How an Inheritance Changes Your Retirement Plan (and Your Tax Plan)

Takeaways

• For most adult children who inherit a parent’s IRA, the account has to be emptied within 10 years, so for many heirs the extra taxable income lands in the years before their own RMDs start.
• Only a spouse can generally roll an inherited IRA into their own and fold it into their own RMD schedule. For everyone else, inherited withdrawals never count toward your own RMDs.
• Inherited cash can pay the tax on a Roth conversion so the full converted amount lands in the Roth. An inherited taxable account with a stepped-up basis may be a tax-efficient source of that cash.
• A large inherited IRA withdrawal at 63 can raise your Medicare premiums at 65, because IRMAA looks back two years.
• Inherited IRA withdrawals and Roth conversions compete for the same low-bracket years, so deciding which goes first is a sequencing call worth making with your full financial picture in view.

Most people expect an inheritance to make retirement simpler. For the first few years, it often does the opposite. It can open up options, and it can also hand you a tax decision you didn’t ask for, usually at a moment when taxes are the last thing you want to think about. That’s why inheritance and retirement planning work best as one conversation.

The goal is to fold the inheritance into your long-term plan on purpose, so the tax rules don’t end up making the decisions for you.

Spouse or non-spouse: which inherited IRA rules apply to you

Before anything else, it helps to know which set of rules applies to you.

If you inherit an IRA from your spouse, you can generally treat it as your own. Roll it into your IRA and it follows your RMD schedule, which starts at age 73 or 75 depending on your birth year. That’s the one case where an inherited account blends into your own required minimum distributions. We cover the spousal options in more detail in what to know when you inherit an IRA from a spouse.

Most other heirs, including adult children, are non-spouse designated beneficiaries who fall under the 10-year rule: the account must be fully distributed by the end of the tenth year after the year the original account owner died. What else applies depends on when the owner died. If the owner died before their required beginning date (RBD), the date by which their own RMDs had to begin, a designated beneficiary generally doesn’t have to take annual withdrawals in years one through nine and can choose the timing within the 10-year window. If the owner died on or after their RBD, the beneficiary generally must also take an annual RMD in years one through nine. Eligible designated beneficiaries, including the owner’s minor children and heirs who are disabled, chronically ill or not more than 10 years younger than the owner, may have other options. Different rules can also apply when the beneficiary is an estate or certain trusts. Because these rules depend on the facts, it’s worth confirming which ones apply to you before you set a withdrawal schedule.

Two details catch people off guard. First, a withdrawal from an inherited IRA can’t satisfy the RMD on your own IRA, or the other way around. Second, timing. If you inherit in your 50s, the 10-year clock will usually run out before your own RMDs begin. That account won’t inflate your RMDs in your 70s, but it will add to your taxable income in the years in between.

Inheritance and retirement planning: 3 ways to put the money to work

Inheritance rarely comes with instructions. Spend it, save it, convert it, reinvest it: every option has a tax consequence, and the easiest choice is to do nothing for a while. Doing nothing is still a decision, and with a 10-year clock running on an inherited IRA, it’s rarely a neutral one.

An inheritance can also pay for strategies you couldn’t fund before. Several of the better tax moves in retirement planning need cash up front, and an inheritance can be that cash. Here are three worth considering.

1. Use the inheritance to fund Roth strategies

One way to turn a windfall into long-term value is to let it cover living expenses while more of your paycheck goes into after-tax 401(k) contributions, which can then be converted to Roth. This is the mega backdoor Roth, but it only works if your employer’s plan allows after-tax contributions plus either in-plan Roth conversions or in-service withdrawals.

There’s a version that may be available to anyone with a pretax IRA: using inherited cash to pay the tax on a Roth conversion. In a simplified hypothetical example, if $100,000 is distributed from a pretax IRA for conversion and $20,000 is instead withheld for federal taxes, $80,000 would be converted to the Roth. If the $20,000 tax is paid from cash held outside the IRA, the full $100,000 could be converted. Depending on the taxpayer’s circumstances, amounts withheld and not converted may also have additional tax consequences, including a potential 10% additional tax for taxpayers under age 59½. Your actual tax on a conversion depends on your other income that year, so the numbers will vary. The example is illustrative only and leaves out state taxes. It assumes current federal rules and doesn’t predict how a Roth account will perform.

An inherited taxable account may be a natural source for that cash. Many inherited investments receive a basis adjustment to fair market value at death under federal tax rules. Depending on the asset, estate structure, jurisdiction and subsequent price movement, selling shortly after inheritance may result in relatively little taxable capital gain.

Thinking through how an inheritance fits into your retirement and tax plan? Let’s talk about your complete financial picture. Schedule a complimentary intro call.

2. Integrate inherited assets into your full portfolio

Many people keep inherited accounts off to the side, as if they’re separate from the main plan. I hear some version of this in almost every inheritance conversation I have: “It’s her money. I’m just looking after it.” That instinct makes sense. Along with the money, though, you’ve inherited the job of managing it, and that job is hard to do well from the sidelines.

An asset is an asset, wherever it came from. Removing artificial barriers between parts of your portfolio gives you more room to rebalance and to reduce concentration risk. That matters most when an inheritance includes a single stock that suddenly makes up a large share of everything you own.

3. Revisit your retirement timing

New assets may give you more control over when you step back from work. Here’s a concrete example: withdrawals from an inherited IRA carry no 10% early-withdrawal penalty, regardless of your age. If you’re retiring before 59½, an inherited IRA can serve as a penalty-free bridge until your own retirement accounts open up. You’ll still owe income tax on what you take out, so the bridge works best inside a multi-year tax plan. (We cover more of this in planning for early retirement.)

It’s also a good moment to revisit what you want your retirement to look like, and to check that your plan still reflects it.

How inherited IRA income complicates the drawdown years

In retirement, the job shifts from growing your assets to drawing them down efficiently. That already means juggling tax brackets and account types against your RMD and Social Security timing. Inherited pretax accounts add another stream of taxable income that has to fit into those same years.

Here’s what can happen without a plan:

• Bigger RMDs, if you inherited from a spouse. A spousal rollover adds to the balance your own RMDs are calculated on. For non-spouse heirs, the 10-year clock usually empties the account before your own RMDs begin, so the pressure shows up earlier, in the years you’re drawing it down.
• Higher Medicare premiums (IRMAA). Medicare’s income-related surcharge uses your tax return from two years earlier. A large inherited IRA withdrawal at 63 can lead to higher Medicare premiums at 65.
• More of your Social Security gets taxed. Up to 85% of your benefits can become taxable as other income rises, and inherited IRA withdrawals count as other income.
• Fewer low-bracket years. Inherited IRA withdrawals use up room in the lower brackets, which leaves less of it for anything else you’d want to do in those years, like Roth conversions.
• A smaller senior deduction. The 2025 tax law added a temporary deduction of up to $6,000 for people 65 and older, available for 2025 through 2028. It phases out as income rises, starting at $75,000 of modified adjusted gross income for single filers and $150,000 for joint filers. Inherited IRA income can quietly phase it out. (More on the 2025 tax law.)

Each of these can happen with or without an inheritance. An unplanned windfall can make all of them bigger.

Questions about how an inheritance fits into your financial plan? Book an intro call with a Brighton Jones advisor.

Tax-efficient withdrawal plans for an inherited IRA

The order and timing of your withdrawals play a major role in your lifetime tax bill. Which account you draw from, and when, decides how far your money goes and how much control you keep over taxes as laws and income sources change. Here’s how that plays out with an inherited IRA.

A hypothetical example. Consider a 62-year-old who has just retired and inherited a $700,000 traditional IRA from a parent. Social Security and Medicare are both a few years away, and the inherited IRA is on a 10-year clock.

A common instinct is to leave the inherited IRA alone and let it grow. It feels conservative. The catch is that the clock doesn’t stop. Whatever is left in year 10 has to come out, and growth makes that final withdrawal bigger. It lands all at once, probably after Social Security has started and in a year that also sets future Medicare premiums.

Meanwhile, the years between retirement and Social Security are often the lowest-income years this person will have. That makes them prime space for two things: inherited IRA withdrawals and Roth conversions of their own pretax savings. Both compete for the same low-bracket room, and that room isn’t unlimited. Using it for inherited withdrawals can spread that tax bill out. Using it for conversions can shrink future RMDs. Deciding which gets the room first, and how much each gets, is exactly the kind of sequencing decision a Personal CFO team can help with.

This example assumes the parent died before their required beginning date (RBD), so no annual minimum applies in years one through nine. If the parent had died on or after their RBD, annual withdrawals would generally be required in years one through nine, which takes some flexibility off the table. This simplified hypothetical is for general educational purposes. Actual results will vary with individual circumstances, and they will depend on future tax law and investment returns.

One note on inherited Roth dollars: they follow the same 10-year clock, but with no annual withdrawals required and no tax on qualified withdrawals. Many heirs choose to let an inherited Roth grow and take it near the end of year 10, though that depends on whether they need the money sooner.

A more intentional withdrawal plan draws modest amounts from pretax accounts in the early years of retirement and covers the rest of your spending from taxable accounts. Depending on your circumstances, this approach may help spread taxable income more evenly over time and reduce future RMDs.

Lower-income years, like the ones before Social Security starts, can also be a lower-tax window for partial Roth conversions. Converted dollars can then grow in the Roth, and qualified withdrawals come out tax-free. Conversions can also shrink future forced withdrawals. In effect, you trade an uncertain future tax bill for a known one now.

Turning a windfall into long-term clarity plus control

An inheritance is worth more when it’s part of your bigger financial picture. Coordinating it with your Roth strategy and your Social Security timing is the kind of work our Personal CFO approach is built around, so each decision gets made alongside everything else on your balance sheet.

It’s also worth remembering that this money usually arrives with a loss attached. Outside the deadlines that come with the accounts, there’s rarely a reason to make every decision in the first few months. Giving yourself time, with a plan around the dates that do matter, can lead to better choices.

Ready to explore how an inheritance fits into your complete financial picture? Our Personal CFO approach helps you align your money with what matters most. Schedule your complimentary intro call.

Frequently asked questions

Does an inherited IRA count toward my own RMDs?

No, unless you inherited it from your spouse and rolled it into your own IRA. Inherited IRA withdrawals and your own RMDs are tracked separately, and a withdrawal from one can’t satisfy the requirement on the other. For non-spouse heirs, the 10-year rule usually decides how fast the inherited account has to be emptied.

Is there a penalty for withdrawing from an inherited IRA before 59½?

No. Withdrawals from an inherited IRA are exempt from the 10% early-withdrawal penalty regardless of your age. You still owe ordinary income tax on withdrawals from a traditional inherited IRA, so timing matters for your bracket. A spouse who rolls the account into their own IRA gives up this exception.

How does the 10-year rule work for an inherited IRA?

Most non-spouse designated beneficiaries must empty an inherited IRA by the end of the tenth year after the year the original account owner died. If the owner died on or after their required beginning date, annual RMDs are generally also required in years one through nine. If not, you can generally choose your own withdrawal schedule within the 10 years.

Can an inherited IRA withdrawal raise my Medicare premiums?

Yes. Medicare’s income-related surcharges, known as IRMAA, are based on your tax return from two years earlier. A large inherited IRA withdrawal at 63 can raise your premiums at 65, so it helps to plan withdrawals with that two-year lookback in mind.

Should I use inherited money to pay the tax on a Roth conversion?

It’s an option worth evaluating. Paying conversion tax from outside the IRA lets the full converted amount go into the Roth, and an inherited taxable account with a stepped-up basis may be a tax-efficient source for that cash. Whether it fits depends on your tax bracket now compared with later in retirement.

About the Author: Dan Moore is an advisor at Brighton Jones who helps clients fold major life changes, including an inheritance, into their retirement income and tax planning.

Standard Disclosure: Please remember that past performance may not be indicative of future results. Different types of investments entail varying degrees of risk. Brighton Jones, LLC is neither a law firm nor a certified public accounting firm, and no portion of the blog content should be construed as legal or accounting advice. To the extent that you have any questions regarding the applicability of any particular issue discussed above to your individual situation, you are urged to consult with the professional advisor of your choosing.