Inheriting a traditional IRA can boost your savings—but it also comes with tax obligations that require careful planning to avoid an unwelcome surprise at tax time.
The IRS generally requires non-spouse beneficiaries to withdraw all funds from an inherited traditional IRA within 10 years. Required minimum distributions may also apply, depending on factors such as whether the original account owner had already begun taking them.
Withdrawals from traditional IRAs count as taxable income. Taking distributions can push you into a higher tax bracket, which is particularly problematic for beneficiaries in their 50s who are still working and earning peak salaries.
Who faces the biggest risk
An adult who inherited a parent’s IRA while still in their career years faces the most challenging position. Their earnings likely already place them in elevated tax brackets, making additional IRA income costly.
Surviving spouses have more options. They can roll inherited assets into their own IRA or delay withdrawals depending on their circumstances.
Higher withdrawals also affect other income sources. They increase modified adjusted gross income, which can raise Medicare Part B and D premiums. For those collecting Social Security, up to 85% of benefits can become taxable when MAGI rises due to IRA distributions.
Strategies to manage the tax hit
Roth IRA inherits differently: withdrawals are generally tax-free, though the 10-year withdrawal rule still applies.
For traditional IRAs, spreading withdrawals across the full 10-year window rather than taking a lump sum in the final year can smooth out the tax burden. Accelerating distributions during lower-income years or periods with higher deductions can also reduce the overall bill.
Consulting a tax professional is advisable given the complexity of options available.