Inherited IRA Planning: Five Decisions That Can Shape Your Tax Bill

An inherited IRA can grow for years and still leave an heir with a much smaller share than expected. The difference often comes down to decisions made early: confirming withdrawal rules, choosing when to take distributions and considering how the account’s tax treatment fits the family’s plans.

Take Lisa, a hypothetical 55-year-old who inherits a $500,000 traditional IRA from her father. She and her husband earn $200,000 a year, and she doesn’t need the account for spending. Leaving it untouched may feel sensible, but a large withdrawal near the deadline could push much of the money into higher tax brackets. Her best schedule depends on the account rules, her income over the next decade and whether the inheritance is traditional or Roth.

1. Confirm the deadline and annual withdrawal requirements

For many adult children who inherit an IRA, the account must be emptied by December 31 of the 10th year after the original owner’s death. Spouses and certain other heirs may have different options. The deadline alone doesn’t tell Lisa whether she must withdraw money each year along the way.

That depends, in part, on whether her father had reached the date when he was required to begin taking required minimum distributions (RMDs). If he died before then, annual minimum withdrawals may not be required during years one through nine. If he died on or after that date, rules taking effect in 2025 require annual RMDs as well as full withdrawal by the 10-year deadline.

Missing a required amount can trigger a penalty equal to 25% of the shortfall, reduced to 10% if corrected in time. Lisa should ask the account custodian whether her father had begun taking RMDs and request her annual requirements in writing. That early check gives her a schedule to work from and can help prevent an avoidable penalty.

2. Don’t assume the last year is the best year to withdraw

If Lisa’s father died before his required beginning date, she may not have annual minimum withdrawals in years one through nine. That flexibility can be useful, but waiting until the final year can concentrate taxable income in a single year.

At a hypothetical 7% annual return, the $500,000 account would grow to about $984,000 after 10 years. If Lisa withdrew the full amount in year 10 while still earning $200,000, her total income that year would approach $1.2 million. Using 2026 tax brackets for married couples filing jointly, the inherited withdrawal would produce about $322,000 in federal income tax. Roughly $383,000 of the withdrawal would fall in the 37% bracket.

Those figures hold today’s brackets and income steady; they’re examples, not forecasts. Still, they show why the timing matters. If Lisa instead withdrew about $71,000 a year, enough to empty the account over the decade at the same assumed return, each withdrawal would top out in the 24% bracket. The estimated average federal tax rate on those withdrawals would be about 23%.

Not needing the cash doesn’t require leaving it in the inherited IRA. Lisa could withdraw money on a schedule and reinvest it in a taxable account. That involves its own tax treatment and investment choices, but it may avoid bunching a large withdrawal into one year.

3. Match withdrawals to income, rather than defaulting to equal amounts

Steady withdrawals can spread taxable income across the decade, but the same amount each year won’t suit every heir. Lisa’s salary may change, and retirement could create lower-income years when a larger withdrawal has less effect on her tax bracket.

If she plans to retire five years after inheriting, she might take only what’s required while her salary is high, then withdraw more in years six through 10. If she expects to work throughout the decade, withdrawing roughly one-tenth of the balance each year, adjusted for growth, may be a reasonable starting point.

The useful exercise is a year-by-year income projection. Estimate salary, retirement income and other taxable income, then look for years when a larger withdrawal may fit into lower brackets. Revisit the schedule annually as circumstances change.

4. Weigh a Roth conversion from the parent’s perspective

Parents may be able to change the tax character of an IRA before an heir inherits it. A Roth conversion counts as taxable income for the parent in the year of conversion. Whether that trade makes sense depends partly on how the parent’s tax rate compares with the children’s likely rates.

If the parent expects to pay a lower rate than the children, converting some or all of a traditional IRA may shift the tax bill to a more favorable time. If the parent’s rate is much higher and the children are likely to have modest incomes, keeping the traditional IRA may work better for the family. Parents whose estates may face estate tax should also consider that paying conversion tax can reduce the taxable estate.

Timing matters because a nonspouse heir can’t convert an inherited traditional IRA to a Roth. The parent’s lifetime is the opportunity to compare the rates and consider partial conversions over several years instead of converting everything at once.

5. Treat an inherited Roth differently

An inherited Roth IRA generally still has to be emptied within the 10-year period for heirs subject to that deadline, but annual RMDs aren’t required along the way. Withdrawals can be timed flexibly, and qualified withdrawals are tax-free. That can make waiting more attractive than it is with a traditional IRA, especially if the heir doesn’t need the funds soon.

There’s one timing detail to check: if the original owner opened their first Roth less than five tax years before a withdrawal, the account’s earnings may be taxable. An heir who plans to wait should confirm when that five-year period began and keep the 10-year deadline in view.

Use the first year to set a workable plan

There’s no single withdrawal schedule for every inherited IRA. The practical starting point is to confirm the deadline and any annual RMDs, then project income across the remaining years. For a traditional IRA, that can reveal opportunities to spread withdrawals across lower-income years. For a Roth, it can help an heir decide whether waiting fits their needs and the account’s five-year history.

Parents can compare their own tax rate with their children’s expected rates while a conversion is still possible. Heirs can use the first year to get the account details and sketch a schedule they’ll review annually. The deadline may be a decade away, but decisions made early can shape how much of the inheritance remains after taxes.