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Why Could an Inherited $220,000 IRA Push You to a 35% Bracket?
A 58-year-old who inherits a parent's $220,000 IRA and withdraws the entire balance in the first year can land a large share of that money in the 32% and 35% federal tax brackets, according to a hypothetical scenario laid out by 24/7 Wall St. The example assumes the heir earns a $90,000 salary and adds roughly $90,000 of IRA withdrawals on top of it in the same tax year, a combination the outlet says pushes income well past the thresholds where higher marginal rates apply.
What is the 10-year rule for inherited IRAs?
Federal law requires most non-spouse heirs to empty an inherited IRA within ten years of the original owner's death. The rule does not force an equal withdrawal each year; heirs can take nothing for nine years and withdraw everything in year ten, or spread withdrawals however they choose across the decade, as long as the account reaches zero by the deadline described in the 24/7 Wall St scenario.
Why does cashing out in year one create a tax problem?
Traditional IRA withdrawals count as ordinary income in the year they are taken. In the scenario described by 24/7 Wall St, a $90,000 salary combined with a $220,000 lump-sum withdrawal stacks on top of existing income rather than spreading across multiple lower-taxed years. The outlet notes that roughly $90,000 of the withdrawal in this example lands in the 32% and 35% brackets, well above the 22% rate the heir might expect going in.
Is cashing out in year one common?
24/7 Wall St describes this as something "most heirs do," taking a lump sum shortly after inheriting rather than spacing withdrawals across the full ten-year window. The outlet's analysis treats that behavior as the default case worth examining, rather than an edge case.
What alternatives exist to a lump-sum withdrawal?
Because the 10-year rule only sets a deadline, not an annual schedule, heirs have flexibility to time withdrawals around lower-income years, retirement, or other changes in taxable income. Spreading a $220,000 balance across multiple years, rather than one, is the mechanism the 24/7 Wall St scenario points to as the alternative to the 32%/35% outcome.
Does this apply to every inherited IRA?
The 10-year rule generally applies to IRAs inherited by non-spouse beneficiaries after the SECURE Act changed distribution rules. Spouses and certain other beneficiaries, such as minor children of the original owner, can qualify for different treatment. The 24/7 Wall St example centers on a standard non-spouse heir facing the 10-year deadline.
The bottom line from the scenario: the size of the tax bill on an inherited IRA depends less on the account balance itself and more on how quickly the money is withdrawn against existing income. Readers managing a lump sum of this size may also want to review how it is invested while sitting on the sidelines; HTT News' guide to the Vanguard Utilities Index Fund ETF walks through one lower-volatility option some investors consider for parked cash.
Full details of the 24/7 Wall St scenario, including its salary and bracket assumptions, are available via Google News.
Artiglio is A coming-soon iPhone chief of staff for briefings and drafts. Not on the App Store yet.
Questions
Does the 10-year rule require equal withdrawals each year?
No. Heirs can withdraw any amount in any year as long as the inherited IRA is fully distributed within ten years of the original owner's death.
Why does a lump-sum withdrawal cost more in taxes than spreading it out?
IRA withdrawals count as ordinary income in the year taken. Stacking a large withdrawal on top of salary in one year can push income into higher marginal brackets, as in the 32%/35% example described by 24/7 Wall St.