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A Kiplinger report identifies five inherited IRA mistakes, including missing required withdrawals, postponing taxable distributions until year 10 and overlooking how Roth accounts differ. The examples are hypothetical: the best withdrawal plan depends on the heir’s income, account type and the original owner’s circumstances.
A Kiplinger report warns that heirs can face higher taxes or penalties if they misunderstand inherited IRA deadlines, delay withdrawals or fail to plan distributions around their income. The report highlights five potential mistakes under the 10-year distribution rule, while stressing that the right approach depends on the account and beneficiary’s circumstances.
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. Whether the heir also has to take annual required minimum distributions (RMDs) during years one through nine depends on when the owner died relative to the required beginning date. Kiplinger says rules taking effect in 2025 require annual RMDs in some cases. A missed RMD can carry a penalty of 25% of the shortfall, reduced to 10% if corrected in time, according to the report.
The report’s hypothetical example concerns a 55-year-old, Lisa, who inherits a $500,000 traditional IRA from her father while she and her husband earn $200,000 a year. Using an assumed 7% annual return, Kiplinger estimates the account could grow to about $984,000 in 10 years. Taking the full amount in the final year could push more income into higher tax brackets; spreading withdrawals over the period may reduce the tax burden in the report’s illustration.
Kiplinger’s other cautions are that equal annual withdrawals may not suit an heir whose income changes, that a parent’s Roth conversion may or may not help children depending on their relative tax rates, and that an inherited Roth has different tax treatment. Eligible heirs generally still face the 10-year deadline for an inherited Roth, but do not have annual RMDs during that period; qualified withdrawals are tax-free, subject to the Roth’s five-year rule.
How Withdrawal Timing Changes Taxes
The choice of when to withdraw can affect how much of a traditional inherited IRA is taxed at higher marginal rates. A large final-year distribution may land on top of the heir’s other income, while withdrawals spread across years can produce a different result. The report’s example illustrates the possible difference; it is not a forecast or a personalized tax calculation.
There is also a compliance risk. An heir who assumes the 10-year deadline is the only rule may miss annual RMDs that apply in their case. The report says a missed distribution can bring a penalty, so confirming the schedule with the account custodian and a qualified tax professional can help heirs avoid both a deadline problem and an unnecessarily concentrated tax bill.
The Roth distinction matters to families planning before an inheritance. A conversion creates taxable income for the account owner, while a nonspouse beneficiary cannot convert an inherited traditional IRA to a Roth after the owner’s death. That makes the decision dependent on the owner’s and heirs’ expected tax situations, rather than a universal solution.
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The 10-Year Rule and Its Exceptions
The SECURE Act changed distribution rules for many beneficiaries beginning January 1, 2020, replacing the lifetime “stretch” option for many nonspouse heirs with a 10-year payout deadline. Spouses and certain other beneficiaries may have different or more flexible options, so the adult-child example in the report should not be applied to every heir.
Traditional IRA distributions are generally included in taxable income, whereas qualified Roth withdrawals can be tax-free. The original owner’s age and RMD status, the beneficiary’s relationship to the owner, the account type and the beneficiary’s income all affect the relevant choices. Kiplinger’s tax estimates use hypothetical income, returns and tax brackets; they do not establish what any particular beneficiary will owe.
“There’s no one-size-fits-all answer for an inherited IRA.”
— Kiplinger report
What Heirs Must Verify
The report does not establish which distribution rules apply to every beneficiary. Beneficiary status, the owner’s date of death and RMD history can change whether annual withdrawals are required, and spouses or certain eligible heirs may have options that differ from those for adult children. Heirs should confirm the rules for their specific account with its custodian and a tax professional.
The dollar and tax figures are illustrative assumptions, not predictions. Actual investment returns, future income, tax brackets and personal circumstances may differ. The report also does not calculate state taxes or address every possible exception. For inherited Roth accounts, heirs should verify whether the five-tax-year holding period has been met before withdrawing earnings.
Steps Before the First Withdrawal
Heirs should first ask the IRA custodian for the account’s beneficiary classification, applicable distribution deadline and written RMD schedule. They can then map expected income across the 10-year period and review the plan as work, retirement or other income changes. The report recommends considering withdrawals in lower-income years rather than relying automatically on equal installments or a final-year payout.
Parents considering Roth conversions can compare their current tax rate with the rates their beneficiaries may face, while recognizing that future income and tax rules are uncertain. For heirs, the next step is to verify account-specific requirements before acting; a tax professional can help assess the implications without treating the report’s hypothetical figures as individual advice.
Key Questions
Do all inherited IRAs have to be emptied within 10 years?
Many nonspouse beneficiaries are subject to a 10-year deadline, but rules can differ for spouses and certain other eligible heirs. Confirm the deadline that applies to the specific beneficiary and account.
Are annual withdrawals required during the 10-year period?
It depends on the original owner’s circumstances and the applicable rules. Kiplinger says annual RMDs may be required when the owner died on or after their required beginning date. Ask the custodian for the beneficiary’s written schedule.
Is it always best to spread traditional IRA withdrawals evenly?
No. The report says an heir’s income may change during the 10-year period. A plan that accounts for expected income and required minimums may differ from equal annual withdrawals.
Can an heir convert an inherited traditional IRA to a Roth?
Kiplinger says a nonspouse heir cannot convert an inherited traditional IRA to a Roth. A parent considering conversion must weigh the tax cost during their lifetime against the beneficiaries’ expected tax situations.
Are inherited Roth IRA withdrawals tax-free?
Qualified withdrawals are generally tax-free, and inherited Roth IRAs under the 10-year rule do not have annual RMDs during that period. Earnings may be taxable if the original owner’s first Roth was opened less than five tax years before a withdrawal.
Source: kiplinger.com
