A Daughter’s $500,000 Inherited 401(k) Deadline Could Trigger a 25% Penalty Before December 31, and the Clock Is Ticking

December 31 could be a costly deadline for someone inheriting a retirement account, as missing a required withdrawal could trigger a 25% IRS penalty. Picture a single 55-year-old who as an example earns $90,000 a year. She inherits her father’s $500,000 traditional 401(k), and her plan is to leave it invested and let it compound until she retires.

The tax code runs on a different clock. Her father dies in 2026 at 82, and she is far more than 10 years younger than him, so she falls under the SECURE Act rule requiring “the entire balance of the deceased participant’s account be distributed within ten years”.

CPA and retirement planner Kurt Supe made the same point in an X post on Nov. 15, 2026: most children must empty the account by the end of the 10th year after death. On a 2022 podcast, Suze Orman told a listener in a similar spot, “You can take it out little by little. You can take it out all at once. But by the end you have got to have withdrawn all of the money.”

Dad Already Started His Required Withdrawals, So She Can’t Skip Years

A lot of heirs assume they can sit tight until year 10. That only works if the owner died before his required beginning date. Her father was well past his, and under the final RMD regulations published in July 2024, she has to take annual withdrawals in years one through nine and then empty whatever is left in year 10.

Her first required withdrawal comes in 2027, when she turns 56. It uses a Single Life factor (the IRS life-expectancy divisor for her age) of 30.6, which works out to about $16,300.

If she skips it, she owes a 25% excise tax, or 10% if she fixes it within the correction window.

Taking Only the Minimum Leaves a $596,000 Withdrawal for Year 10

Suppose the account earns 6% a year and she withdraws only the minimum. By year nine, at 64, her RMD has grown to roughly $26,000.

Even so, about $596,000 is still in the account, and all of it has to come out in 2036, the year she turns 65.

Put that on top of her salary and take off the $16,100 standard deduction. Using today’s brackets, roughly $468,000 of her income lands above the 24% bracket’s $201,775 ceiling.

At rates ranging from 32% to 37%, well above the 24% bracket, those dollars add up quickly to $50,000 in additional tax.

That is the first-year tax bomb in miniature: a pre-tax balance the owner never touched suddenly lands on someone else’s return in a single year. We walked through how to prevent one years before it detonates in a free guide here.

Medicare Bills Her for the Spike Two Years Later

Medicare’s income surcharge, called IRMAA, is based on the tax return from two years earlier. Her 2036 windfall therefore sets her 2038 premiums.

Based on 2026 thresholds, single filers above $500,000^[1] pay $690 a month for Part B, compared with the standard $203, and they also pay a $91 Part D surcharge.

For that one year, the surcharges come to about $6,900. Her larger late-stage RMDs can also push her over the $109,000^[1] first threshold in the years that set her premiums at 65 and 66.

Empty the Account Before Age 63 to Stay in the 24% Bracket

One option is to drain the account between ages 56 and 62, spreading it evenly over seven years.

At 6%, that works out to about $89,600 a year, raising her taxable income to roughly $163,000, which remains inside the 24% bracket every year. Each of those withdrawals is larger than the required minimum, so she meets her RMDs automatically.

The account is empty by the end of 2033. That keeps her income from 2034 through 2036 at salary level and below the IRMAA threshold when Medicare starts. Her age also works in her favor: distributions made to a beneficiary on or after the death of the employee^[2] are exempt from the 10% early withdrawal penalty under 26 U.S.C. § 72(t)(2)(A)(ii). Whatever she doesn’t spend can go into a taxable brokerage account, where future growth is taxed at capital gains rates rather than as ordinary income.

Three Moves to Make Before December 31

1. Check whether Dad took his 2026 RMD. If he died before taking it, she has to withdraw whatever is left of it by year end. The 2027 withdrawal is separate, so put both on the calendar now.
2. Move the money with a direct trustee-to-trustee transfer. When an heir rolls a 401(k) this way, the new account shall be treated as an inherited individual retirement account^[3] under 26 U.S.C. § 402(c)(11)(A)(ii). She keeps the same 10-year clock but gets control over investments and timing that some employer plans don’t offer heirs.
3. Size each withdrawal against two numbers. One is the $201,775 top of the 24% bracket. The other is the $109,000^[1] IRMAA threshold, which matters from age 63 on. If she has a bonus year, she should withdraw less. If she retires at 60, her salary drops and she can withdraw more at lower rates.

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