A Beneficiary With $900,000 in an Inherited 401(k) Discovers She’ll Pay $150,000 More in Taxes by Waiting Until Year 10

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 simple. Leave the money alone. 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, all of 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Every dollar withdrawn from a traditional inherited 401(k) is taxed as ordinary income in the year taken.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. Thanks to the One Big Beautiful Bill Act signed in July 2025, the seven federal tax brackets are now permanent, so the bracket math described below will not expire the way the old TCJA provisions were set to.

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, and the result is brutal.

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 thin 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. For beneficiaries in high-tax states such as California or New York, add another $80,000 to $120,000 on top of that federal bill.

The Second-Order Costs Nobody Mentions

Retiring before year 10 makes the problem worse, not just in headline federal tax. 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 (which starts at $500,000), adding $487 per month to Part B premiums alone, plus $91 per month for Part D. That comes to roughly $6,936 in additional Medicare costs for the spike year, and the surcharge persists for the full calendar year it applies.

The 10-year Treasury yield, now trading above 5.2% after climbing to its highest level since 2007, sharpens the calculus considerably. The argument for leaving the inherited account to compound only holds if the after-tax return inside that account materially beats the after-tax return from pulling money out at a lower bracket and reinvesting in a taxable account. At current yields, that gap has narrowed to near zero for many beneficiaries.

Three Moves to Make This Year

1. 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.
2. 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.
3. 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 more of the money. Those who wait until year 10 fund the Treasury instead.

Editor’s note: The 10-year Treasury yield figure has been updated to above 5.2%, reflecting its rise to a 19-year high as of late September 2026, up from the 4.77% cited at original publication. The article also adds context on the One Big Beautiful Bill Act, which made the seven federal income tax brackets permanent, and corrects the annual IRMAA cost figure for the top tier to approximately $6,936 (from “roughly $6,900 or more”).

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