This is the majority of the eligible designated beneficiaries; the spouse is handled in the section above. See “The Inheritance Rules” for the full definition of the eligible designated beneficiaries. These beneficiaries will normally include minor children of the deceased account holder, disabled or chronically ill beneficiaries, and any beneficiary that is less than 10 years younger than the deceased account holder.

Your primary option here is to take distributions over the longer lifespan of you or the deceased account owner. If the deceased account owner was younger than you, your best option is to use the lifespan (i.e., age) of the deceased account owner to calculate RMDs. You can always distribute more than the RMD, but a younger age means that the RMDs will be smaller. You may not need the flexibility, but this gives you more flexibility in taking distributions.

If the deceased account holder was not past the required beginning date, you have the option of using the 10-year rule. This requires you to empty the account within 10 years with no required minimum distribution. There is at least one case where the 10-year rule might suit your situation. If you have reason to believe you will not be alive in 10 years, you can take out nothing and assign a beneficiary to pass all the inherited funds on to someone else. If you are wrong, the taxes at year 10 might be much larger than they could have been.

There are extra pitfalls for a minor child of the deceased account holder inheriting an IRA. Your best bet might be to seek the assistance of an investment advisor and tax advisor.

• The child must switch to the 10-year rule when they reach the age of 21. (Depending on the state, the age of majority is 18 – 21 years old, but for this, it is 21.)
• If the child is pursuing a specified course of education, they can get an extension to 26 years old before switching to the 10-year rule
• Inherited IRAs are subject to the kiddie-tax, until the child is 18 or 24 for a full-time dependent student. Distributions exceeding $12,500 could be taxed at 37%. This is one of the rare cases where taking a short-term loan and paying it back with distributions might be cheaper that taking a lump sum distribution

This is the designated beneficiaries section. This will normally include healthy adult children and healthy individuals more than 10 years younger (e.g., friends, siblings, etc.). Your only option is to distribute the entire inherited IRA in 10 years. If the deceased owner was past their required beginning date, you will be required to distribute RMDs for your age. Practically, this will not matter to most people. Unless you are in your 80’s, your annual RMDs will not empty an account in ten years. Leaving a large distribution at the end of 10 years will be handing a fat, juicy medium rare tax haul to the government. The government will appreciate it, but you should try harder to (legally!) keep your money.

If you have reason to believe you will not survive for 10 years and want to pass the money on, you might prefer to remove just the minimum possible every year. If the account owner was not past their required beginning date, this is zero. Otherwise, it is the RMD based on your age. This will leave the largest possible balance to the person you choose as a beneficiary.

This section is for situations where sufficient funds are distributed from the IRA to have significant tax consequences. Your driving factor is getting money out of the IRA, and the tax consequences are a secondary concern. This would include situations such as having to purchase a house or land that was inherited by multiple siblings. Most siblings are not going to want to wait 30 years for their share of the inheritance. The tax consequences of removing $250,000 from an IRA could be significant for you.

The money has to come out, and there will be tax consequences. So, what are the tax consequences and what can be done about taxes?

• If you need the money for survival now, you can remove some or all the money immediately from an inherited IRA. Depending on you age, you might be penalized for distributions from a non-inherited IRA.
• For large distributions (e.g., house, car, etc.), your taxes may be much higher than using options that distribute smaller amounts annually.
• Distributions will be taxed at your highest ordinary income tax bracket (or raise it to a higher tax bracket)
• If the distribution is large relative to your income, you will need to pay quarterly estimated taxes or pay interest, in addition to the taxes due.
• You cannot spend all of the money; part of the money must be reserved for taxes. The amount you can spend is based on the highest tax bracket that the distributed money puts you in. You can use “Your Annual Income + Distribution Amount” to estimate the tax rates. For example, this person could only spend $7,100 from a balance of $10,000 because their federal tax rate is 24% and state tax rate is 5%.
        Balance × (100% – Federal Tax Rate – State Tax Rate)
      $10,000 × (100% – 24% – 5%)
      $10,000 × 71%
      $7,100
• If you do not take the entire balance in one distribution, expect to need more money than you distributed to pay taxes. Make sure this total does not exceed the balance of the IRA. You can use “Your Annual Income + Distribution Amount” to estimate the tax rates. For example, this person will need an additional $4,084 to pay taxes on a $10,000 distribution because their federal tax rate is 24% and state tax rate is 5%.
        Amount ÷ (100% – Federal Tax Rate – State Tax Rate))
        $10,000 ÷ (100% – 24% – 5%)
        $10,000 ÷ 71%
        $14,084
• If you only need one large distribution, you may be able to reduce taxes slightly by distributing the money you need in Oct – Dec. Quarterly estimated taxes are due by mid-January, so you can distribute and pay the tax portion early Jan the next year. This could lower your tax bracket and reduce taxes slightly because the tax distribution is taxed in another year. The tax distribution could cover all or a part of your RMD for the next year, too.

For example, person 1 and 2 make $50,000 per year and inherit a $500,000 Traditional IRA. Person 1 distributes $250,000 plus their additional taxes in one year to purchase a house from siblings. Person 2 distributes $250,000 in the 4th quarter of one year and taxes in the beginning of the next year. State income taxes are 5% in their state. Table 1 shows that person 1 paid about $153,500 in taxes over two years, and person 2 paid about $131,000 in taxes over two years. Both people paid more than 5x their normal taxes for the large withdrawal, but person 1 paid about $22,500 more in taxes than person 2. That would buy a new car (or at least a Kia). (Note: The tax calculation ignores the standard deduction and personal exemptions.)

Entry	Person 1 (year 1)	Person 1 (year2)	Person 2 (year 1)	Person 2 (year 2)
Wages	$50,000	$50,000	$50,000	$50,000
House Dist	$250,000	$0.00	$250,000	$0.00
Taxes Dist.	$136,000	$0.00	$0.00	$82,000
Income	$436,000	$50,000	$300,000	$132,000
Federal Tax	$123,000	$6,000	$75,500	$32,500
State Tax	$22,000	$2,500	$15,000	$8,000
Tax	$145,000	$8,500	$90,500	$40,500

This section is for trying to minimize the amount of money wasted on taxes. This includes the situation where the money is not needed, but it has to be removed within a shorter time span (i.e., 10-year rule or short life expectancy). This section can also be helpful when using the inherited IRA to supplement your income for the rest of your life.

• If you can distribute the money to an individual brokerage account without paying taxes, do that as fast as you can, especially if your federal plus state income tax is high. If it is more money than you need, you can live on what you need and invest the rest. If your combined income tax rates are low, this is less important.
• If your income is fairly constant every year (e.g., salary, pension, etc.), you usually pay the least taxes by taking roughly equal distributions over the distribution time (i.e., a life time or 10 years)
• If your income is variable (e.g., commissioned salesperson), you might be able to pay less taxes by taking larger distributions in lower income years.
• If you know your income is lower now than it will be in a few years (e.g., college student), you may want to take more our now and less out later.
• If you know your income is higher now than it will be in a few years (e.g., retirement), you may want to take out less now and more later.
• If you need to distribute more money than you plan to live on, you can try to compensate for the distributions by increasing your 401(k), Traditional IRA, or HSA contributions. This moves the money from one tax deferred location to another, but it effectively allows you to defer taking RMDs and paying taxes. This works best when you can distribute it later in life, when your income is lower (e.g., retirement).

For example, person 1 and 2 inherit a $600,000 Traditional IRA at 46 when they make $50,000 per year. The life expectancy factor from the Single Life Expectancy table is 40.0. They retire at 66 and receive social security payments totaling $17,000 per year. Their state has 5% income tax. Person 1 takes $20,000 per year, until the money runs out in 30 years. Person 2 takes RMDs until turning 66, then takes $30,000 per year, until the money runs out. The RMD is $600,000 ÷ 40.0 = $15,000, assuming no growth in the IRA. Table 2 shows the annual incomes and tax burdens of the two people before and after retirement. Person 1 pays $339,500 in taxes over 30 years, and person 2 pays $329,500 in taxes over 30 years. Person 1 made a donation to the government of a nice steak dinner for two every quarter for 30 years. (Note: The tax calculation ignores the standard deduction and personal exemptions.)

Entry	Person 1 (46-65)	Person 1 (66-75)	Person 2 (45-65)	Person 2 (66-75)
Wages	$50,000	$17,000	$50,000	$17,000
Distribution	$20,000	$20,000	$15,000	$30,000
Income	$70,000	$37,000	$65,000	$47,000
Federal Tax	$10,450	$4,200	$9,350	$5,400
State Tax	$3,500	$1,850	$3,250	$2,350
Tax	$13,950	$6,050	$12,600	$7,750

If you never expect to need the money or want to leave it to someone else, you can take the minimum possible distributions for life to pay less (or no) taxes and leave as much as possible to be inherited (again). The meaning of minimum is zero or RMD depending on whether RMDs are required. Zero distributions would only apply for not surviving to the year that funds have to be distributed for one of these three options – deferring distributions, rolling over to your IRA, or the 10-year rule (with no RMD).

In some ways, this is the best way to move the money out of the traditional IRA free of federal taxes. The state tax implications will vary by state. This option is also the least likely to be available. The Tax Cut and Jobs Act (TCJA) doubled the standard deduction and set the personal exemption to zero. This gives individuals slightly more tax free income to use for moving the money out of the inherited IRA without having to pay taxes. It may not be beneficial for larger families. Unfortunately, the TCJA sunsets after 2025, unless Congress renews it. With Republicans winning the 2024 election, it may be renewed.

Assuming:

• $8000 annual income
  • $7250 pension income
  • $250 interest income
  • $500 rent income
• Tax Cut and Jobs Act expires after 2025
  • $14,600 Standard Deduction for 2024
  • $15,000 Standard Deduction for 2025
  • $13650 Standard Deduction plus Personal Exemption for 2026+

In 2024, $6,600 (= $14,600 – $8000) could be moved out of the inherited IRA free of federal taxes. In 2025, $7,000 (= $15,000 – $8,000) could be moved. For 2026+, $5,650 (= $13,650 – $8000) could be moved. In reality, the standard deduction and personal exemption will increase with inflation. The 2026 value is used in the example in Table 3 for 2026+ instead of guessing at inflation.

Table 3 shows an example $25,000 inherited Traditional IRA distributing $37k in less than 10 years with about a 9.6% average return. The $37k should be federal tax free, but state tax will vary by state. The 9.6% return is in the neighborhood of the long term S&P 500 30-year average return. Since it takes less than 10 years to empty the account federal tax free, the actual return could be significantly more or less. If it is more, there may be a large lump-sum distribution at the end. If it is less, you will have the money in your own Individual Brokerage Account to keep growing. If the TCJA is renewed, the money can be moved faster. The specific values moved every year will vary based on the actual individuals income.

The amount of money that can be moved federal tax free every year is:

Distribution = (Standard Deduction + Personal Exemption) – Total Annual Income

If the value is zero or negative, no money can be moved free of federal taxes. Whether you can get it tax free or not, always take at least the annual RMD. If not, you will lose 50% of it to the federal penalty excise tax. If the funds in the inherited account are growing faster than you can distribute them tax free, try to stay within a lower tax bracket (e.g., up to $47,150 to pay 12% instead of 22%).

Year	Balance	Growth	Deductions	Distribution
2024	$25,000.00	27.95%	$14,600	$6,600.00
2025	$23,542.80	24.20%	$15,000	$7,000.00
2026	$20,546.16	24.68%	$13,650	$5,650.00
2027	$18,572.53	-5.71%	$13,650	$5,650.00
2028	$12,184.65	-0.08%	$13,650	$5,650.00
2029	$6,529.43	-7.90%	$13,650	$5,650.00
2030	$809.95	15.97%	$13,650	$809.95
2031	$0.00	10.49%	$13,650	$0.00
2032	$0.00	-12.49%	$13,650	$0.00
2033	$0.00	29.33%	$13,650	$0.00

The assumed $8,000 in annual income listed above is taxed at ordinary income tax rates. In 2024, I believe you could have another $47,000 in income taxed as long-term capital gains and still not have to pay federal taxes on the $6,600 distributed from the inherited Traditional IRA. This is due to capital gains being taxed at 0% for individuals up to $47,025 of income.

• $61,600 Income
  • $8,000 Ordinary (i.e., wages, interest, etc)
  • $47,000 Long-term Capital Gains
  • $6,600 Inherited Traditional IRA distribution (taxed as ordinary)
• $14,600 Standard Deduction
• $47,000 Adjusted Gross (Capital Gains) Income ($61,600 – $14,600)

Since the AGI is less than $47,025 and the standard deduction reduces ordinary income first, there should be no federal taxes. Even if the capital gains was greater than $47,000, the traditional IRA distribution is reduced to a 15% capital gains rate instead of the 22+% ordinary tax rate. It would be wise to validate this on a tax program or a tax estimation website on the internet before taking the distribution. The pre-TCJA capital gains may be calculated differently than the current TCJA calculation, so this may not be accurate starting in 2026.

The advantage of this mechanism is that it transfers the money out of the tax-deferred account with minimal to no taxes into an individual brokerage account. The individual brokerage account should average lower than ordinary taxes, since some of the money should be taxed at long-term capital gains rates. The disadvantage is that it requires estimating your income at the end of the year. If your estimate is wrong or there is no leftover standard deduction, you pay full ordinary taxes on the distribution.

If you have earned income, you can contribute to both a 401(k) and a traditional IRA. In 2024, the contribution limits are:

• 401(k)
  • $23,000, if under 50 years old
  • $30,500, if 50 years old or over (catch up contribution)
• Traditional IRA
  • $7,000, if under 50 years old
  • $8,000, if 50 years old or over (catch up contribution)

Contributing to a Traditional IRA is the easier solution. Assuming you contribute $300 per month into a Traditional IRA, you are contributing a total of $3,600 per year. The left over contribution limit is $3,400 (= $7,000 – $3,600), if under 50 years old, and $4,400 (= $8,000 – $3,600), if over 50 years old. Table 4 shows a $25,000 inherited Traditional IRA distributing almost $41k in less than 10 years with about a 9.6% average return. The $41k should be federal tax free, but state tax will vary by state. The 9.6% return is in the neighborhood of the long term S&P 500 30-year average return. Since it is only 10 years, the actual return could be significantly more or less. If it is more, there may be a large lump-sum distribution at the end. If it is less, you will have the money in your own Traditional IRA to keep growing.

The amount of money that can be moved federal tax free every year is:

Distribution = Annual IRA Limit – (12 x Monthly IRA Contribution)

If you are 50 years old or older, the “Annual IRA Limit” should be slightly higher due to catch-up contributions. If you calculated the distribution value as zero, you are fully funding your Traditional IRA, and you cannot use this to avoid paying federal taxes. If the value is negative, you are over contributing, and you should stop that. There are federal penalty taxes for over contributing to an IRA.

Year	Amount	Return	Distribution
2024	$25,000.00	27.95%	$4,400.00
2025	$26,358.30	24.20%	$4,400.00
2026	$27,272.10	24.68%	$4,400.00
2027	$28,516.62	-5.71%	$4,400.00
2028	$22,739.68	-0.08%	$4,400.00
2029	$18,324.66	-7.90%	$4,400.00
2030	$12,824.90	15.97%	$4,400.00
2031	$9,770.75	10.49%	$4,400.00
2032	$5,934.25	-12.49%	$4,400.00
2033	$1,342.67	29.33%	$1,342.67

Note: the Traditional IRA mechanism does not generate more income ($41k vs $37k) than the standard deduction mechanism. The growth of the money moved outside the inherited Traditional IRA is not shown in Table 3 or Table 4. Aside from tax differences in destination accounts, the total money outside the inherited traditional IRA should be similar, for identical investments, at the end of 10 years.

If the inherited traditional IRA grows too much, you might need to perform a similar action with your 401(k). The government limit is $23,000 for under 50 years old and $30,500 for over 50 years old. A 401(k) can absorb a lot more tax-deferred money, but it takes more preparation. The 401(k) contributions are periodic, and you may not be able to change the contribution amount arbitrarily. Unlike the Traditional IRA, you can not use a 401(k) at the last minute. If the inherited account seems to be growing too fast, you could increase your annual 401(k) contribution for the current or next year and live off of the inherited traditional IRA distribution while saving more of your income in your 401(k). Do not forget to change your 401(k) contribution back to what it was!

The disadvantage of this method is that it moves the money from one tax-deferred account to to another tax-deferred account. When it is distributed from your Traditional IRA or 401(k), the money will still be taxed at ordinary income tax rates. The advantage is that the money was not taxed now, when you are working and your taxes are (presumably) higher. If you need to use your 401(k) to move money federal tax free, it has the disadvantage of being a pain in the ass.

If your health insurance plan allows it, you can contribute the distribution of your inherited traditional IRA to an HSA, up to the annual HSA limit. This is only useful when you have an HSA compatible plan that you are not already fully funding. The limits are on the low side; in 2024, the limit is $4,150 for individuals. With the same example as Table 3 and Table 4, there would be a nearly full distribution of $4k in the last year. A little over $41k would be distributed into an HSA account in ten years with this method.

Year	Amount	Return	Distribution
2024	$25,000.00	27.95%	$4,150.00
2025	$26,677.58	24.20%	$4,150.00
2026	$27,979.25	24.68%	$4,150.00
2027	$29,710.31	-5.71%	$4,150.00
2028	$24,100.81	-0.08%	$4,150.00
2029	$19,934.85	-7.90%	$4,150.00
2030	$14,537.85	15.97%	$4,150.00
2031	$12,046.79	10.49%	$4,150.00
2032	$8,725.16	-12.49%	$4,150.00
2033	$4,003.72	29.33%	$4,003.72

This is one of the less advantageous ways to avoid paying federal taxes, but it is also state tax free for most states. If you have medical expenses, you can use the money to pay many medical expenses tax free. At 65, you can use the money for non-medical expenses, but you have to pay ordinary taxes. It also appears that you do not need earned income to fund it. It has the disadvantage that you have to stop contributing to your HSA six months before you retire or get Medicare Benefits. It also has fairly low contribution limits when compared to an IRA.

This situation is a bit more nebulous. Use this when:

• your ordinary income exceeds your standard deduction plus personal exemption
• you have no earned income
• your HSA is fully funded

The process for this is essentially the same as for the standard deduction method. The difference is that the goal is to try to distribute the money in the lowest ordinary tax bracket possible.

• The simplest method is to take substantially even distributions every year – 1/10 the first year, 1/9 the second year, etc.
• If there is more space at the current tax bracket, you can distribute more this year to avoid getting stuck paying more taxes because you have insufficient bracket space in a future year. This assumes that you are in a typical or low tax bracket this year or there is a pending tax change (e.g., TCJA expiring) that will raise tax rates.
• If your earnings are variable (e.g., commissioned sales person, retiring soon, graduating college soon), try to distribute more in years with low ordinary income.
• If you can move your earnings around, you can try to create a year with low earnings. For example, if you had short-term unrealized investment gains, you might delay selling them for a year to allow distributing the IRA at lower taxes. Delaying long-term capital gains is not useful for this due to the different tax tables.