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 the situation: her father passed away in 2024, she was the sole non-spouse beneficiary of his 401(k), and the balance sat at roughly $900,000. She is 55, still working, and her plan was simple. Let it grow. Take it all in year 10. Pay the taxes then.

That plan will cost her somewhere between $150,000 and $250,000 in 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. The full balance, whatever it has grown to, comes out by the end of year ten.

Every dollar withdrawn from a traditional inherited 401(k) counts as ordinary income in the year taken. There is no capital gains treatment, no step-up in basis, no stretch over a lifetime. The 10-year window is the entire runway.

What Compounding Does to the Bill

Assume the $900,000 balance earns a middle-of-the-road 6% per year while the beneficiary sits on it. By the end of year 10, that account is worth roughly $1.61 million. Taking it all as one distribution in year 10 stacks $1.61 million on top of her existing salary.

For a single filer in 2026, the 37% bracket kicks in 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 into the 37% bracket and drags the middle chunks through 32% and 35%. The blended federal tax on the distribution alone lands somewhere near 32% to 33%, or roughly $520,000.

The Level-Distribution Alternative

Now spread the distributions evenly. Take about $120,000 per year for 10 years (the number rises modestly as the remaining balance grows). Layered on a $90,000 salary, total taxable income sits around $210,000. That keeps almost every dollar of the inherited money inside the 24% bracket, which runs up to $201,775 for single filers in 2026, with only a 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 the privilege of procrastinating. If she is in a high-tax state like California or New York, add another $80,000 to $120,000 on top.

The Second-Order Costs Nobody Mentions

Retiring before year 10 makes the bomb worse. If the beneficiary is 65 or older when the year-10 distribution hits, that $1.6 million spike also causes up to 85% of Social Security benefits to be taxed and triggers IRMAA Medicare premium surcharges of $400-plus per month two years later. A single lump-sum year can add $5,000 to $9,000 in Medicare surcharges alone.

The 10-year Treasury at 4.69% also changes the calculus. The “let it compound” argument only works if the after-tax return inside the inherited account materially beats the after-tax return of taking the money out, paying tax at a lower bracket, and reinvesting in a taxable account. At current yields, the gap is narrow.

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 much 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 now triggers a 25% excise tax under SECURE 2.0, reducible to 10% if corrected promptly.

The 10-year rule is a countdown clock with a tax bill attached. The beneficiaries who spread the distributions keep the money. The ones who wait until year 10 fund the Treasury.

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