply to inherited retirement assets.
Focus on diversification and asset allocation
Whether the funds remain in the inherited IRA or are distributed and reinvested elsewhere, you’ll need to decide how to allocate the investments. One of the most important considerations is balancing risk tolerance with your time horizon.
Diversification plays a central role in this process. By spreading investments across multiple asset classes—such as stocks, bonds, and short-term investments—you can help reduce the risk that a single holding will dominate your portfolio’s performance. While diversification cannot guarantee gains or prevent losses, it may help smooth volatility over time.
Investment strategies often fall along a spectrum ranging from conservative to aggressive growth. Conservative portfolios generally hold more bonds and short-term assets, while growth-oriented strategies include a higher proportion of stocks. Higher stock exposure may increase potential returns but also tends to bring greater short-term price fluctuations.
Align the strategy with your financial situation
Your personal financial position should guide how the inherited assets are invested. If the inheritance significantly changes your financial picture, it may affect how much risk you are comfortable taking.
For example, someone with limited savings or a low tolerance for market volatility may prefer a more conservative allocation to help preserve capital. On the other hand, someone with strong financial security and a long investment horizon may feel comfortable maintaining more exposure to growth-oriented investments.
Withdrawal plans are also important. If you expect to take distributions soon—or rely on them for ongoing expenses—holding a large portion of the account in highly volatile investments may not be appropriate. Market downturns can be particularly challenging if you are required to sell investments at depressed prices to meet withdrawal obligations.
Potential approaches to managing an inherited IRA
Different withdrawal strategies can influence how the account should be invested.
1. Waiting until year 10 for a full withdrawal
If you plan to leave the account untouched until the final year of the 10-year window, your investment mix may largely depend on your comfort with risk. Investors who prefer stability might choose conservative or balanced allocations. Those seeking higher long-term growth may consider a more aggressive mix. As the tenth year approaches, gradually reducing risk may help protect the account balance before the required distribution.
2. Taking annual distributions before the final withdrawal
Some beneficiaries must take required minimum distributions (RMDs) during the first nine years before emptying the account in year ten. Because assets must be sold each year to fund those withdrawals, a moderately conservative portfolio may help limit the risk of selling investments during market downturns. However, investors comfortable with some risk may still maintain a portion of the portfolio in stocks to support growth.
3. Withdrawing the account within a few years
If the plan is to distribute the inherited IRA within three years or less, protecting the principal becomes a higher priority. Short-term investments or other relatively stable holdings may be more appropriate when the time horizon is brief.
4. Lifetime distributions
In certain situations—such as when the beneficiary is a spouse, an eligible designated beneficiary, or someone who inherited the account prior to 2020—withdrawals may be spread over the beneficiary’s lifetime. A longer investment horizon may allow for a more balanced or growth-oriented allocation, although withdrawal timing should still be considered carefully.
Matching investments to withdrawal needs
Liquidity is another factor to evaluate. Some investments—such as stocks, exchange-traded funds (ETFs), and most mutual funds—can typically be sold quickly to generate cash. Other holdings, including certain long-term bonds or alternative investments, may be less liquid or may have restrictions on when they can be sold.
If a required distribution occurs when markets are weak, being forced to sell less liquid or poorly performing assets could complicate your strategy. Ensuring that a portion of the portfolio remains easily accessible can help manage this risk.
Understanding asset location
Inheriting an IRA may increase the number of accounts within your overall portfolio, making it important to consider where different investments are held. This concept—known as asset location—involves placing investments in accounts that provide the most favorable tax treatment.
In general, investments that generate significant taxable income may be better suited for tax-advantaged accounts like traditional or Roth IRAs. Investments that are more tax-efficient may work well in taxable brokerage accounts. However, while optimizing tax efficiency is important, it should not override maintaining a well-balanced overall asset allocation.
Tax considerations
Distributions from most inherited traditional IRAs are treated as ordinary income and are subject to federal and potentially state taxes in the year the withdrawal occurs. One exception may apply to after-tax contributions contained within the account. Once taxes are paid, the distributed funds can be spent, saved, or reinvested in other accounts.
The bottom line
Managing an inherited IRA often involves balancing tax rules, withdrawal timelines, and investment strategy. A shorter distribution window may require a more conservative approach, while a longer timeframe could allow for greater growth potential. Because these decisions can affect both your taxes and your long-term financial plan, consulting with a financial or tax professional can help ensure the strategy aligns with your goals while remaining compliant with IRS requirements.
Sources:
https://www.fidelity.com/learning-center/personal-finance/retirement/how-to-invest-an-inherited-ira
Disclosure:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
This material is provided as a courtesy and for educational purposes only.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.