TL;DR
Get smart everyday buys delivered free with Prime
- Fast, free delivery on millions of items
- Prime Video, Amazon Music and more included
- Member-only deals all year
A Kiplinger report identifies five inherited IRA mistakes that can lead to missed required withdrawals or higher taxes: misunderstanding the 10-year rule, postponing traditional IRA withdrawals, using a fixed schedule without considering income, overlooking Roth conversion trade-offs and mishandling an inherited Roth. The examples are hypothetical, and the right approach depends on the original owner, beneficiary, account type and tax situation.
A Kiplinger report warns that beneficiaries who misunderstand inherited individual retirement account rules or delay planning can face missed required withdrawals and higher tax bills, particularly under the 10-year distribution deadline that applies to many nonspouse heirs. Its examples are hypothetical, and the appropriate withdrawal schedule depends on factors including the beneficiary, account type, original owner’s age and the beneficiary’s other income.
The report describes a hypothetical 55-year-old, Lisa, who inherits a $500,000 traditional IRA from her father while she and her husband earn $200,000 a year. As an adult child, she generally must empty the inherited account by December 31 of the 10th year after her father’s death. The report cautions that some beneficiaries, including spouses, can have different options.
Whether Lisa must also take annual required minimum distributions (RMDs) during years one through nine depends on when her father died in relation to his required beginning date. The report says that if he died on or after that date, rules effective in 2025 require annual RMDs as well as full distribution by the 10-year deadline. A missed RMD can draw a penalty of 25% of the shortfall, reduced to 10% if corrected within the permitted time, according to the report.
For its tax illustration, Kiplinger assumes the account earns 7% a year and that Lisa’s household income stays unchanged. The account would grow to about $984,000 after 10 years. Withdrawing it all in the final year could add substantial taxable income; the report estimates about $322,000 in federal income tax on the withdrawal using 2026 joint-filer brackets. It contrasts that with withdrawals of about $71,000 a year, estimated to produce an average federal rate of about 23% rather than roughly 33%. These are illustrations, not forecasts, and depend on the report’s assumptions.
How Timing Can Change the Tax Bill
Traditional inherited IRA withdrawals are generally included in a beneficiary’s taxable income. A large withdrawal in one year can therefore push income into higher tax brackets, while a schedule spread across the available years may reduce the tax impact. The difference matters even when a beneficiary does not need the cash: the report suggests taking distributions and reinvesting money outside the IRA may be preferable to leaving the account untouched until the deadline.
But spreading withdrawals evenly is not automatically best. A beneficiary expecting to retire during the 10-year period might have lower income in later years, making larger withdrawals then potentially more tax-efficient. The report’s central point is that income, deadlines and account type should be considered together rather than relying on a default schedule.
Errors can also have different consequences. Missing a required distribution risks a penalty, while postponing withdrawals can concentrate taxable income near the deadline. A Roth account has different tax treatment, so applying a traditional IRA strategy without checking the account type can be costly.
Products Worth Considering
Ledger Stax Crypto Wallet with Touchscreen
Apple MacBook Pro 16.2-inch with M5 Pro, 18-Core CPU, 20-Core GPU, 48GB Memory, 1TB SSD, Wi-Fi 7, Silver
LG UltraGear 45GX900A-B 45-Inch Curved OLED Gaming Monitor
As an affiliate, we earn on qualifying purchases.
The 10-Year Rule and Its Exceptions
The report traces the 10-year rule to the SECURE Act, which took effect for most affected heirs beginning January 1, 2020. It replaced the so-called stretch IRA for many beneficiaries, under which withdrawals could be spread over an heir’s lifetime, with a requirement to distribute the inherited account within a set period. The report notes that spouses and certain other heirs may qualify for different treatment; the rule should not be assumed to apply identically to everyone.
Kiplinger organizes its guidance around five potential mistakes: assuming no money is due before year 10; waiting until year 10 because the beneficiary does not need the cash; taking equal withdrawals without considering future income; assuming a parent should always convert a traditional IRA to a Roth; and overlooking the tax treatment of an inherited Roth. A nonspouse beneficiary cannot convert an inherited traditional IRA to a Roth, the report says, so any conversion decision must be made by the original owner before death.
For an inherited Roth subject to the 10-year rule, the report says beneficiaries still must empty the account by the deadline, but generally do not have annual RMDs during the period. Qualified withdrawals are tax-free. However, if the original owner’s first Roth contribution was made less than five tax years before a withdrawal, earnings may be taxable. Beneficiaries should confirm the account’s history and applicable rules before relying on tax-free treatment.
““there is a wrong one: Doing nothing for nine years and letting the deadline decide””
— Kiplinger report
Beneficiary Rules and Tax Outcomes Vary
The report’s dollar figures are based on a hypothetical household and stated assumptions, including a 7% annual return, steady income and 2026 federal tax brackets. Actual returns, tax brackets, other income, deductions and state taxes can change the result. The estimates are not a prediction of any beneficiary’s tax bill.
The source does not provide individualized guidance for every category of beneficiary or every inheritance date. An heir’s options can depend on their relationship to the original owner, the owner’s age and distribution status at death, and the type and history of the account. It is also not clear from the hypothetical whether Lisa’s circumstances match any real beneficiary. Readers should verify the governing rules with the IRA custodian and a qualified tax professional.
Check the Account Before Planning
The report recommends that heirs ask the IRA custodian in the year they inherit whether the original owner had started RMDs and obtain the beneficiary’s annual withdrawal requirements in writing. Beneficiaries can then map expected income across the 10-year period, identify years when income may be lower and review the plan annually as circumstances change.
For parents considering a Roth conversion, the report advises comparing the parent’s current tax rate with the heirs’ likely future rates before converting. For inherited Roth accounts, heirs should confirm the five-tax-year holding period and distribution deadline. The next practical step is to establish the applicable deadlines and account rules before choosing a withdrawal schedule.
Key Questions
Does every inherited IRA have to be emptied within 10 years?
No. The report says the 10-year rule applies to many nonspouse heirs, but spouses and some other beneficiaries may have different options. The beneficiary should confirm which rules apply to their situation.
Are annual RMDs required during the 10-year period?
It depends on the original owner’s age and whether they had reached their required beginning date. The report says annual RMDs apply in some cases in addition to the requirement to empty the account by the deadline.
Is it better to withdraw an inherited traditional IRA evenly?
Not necessarily. The report says withdrawals should be considered alongside expected income over the full period. A beneficiary nearing retirement may have lower-income years later, while another person’s circumstances may favor a different schedule.
Can an heir convert an inherited traditional IRA to a Roth?
The report says a nonspouse heir cannot convert an inherited traditional IRA to a Roth. The original owner may consider a conversion while alive, but should compare the relevant tax rates and account for the tax due on conversion.
Are withdrawals from an inherited Roth IRA tax-free?
Qualified withdrawals are generally tax-free, according to the report, but a five-tax-year rule can affect earnings if the original owner opened their first Roth less than five tax years before withdrawal. The account’s history and distribution rules should be verified.
Source: kiplinger.com
