The $900,000 Inherited 401(k) Tax Trap Most Heirs Never See Coming

A 65-year-old who inherits a $900,000 pretax 401(k) from a parent who died at age 80 after reaching the plan’s required beginning date can wind up with a serious tax-planning problem. The stretch IRA largely disappeared for many nonspouse heirs after 2019. In its place, the SECURE Act 10-year rule generally requires many nonspouse beneficiaries to empty an inherited retirement account by the end of the 10th year after the original owner’s death.

There is another wrinkle when the parent dies after required distributions have already begun. Final IRS regulations published in July 2024 confirm that certain beneficiaries must also take annual required minimum distributions during the 10-year window. That can make the tax planning considerably more complicated.

First, Make Sure the 10-Year Rule Actually Applies

The 10-year rule does not apply the same way to every beneficiary. The law created a group called eligible designated beneficiaries. That category includes a surviving spouse, the account owner’s minor child, certain disabled or chronically ill beneficiaries, and a beneficiary who is not more than 10 years younger than the person who died.

That age exception matters more than it sounds. In this example, the parent died at 80 and the beneficiary is 65, making the beneficiary 15 years younger. Assuming the beneficiary is not disabled or chronically ill, the age-based exception does not apply. The beneficiary is therefore subject to the 10-year rule.

You Usually Cannot Just Wait Until Year 10

When the original account owner dies on or after the required beginning date and the beneficiary is subject to the 10-year rule, the IRS generally requires annual distributions to continue during the 10-year period. The beneficiary takes annual RMDs under the applicable life-expectancy rules, then empties whatever remains by December 31 of the 10th calendar year after the year of death.

The IRS provided transition relief for certain missed beneficiary RMDs in 2021, 2022, 2023, and 2024 while the rules were being finalized. That relief did not extend the 10-year deadline. The final regulations apply to RMDs for calendar years beginning January 1, 2025.

A missed RMD can trigger an excise tax equal to 25% of the amount that should have been withdrawn. That rate can fall to 10% when the shortfall is corrected within the IRS correction window, generally within two years. The IRS can also waive the tax when the shortfall resulted from reasonable error and the taxpayer is taking reasonable steps to fix it.

The Tax Bill Depends on When You Take the Money

A $900,000 pretax 401(k) does not come with one predictable 10-year tax bill. Investment returns matter, but so do the beneficiary’s wages, filing status, deductions, state of residence, other investment income, retirement date, Social Security income, and the timing of every withdrawal.

That makes a simple claim that a fixed percentage of the inheritance will disappear to taxes misleading. Pretax inherited 401(k) distributions are generally taxable as ordinary income, but the rate paid on those dollars depends on where they land in the beneficiary’s marginal tax brackets each year. Taking only the required minimum early in the window can leave a much larger balance for later years. Taking more earlier reduces the account faster but may push current income into higher brackets. That tradeoff is the heart of the problem.

The 2026 Federal Tax Brackets Get Crowded Fast

For 2026, the 24% federal bracket applies to taxable income above $105,700 and up to $201,775 for single filers. The 32% rate applies above $201,775 and up to $256,225, followed by the 35% rate above $256,225 and up to $640,600.

For married couples filing jointly, the 24% bracket runs above $211,400 and up to $403,550. The 32% bracket applies above $403,550 and up to $512,450, followed by the 35% bracket above that amount and up to $768,700.

Those are marginal tax brackets, so moving into a higher bracket does not suddenly subject all of a person’s income to the higher rate. Only the dollars inside that bracket face the higher rate. A California resident can also owe California income tax on taxable retirement distributions, adding another layer to the calculation.

Medicare Can Add a Second Cost

If the 65-year-old beneficiary is enrolled in Medicare Part B, Part D, or both, inherited-account withdrawals can also affect Medicare’s income-related monthly adjustment amount, better known as IRMAA. Not every 65-year-old is enrolled in Medicare, particularly someone who still has qualifying employer coverage, so that distinction matters.

For 2026, the standard Medicare Part B premium is $202.90 per month, up from $185.00 in 2025. IRMAA begins when modified adjusted gross income exceeds $109,000 for an individual filer or $218,000 for a married couple filing jointly.

At the first 2026 tier, the Part B surcharge is $81.20 per month and the Part D surcharge is $14.50 per month. The highest tier adds $487.00 per month to Part B and $91.00 per month to Part D. The Part D amount is added on top of the beneficiary’s normal drug-plan premium.

The IRMAA Hit Usually Shows Up Two Years Later

IRMAA normally uses tax information from two years earlier. That means 2026 Medicare premiums are generally based on a beneficiary’s 2024 federal tax return. In the same way, a large inherited-account distribution taken during 2026 would generally affect Medicare premiums in 2028, assuming the beneficiary is enrolled then.

The 2028 thresholds are not known yet, so today’s 2026 thresholds should not be used as if they are guaranteed to remain unchanged. They are still useful for showing how the system works. In 2026, the first IRMAA tier covers individual MAGI above $109,000 and up to $137,000, or joint MAGI above $218,000 and up to $274,000.

IRMAA is tiered rather than gradually phased in. Crossing a threshold can therefore trigger the full surcharge for the next tier. At the first 2026 tier, someone subject to both the Part B and Part D adjustments pays an additional $95.70 per month, or $1,148.40 for the year. If both spouses are enrolled in both programs and both are subject to the first tier, the combined annual surcharge is $2,296.80.

Bracket Smoothing Is the Main Planning Lever

The beneficiary does not have to limit withdrawals to the required minimum. That flexibility is important. A common strategy is to model the entire remaining 10-year window and spread taxable withdrawals across years instead of allowing too much money to pile up for the final few years.

Lower-income years after retirement can be especially useful. If wages disappear before Social Security begins or before the beneficiary’s own RMDs start, there may be more room to take inherited distributions without pushing as much income into higher brackets. For someone born in 1960 or later, the applicable RMD age for their own retirement accounts is generally 75, although workplace-plan rules can differ for people who continue working.

The right target is not automatically the top of the 24% bracket. Sometimes paying more tax earlier makes sense to avoid an even larger distribution later. The useful comparison is year by year: wages, pension income, Social Security, capital gains, deductions, inherited withdrawals, state taxes, and Medicare MAGI all need to be considered together.

Roth Rules Depend on What You Inherited

A nonspouse beneficiary cannot take an inherited traditional IRA and simply convert it into their own Roth IRA. An inherited IRA has to remain an inherited account, and a nonspouse beneficiary generally cannot roll money into or out of it the way the original owner could.

An inherited employer plan such as a 401(k) is different. Eligible amounts from the plan can potentially be moved through a direct trustee-to-trustee rollover to an inherited traditional IRA. Current IRS rules also allow certain eligible employer-plan distributions to be rolled directly to an inherited Roth IRA, with the pretax amount generally becoming taxable in the year of the rollover.

Required minimum distributions themselves are not eligible for rollover, and moving money to an inherited IRA does not erase the inherited-account distribution rules. The 10-year deadline still follows the original owner’s death. The beneficiary should confirm the plan’s available rollover options before moving anything.

A Disclaimer Is Not a Choose-Your-Own-Beneficiary Button

A beneficiary can sometimes make a qualified disclaimer of inherited property, but the rules are strict. The disclaimer generally must be in writing, must be received within nine months, must be irrevocable and unqualified, and must be made before the beneficiary accepts the interest or any of its benefits.

Just as important, the beneficiary making the disclaimer cannot decide who gets the account instead. The money has to pass without direction from that beneficiary, usually according to the account’s contingent-beneficiary designation, plan documents, or other applicable rules.

That can still matter when the existing contingent beneficiary is in a very different tax situation. But this is one of those moves where the beneficiary should know exactly where the account goes before signing anything, because a qualified disclaimer is not something to casually undo later.

Spouses Get a Different Rulebook

A surviving spouse generally has options that adult children and other nonspouse beneficiaries do not. Depending on the account and circumstances, a spouse may be able to keep the money as an inherited account or roll an eligible inherited balance into their own IRA and then follow the RMD rules that apply to their own account.

A nonspouse beneficiary cannot simply make the inherited account their own. That difference is why the beneficiary’s relationship to the original owner needs to be established before anyone starts calculating a 10-year withdrawal schedule.

QCDs Can Help Once the Beneficiary Reaches 70½

Once the beneficiary reaches age 70½, a qualified charitable distribution can become useful for someone who already plans to give money to charity. A QCD is paid directly from an IRA to an eligible charitable organization and can count toward an IRA’s required minimum distribution.

The 2026 QCD limit is $111,000 per person, up from $108,000 in 2025. IRS reporting rules expressly recognize QCDs from inherited IRAs, provided the beneficiary has reached the QCD eligibility age and the other requirements are met.

A QCD cannot be made directly from a 401(k). If the inherited money is still inside an employer plan, eligible funds may first need to be moved by direct rollover to a properly titled inherited IRA. An RMD that has already become payable cannot simply be rolled into the IRA.

Beginning in 2026, taxpayers who itemize generally can deduct charitable contributions only to the extent they exceed 0.5% of adjusted gross income, and taxpayers in the top federal bracket face an additional limitation on the tax benefit of itemized deductions. A properly executed QCD is excluded from income rather than claimed as an itemized charitable deduction. For someone who is already charitably inclined, that can make it more tax-efficient than taking a taxable IRA distribution and then writing a check to charity.

SSA-44 Can Fix Some IRMAA Problems, But Not All of Them

Medicare beneficiaries whose income falls after the tax year Social Security used for IRMAA may be able to ask for a new determination using Form SSA-44. The catch is that the income decline has to be connected to a qualifying life-changing event.

Work stoppage and work reduction are qualifying events. That means retirement can support an SSA-44 request when it involves stopping work or reducing hours and causes income to fall. Marriage, divorce, the death of a spouse, loss of certain income-producing property, loss of pension income, and certain employer settlement payments can also qualify.

A Roth conversion is not itself a qualifying life-changing event. Neither is taking a large inherited retirement-account distribution. If a beneficiary retires and income genuinely falls, however, Social Security may use more recent income information rather than continuing to rely on the older lookback year.

The 10-Year Deadline Does Not Stop During the IRS Relief Years

The 10-year clock is tied to the year of the account owner’s death. If the parent died in 2022, the inherited account generally has to be emptied by December 31, 2032 when the 10-year rule applies.

The IRS relief for certain missed annual beneficiary RMDs in 2021 through 2024 did not push that deadline back. In the 2022 example, a nonspouse beneficiary subject to the 10-year rule whose parent died after the required beginning date generally had to resume the applicable annual beneficiary RMDs in 2025.

Anyone who inherited an account several years ago should therefore check the original owner’s year of death before assuming there is still a full decade left. The calendar has been running the entire time.

What to Do This Week

Start with the plan administrator. Confirm the original owner’s date of death, both dates of birth, whether the owner had reached the plan’s required beginning date, whether any year-of-death RMD remained unpaid, and exactly how the plan classifies the beneficiary. Also confirm whether the account contains pretax, Roth, or after-tax money and what direct-rollover options the plan allows.

Then build the distribution plan year by year instead of looking only at the final deadline. Federal taxable income and Medicare MAGI are related, but they are not the same calculation. State taxes, planned retirement, Social Security, capital gains, charitable giving, and future RMDs can all change which years are best for larger withdrawals.

With a $900,000 inherited pretax retirement account, this is substantial enough that multi-year modeling by a CPA, enrolled agent, or other qualified tax professional can be useful. The goal is not simply to minimize this year’s tax bill. It is to avoid solving one year’s problem by creating a much larger one three, five, or nine years down the road.

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