If You Do This With Your Inherited IRA, You’re Probably Costing Yourself Big Time

You probably have a lot of ideas about what you’d like to do with your inherited individual retirement account (IRA), and you’re free to do whatever you want with the money. But there are still a few rules you need to follow to stay on the IRS’s good side.

There are also decisions that, while perfectly legal, might not be the best for you in the long term. There’s one in particular that could prove costly at tax time.

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A lump-sum withdrawal could be a bad idea

Generally, you have until the end of the 10th year following the year of the original account owner’s death to withdraw all your funds from your inherited IRA. So if the original account owner died in 2026, you would have until Dec. 31, 2037, to withdraw all the money. Failing to do this could lead to tax penalties.

There’s no rule about how much you have to withdraw each year. You’re free to leave the money untouched for nine of those years and take out all the funds in the 10th year following the account owner’s death. But a lump-sum withdrawal could be risky, especially if you’re dealing with a traditional IRA.

Traditional IRAs are tax-deferred, which means you get a tax break on your contributions when you fund the account, and you pay income taxes on your contributions and earnings when you take the money out later. If a person dies with money left in their traditional IRA, the responsibility to pay taxes on those funds falls to the heirs inheriting them.

If you withdraw $100,000 from a traditional IRA, you’re effectively adding $100,000 to your taxable income for the year. This can push you into a much higher tax bracket, forcing you to give back a larger chunk of your inheritance to the government.

This isn’t a concern with inherited Roth IRAs, as these withdrawals are generally tax-free. But you still may not want to take a lump-sum withdrawal from these accounts right away. You’ll miss out on the potential investment earnings you would have gotten if you’d left the money invested for a while longer.

Other options available to you

Rather than withdrawing the money as a lump sum, you could spread it out over 10 years to minimize the effect it has on your tax bill. This will also let you enjoy some of the money now while still allowing some of your inheritance to remain invested.

If you’re inheriting an IRA from your spouse, you’ll have the option to roll that money into your own IRA instead. This could be a good choice if you don’t need the money anytime soon. But you should note that once the money is in your account, you won’t be able to access it penalty-free until you’re at least 59 1/2.

Surviving spouses, minor children of the account owner, disabled or chronically ill individuals, and anyone not more than 10 years younger than the original owner can also choose to spread their withdrawals out over their lifetime using the required minimum distribution method. Minor children can use this method only until they turn 18.

It’s ultimately up to you when you want to access your inherited IRA funds, but one of the above options could be a better fit for you than a lump sum if you’re trying to squeeze the most out of your inheritance. So make sure you consider all your options before deciding how to proceed.

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