A Beneficiary With $900,000 in an Inherited 401(k) Discovers She’ll Pay $150,000 More in Taxes by Waiting Until Year 10
Inheriting a $900,000 401(k) sounds like a windfall until you realize the timing of your withdrawals could hand the IRS a staggering amount of money you were never legally required to give up.
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A reader on Bogleheads recently laid out her situation: her father passed away in 2024, she was the sole non-spouse beneficiary of his 401(k), and the account balance sat at roughly $900,000. She is 55, still working, and her plan was straightforward. Let it grow. Take everything in year 10. Pay the taxes then.
That plan will cost her somewhere between $150,000 and $250,000 in entirely avoidable federal tax. Here is why, and what the math actually looks like.
The 10-Year Rule Is a Countdown Clock
Under SECURE Act rules, most non-spouse beneficiaries who inherited a 401(k) after 2019 must fully drain the account by December 31 of the tenth year following the original owner’s death. If the parent had already begun required minimum distributions before dying, the beneficiary also owes annual RMDs in years one through nine. Whatever the balance has grown to, it must come out by the end of year ten.
Every dollar withdrawn from a traditional inherited 401(k) is taxed as ordinary income in the year taken. There is no capital gains treatment, no step-up in basis, and no option to stretch withdrawals over a lifetime. The 10-year window is the entire runway.
What Compounding Does to the Bill
Assume the $900,000 balance earns a middle-of-the-road 6% per year while the beneficiary leaves it untouched. By the end of year 10, that account is worth roughly $1.61 million. Taking it all as a single distribution stacks $1.61 million on top of her existing salary in one tax year.
For a single filer in 2026, the 37% bracket begins at $640,600, the 35% bracket at $256,225, and the 32% bracket at $201,775. A $1.6 million lump-sum distribution on top of even a $90,000 salary pushes the top slice of that money deep into 37% territory and drags the middle portions through the 32% and 35% bands. The blended federal tax on the distribution alone lands near 32% to 33%, or roughly $520,000.
The Level-Distribution Alternative
Spreading withdrawals changes the picture completely. Taking about $120,000 per year over 10 years (a figure that rises modestly as the remaining balance grows) layered on a $90,000 salary keeps total taxable income around $210,000. That holds almost every dollar of the inherited money inside the 24% bracket, which runs to $201,775 for single filers, with only a small sliver crossing into 32%.
Blended federal tax on the same $1.6 million distributed this way lands closer to 22% to 24%, or roughly $370,000. The reader who waits until year 10 hands the IRS an extra $150,000 or more. If she is in a high-tax state like California or New York, add another $80,000 to $120,000 on top of that.
The Second-Order Costs Nobody Mentions
Retiring before year 10 makes the problem worse. If the beneficiary is 65 or older when the year-10 distribution hits, that $1.6 million spike causes up to 85% of Social Security benefits to be taxed. It also triggers IRMAA Medicare premium surcharges two years later. At a MAGI of $1.6 million, a single filer lands in the top IRMAA tier, adding $487 per month to Part B premiums alone, plus up to $91 per month for Part D. That is roughly $6,900 or more in additional Medicare costs for that single spike year, and the surcharge persists for the full calendar year it applies.
The 10-year Treasury yield, now trading near 4.77%, changes the calculus on patience as well. The argument for letting the account compound only holds if the after-tax return inside the inherited account materially beats the after-tax return of pulling money out at a lower bracket and reinvesting in a taxable account. At current yields, that gap is narrow to nonexistent.
Three Moves to Make This Year
- Model the year-10 balance at 5%, 6%, and 7% growth, then compare the federal tax on a lump-sum distribution against 10 equal draws. The bracket math almost always favors level distributions unless the beneficiary expects a meaningfully lower income year late in the window.
- Front-load distributions in low-income years. A sabbatical, a career break, or the gap between retirement and Social Security claiming is prime territory to pull larger slices at 12% or 22% rates.
- Check whether annual RMDs are already required. If the original owner died on or after their required beginning date, years one through nine carry mandatory withdrawals. Missing them triggers a 25% excise tax under SECURE 2.0, reducible to 10% if the shortfall is corrected within a two-year window.
The 10-year rule is a countdown clock with a tax bill attached. Beneficiaries who spread distributions keep the money. Those who wait until year 10 fund the Treasury instead.
Editor’s note: This article was updated to reflect the 10-year Treasury yield at approximately 4.77% (up from 4.69% at original publication), the 2026 IRMAA top-tier Part B surcharge of $487 per month with specific dollar-per-year context, and the SECURE 2.0 two-year correction window for missed RMD penalties.
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Marc Guberti is a personal finance writer who has written for US News & World Report, Business Insider, Newsweek and other publications. He also hosts the Breakthrough Success Podcast which teaches listeners how to use content marketing to grow their businesses.
