The $55,000 Tax Mistake: How to Spread Inherited IRA Distributions Across the 10-Year Window
Every dollar you withdraw from an inherited traditional IRA is taxed as ordinary income. The 10-year rule gives you a decade to empty the account, but it does not tell you when within that decade to take the money. That silence is expensive. The single most common mistake I see beneficiaries make is also the most natural one: take the minimum (or nothing) for nine years, then absorb the entire balance as a lump sum in year 10. On a midsize inherited IRA, that one decision can easily cost $50,000 to $100,000 in unnecessary federal taxes. Here is the math, and the three strategies that beat it.
Why the lump sum hurts so much
Our tax system is progressive: income stacked on top of your existing earnings gets taxed at your marginal rate, which climbs as the pile grows. A $600,000 distribution landing in a single year does not get taxed at your normal rate. It gets taxed at rates up to 35 or 37 percent on the top layers.
Take a concrete comparison. You inherit a $600,000 traditional IRA, and your regular taxable income is $100,000 a year. Using 2026 federal brackets:
| Strategy | Math | Est. federal tax on the inheritance |
|---|---|---|
| Full $600,000 lump sum in one year | Tax on $700,000 minus tax on $100,000 | $198,245 |
| $60,000 per year for 10 years | Roughly $14,286 per year at 22-24% | $142,860 |
The difference is $55,385 in federal tax alone, for the same $600,000 of inheritance. No exotic planning, no loopholes. Just timing. A larger account makes the gap worse: a $500,000 IRA left to grow at 6 percent becomes roughly $895,000 by year 10, and taking it all at once can push the effective tax rate on the inheritance above 30 percent, versus about 26 percent with level annual withdrawals. That is roughly $100,000 left on the table.
Strategy 1: level annual distributions
The simple version that beats the lump sum
Divide the account by the years remaining and withdraw roughly that amount each year, adjusting for growth. On the $600,000 example, about $60,000 a year keeps each year's withdrawal inside your existing 22 to 24 percent brackets instead of spilling into the 32 percent and higher brackets a lump sum would hit. It is not perfectly optimal, but it captures most of the savings with almost no planning effort. If you do nothing else, do this.
Strategy 2: fill your bracket every year
The sophisticated version
Each year, calculate exactly how much room remains in your current tax bracket and withdraw up to that ceiling. Say you are married filing jointly with $220,000 in taxable income. For 2026, the 24 percent bracket for joint filers tops out around $398,350, so you have roughly $178,000 of 24 percent space. Take what you need from the inherited IRA up to that line, and every dollar is taxed at 24 percent instead of the 32 percent or higher it would face if deferred into a lump sum.
The real power shows up in variable income years. Suppose in one year your household income drops to $140,000, a sabbatical, a job change, an early retirement gap. Your 24 percent space just grew enormously. Take $120,000 from the inherited IRA that year and it is all taxed at 24 percent. This bracket filling approach can save an additional $15,000 to $30,000 over plain level withdrawals, depending on how much your income varies.
Strategy 3: time big withdrawals for low income years
Plan around your life, not just the calendar
The years between retiring and starting Social Security are golden for inherited IRA withdrawals: your earned income has stopped, but your own RMDs and Social Security have not started yet. Those gap years often have the lowest taxable income of your adult life, which means the most bracket room at the lowest rates. If your 10-year window overlaps with that gap, front load the larger withdrawals there. Similarly, a year with big deductions, business losses, or unusually low income is a year to take more from the inherited IRA.
The IRMAA trap most articles skip
A large lump sum can also increase how much of your Social Security benefits are taxed and phase out various credits and deductions. The bracket damage radiates outward. Smoothing the income over ten years contains all of it.
The Roth playbook is the opposite
If the inherited account is a Roth IRA, flip everything above. There are generally no annual RMDs, qualified distributions are tax free, and the only deadline is emptying the account by the end of year 10. The smart move is usually to let an inherited Roth grow untouched for as long as the rules allow and withdraw near the end of the window. Every year you wait is another year of tax free compounding. Do not let a traditional IRA strategy leak into a Roth account.
What I would actually do
My default recommendation for a traditional inherited IRA: start level annual withdrawals immediately, recalculate the bracket room every December, and take extra in any year your income dips. Revisit the plan if Congress changes the rules, which it has done twice in five years already. And get a professional projection done once, early. This is exactly the kind of multiyear planning where a good advisor pays for themselves several times over, because the mistakes compound for a decade before you feel them.
Model your own distribution schedule.
Annual RMD amounts, year-by-year balances, and your deadline.
Run your own numbers with the free calculatorFrequently asked questions
Can I take more than the required minimum in a given year?
Yes. Annual RMDs, where they apply, are a floor, not a ceiling. You can always withdraw more, and strategically withdrawing extra in low income years is one of the best ways to reduce the year-10 lump sum. Just remember every dollar is taxable as ordinary income in the year you take it.
What happens if I do nothing until year 10?
If no annual RMDs were required (owner died before their required beginning date), doing nothing until year 10 is legal, and the entire balance becomes taxable income in that one year. It is the most expensive legal option for most beneficiaries. If annual RMDs were required, doing nothing means missed RMDs plus penalties on top of the eventual lump sum.
Do state taxes change the strategy?
They can amplify it. If you live in a high tax state now but plan to move to a low or no income tax state during the 10-year window, deferring larger withdrawals until after the move can save meaningful state tax on top of the federal savings. Factor your state into the bracket math each year.
Should I convert the inherited IRA to a Roth?
Generally no. You cannot convert an inherited traditional IRA to a Roth IRA; conversions are only allowed from your own accounts. The one exception people confuse this with is inheriting a Roth, which is already tax free. Your lever with an inherited traditional IRA is timing, not conversion.
Related: Do You Have to Take Annual RMDs During the 10-Year Rule? It Depends on One Date