Inherited IRA Mistakes That Drain Your Account

Based on reporting by Vilma Rios (24/7 Wall St.).

What the SECURE Act Requires for Inherited IRAs

When a traditional IRA owner dies, the rules that govern how the beneficiary must take distributions depend on the owner’s age at death and the beneficiary’s relationship to the owner. Under Section 401 of the SECURE Act, most adult children are classified as "non‑eligible designated beneficiaries." For them, the entire account must be emptied by December 31 of the year that marks the tenth anniversary of the owner’s death.

In the example from 24/7 Wall St., a father died in 2025 at age 71, leaving a $500,000 traditional IRA to his 48‑year‑old daughter. Because the father died before the SECURE 2.0 required‑beginning‑date of age 73, no required minimum distributions (RMDs) are required for the first nine years. The deadline arrives in 2035, and the entire balance must be withdrawn that year.

Common Mistakes That Cost Taxpayers

Many beneficiaries assume that delaying withdrawals saves taxes, but the tax code treats the full distribution as ordinary income in the year it is received. If the daughter takes the whole $500,000 in the tenth year, her taxable income jumps to $650,000. Using the 2026 single‑filers brackets cited in the source, the federal tax on the inherited money alone would be $167,859.25.

Two additional pitfalls can increase the cost:

• Missing the year‑10 deadline triggers an excise tax equal to 25% of the shortfall, as prescribed by 26 U.S.C. § 4974(a).
• Assuming the account will grow tax‑free for a decade. In reality, the balance usually increases, pushing more dollars into the 35% and 37% brackets.

How to Structure Withdrawals to Save Taxes

Advisors recommend spreading the $500,000 over the ten‑year window to stay within lower tax brackets. The daughter’s other taxable income is $150,000, leaving $51,775 of room in the 24% bracket (which tops out at $201,775 for 2026). Ten equal withdrawals of $50,000 each fit inside that space.

Each $50,000 withdrawal adds roughly $12,000 of tax, totaling $120,000 over the decade. Compared with the $167,859.25 lump‑sum tax, the spread‑out approach saves $47,859.25 in federal tax.

In practice, the savings can be larger because:

1. The account’s balance may grow, meaning a lump‑sum withdrawal would be taxed at higher rates.
2. Beneficiaries can time larger withdrawals for low‑income years—such as a gap between jobs, a sabbatical, or the first year of early retirement—and take smaller amounts when bonuses or other income push them into higher brackets.

For readers looking for a broader estate‑planning perspective, incentive trusts can complement IRA strategies by providing additional control over how and when assets are distributed.

What It Means for Your Retirement Planning

The key takeaway for investors and savers is that inherited IRAs are not a tax‑free windfall. The timing of distributions directly impacts the marginal tax rate applied to the money. By planning withdrawals to stay within lower brackets, beneficiaries can preserve a significant portion of the inherited balance.

Financial professionals—CPAs, estate‑tax attorneys, or qualified financial planners—should run a personalized cash‑flow analysis that accounts for:

• Current taxable income and projected changes.
• State income‑tax rules, which can vary widely.
• Potential growth of the IRA balance.
• Other retirement assets that might affect overall tax liability.

Kiplinger recently warned that the year‑end deadline is approaching, urging beneficiaries to review their distribution schedules before December 31.

What to Watch Next

As the SECURE 2.0 regulations continue to shape retirement‑account rules, keep an eye on:

• Any updates to the required‑beginning‑date for owners born after 1950.
• State‑level changes that could affect the tax treatment of inherited IRAs.
• New guidance from the IRS on how to calculate the excise tax for missed deadlines.

Staying informed and working with a qualified advisor can help avoid the hidden tax traps that silently drain six‑figure retirement accounts.

Sources

• If Dad Died at 71, Your Inherited IRA Has No Required Withdrawals for Nine Years. Wait for Year 10 and the Whole $500,000 Lands on One Return at 37%, and Here’s the Schedule ... — reported by Vilma Rios, 24/7 Wall St.