Inherited $400,000 IRA Can Trigger $127,000 Tax Bill if Beneficiary Delays 10-Year Withdrawals
Updated
Updated · AOL · Sep 9
Inherited $400,000 IRA Can Trigger $127,000 Tax Bill if Beneficiary Delays 10-Year Withdrawals
1 articles · Updated · AOL · Sep 9
Summary
$400,000 inherited IRAs can generate about $127,057 in added federal tax if a non-spouse beneficiary waits until year 10 to withdraw the full balance, versus roughly $94,860 if withdrawals are spread evenly.
The gap stems from the 10-year rule: many non-spouse heirs must empty the account by Dec. 31 of the 10th year, and some also must take annual required minimum distributions.
Missing a required distribution can bring an excise tax of up to 25% of the amount not withdrawn, adding another cost beyond the higher income-tax hit from bunching withdrawals.
In the example, a single filer with $100,000 of taxable income would jump to $500,000 in the lump-sum year, pushing more of the IRA money into higher brackets than a $40,000 annual withdrawal plan.
The report says beneficiaries can cut the tax hit by matching withdrawals to lower-income years while still meeting any annual RMDs and the 10-year deadline.