There are no recognized side effects of drinking rusty water. The Environmental Protection Agency states that rusty water is safe to drink unless it has also been contaminated with unrelated substances. There are no enforceable federal limits on the amount of rust in drinking water.
Rusty water occurs in residential water systems when sediment in the pipes is stirred up or when iron in the water is oxidized by disinfectants. Although it is safe to drink, rusty water has an unpleasant appearance, smell and taste. Allowing the pipes to clear or the rust to settle until the water looks and tastes palatable is sufficient. All iron water pipes have some amount of rust in them; even when drinking water does not appear rusty, there are small amounts of rust in the water.
Rusty water can stain clothing and other household items, so it is best to avoid washing clothing and dishes in water that is visibly rusty. It is safe to water plants with rusty water, and running a garden hose to water landscaping is an effective way to flush unsightly rust from pipes without wasting water. Rust can contribute to corrosion in pipes and water treatment equipment, but this is not of concern to consumers.