Quick Read – Spreading a $750,000 inherited 401(k) over 10 years saves roughly $120,000 in federal taxes compared to taking a single lump-sum distribution. – The SECURE Act requires non-spouse beneficiaries to drain inherited 401(k)s within 10 years, taxing every dollar at their…
rginal income rate with no capital gains treatment. – A lump-sum inheritance withdrawal can also trigger IRMAA Medicare surcharges two years later, make 85% of Social Security taxable, and eliminate the 0% capital gains rate. – A 62-year-old in New Jersey posted on Bogleheads earlier this year asking a simple question. Her father had died with a $750,000 401(k) and named her the sole beneficiary
Her CPA told her to roll it into an inherited IRA and take it out slowly. Her brother’s advisor told him to take his half of a similar account as a lump sum and get the taxes over with. Only one of them was right.
The wrong answer, repeated in tax offices across the country every spring, will quietly cost heirs close to $120,000 more than it needs to. The mistake sits inside a rule most beneficiaries have never read. The 10-Year Rule Has Teeth Under SECURE Act rules now fully in force, most non-spouse beneficiaries of a 401(k) or IRA must empty the account by December 31 of the tenth year following the original owner’s death.