Inherited an IRA and Still Working? Avoid This Tax Mistake

Why Inherited IRA Withdrawals Can Push You Into a Higher Tax Bracket While You're Still Working

If you inherited a Traditional IRA from a parent and you're still working full time, there's a mistake that happens more than people realize. It can quietly push you into a higher tax bracket for years without you ever noticing it happening.

It's not the account that's the problem. It's stacking withdrawals from that inherited IRA directly on top of the paycheck you're already earning. And the surprising part is that the 10-year rule may actually give you a way to avoid making that mistake in the first place.

This topic connects directly to how inherited IRA rules work more broadly. You may also find our inherited IRA 10-year rule video and our complete guide to inherited IRA rules helpful for understanding the full framework before mapping out your strategy.

The Mistake: Taking Even Withdrawals Without Thinking About Your Tax Bracket

Here's what happens more than people realize. Someone inherits a Traditional IRA from a parent while they're still in their peak earning years, late 40s, 50s, or early 60s. They know about the 10-year rule, so they default to the simplest math: divide the balance by 10 and take even withdrawals every year.

That sounds responsible. But it ignores the single most important variable in inherited IRA planning when you're still working: your income in each year of that 10-year window.

If you're earning a six-figure salary and you layer inherited IRA withdrawals on top of that, the taxable portion of the withdrawal is generally taxed as ordinary income. You're not spreading that tax burden efficiently. You're compressing it into the highest-income years of your life.

The Two Scenarios That Determine How Much Flexibility You Have

There are really only two situations you need to understand here, and which one applies to you determines how much room you have to work with.

These examples assume you're a non-spouse adult beneficiary subject to the 10-year rule. Different rules may apply to spouses and certain eligible designated beneficiaries.

Scenario 1: Your Parent Died Before Their Required Beginning Date

If your parent passed away before they were required to begin taking RMDs, you generally have more flexibility. For a non-spouse beneficiary subject to the 10-year rule, no annual distribution is generally required in years one through nine. You can let the money continue to grow and choose when to take withdrawals, as long as the inherited IRA is fully distributed by December 31 of year 10.

Scenario 2: Your Parent Died On or After Their Required Beginning Date

If your parent passed away on or after the date they were required to begin taking RMDs, the rules are different. For a non-spouse beneficiary subject to the 10-year rule, annual beneficiary RMDs generally apply in years one through nine, and the account must still be fully distributed by December 31 of year 10.

The Strategy: Time Withdrawals to Your Income, Not the Calendar

Instead of automatically spreading withdrawals evenly across all 10 years, the better approach is to line your withdrawals up with the years when your income is likely to be lower.

That might be the year you retire. The year you drop to part-time. A year between jobs. Or simply the early retirement years before Social Security and your own required minimum distributions begin. Any of those windows creates an opportunity to take larger withdrawals at a lower effective tax rate.

To illustrate: say you inherit a $300,000 Traditional IRA at age 54, while you're still working and sitting in the 32% federal tax bracket. If you take that money out evenly while you're still working, a large share of those withdrawals could be taxed at 32% or higher.

Now say instead you take only what you're required to while you're working, then retire at 62 and take more of the remaining balance in years eight, nine, and ten, when your income has dropped and you're in the 22% bracket. If $300,000 of distributions were ultimately taxed at an average rate 10 percentage points lower, that difference could represent roughly $30,000 in federal taxes. Actual results would depend on how much is withdrawn each year, your other taxable income, deductions, and where those dollars fall within the tax brackets.

That's why the timing matters. The 10-year window isn't a countdown to an equal distribution. It's a planning opportunity.

Three Things to Keep in Mind Before You Act

If your parent died on or after their required beginning date and annual beneficiary RMDs apply, don't skip a required distribution. Missing a required distribution can trigger an IRS excise tax on the amount you should have withdrawn.

The 10-year clock starts the year after your parent passed, not the year they passed. Know your exact deadline and mark it now.

Don't wait until year nine to figure out your strategy. By then you've lost most of the flexibility you had. The planning needs to happen early, ideally in year one or two, when the full 10-year window is still in front of you.

For a broader look at how inherited accounts from both traditional and Roth IRAs interact with tax planning, see our video on what happens to retirement accounts when you die .

Investment advice is offered through Bayntree Wealth Advisors, LLC, an SEC-registered investment adviser. Insurance and annuity products are offered separately through Bayntree Planning Group, LLC. Bayntree does not provide, and no statement contained herein shall constitute, tax or legal advice. You should consult a tax or legal professional on any such matters. Opinions expressed herein are solely those of Bayntree Wealth Advisors. All content is for informational purposes only and is not intended to provide the basis for any financial decisions.