Dear Penny: Can I Withdraw a Lump Sum From My Late Wife’s IRA and Avoid Taxes?

Dear Living,

A beneficiary of a retirement account has to report distributions from the account as part of their gross income in the same way the original account owner would have done.

Assuming your wife had reached the age where she had to take a required minimum distribution (RMD) from the account, your distribution amounts are also subject to that requirement. (This has changed for folks whose spouse died in 2020 or later; they have the additional option of rolling over the inherited account into their own IRA.) You’ll receive a required minimum distribution (usually quarterly, as you do) based on your life expectancy, or more if you choose a higher distribution, and you have to report that amount as gross income for the year.

You also have the option to take a lump-sum distribution from the account anytime, and you have to include that amount in your gross income for tax purposes in the year you withdraw it.

You don’t owe tax on the distributions if this is a Roth IRA, because your wife would have been paying taxes on her contributions up front. You owe tax on withdrawals from a traditional IRA, because contributions would have been tax free when your wife made them.

Taxes are owed on retirement account contributions because those distributions are income similar to any other income you earn. You can’t legally evade these taxes entirely.

You can review the tax brackets for 2024 to get an idea of how much you’d owe if you take a lump sum distribution this year (alongside any other income you’ll claim). Tax rates for an individual include:

• Taxable income up to $11,600: 10%
• Up to $47,150: 12%
• Up to $100,150: 22%
• Up to $191,950: 24%
• Up to $243,725: 32%
• Up to $609,350: 35%
• More than $609,350: 37%

You can speak with a financial advisor to determine the most advantageous way to receive your distributions. For example, some people take a lump sum distribution and pay a higher percentage in taxes for a single year, then have no income and therefore owe nothing in following years. That might help you keep a larger portion of the inheritance in the long term.

If you receive a lump sum and face a large tax bill, you can set aside a portion of your distribution to cover the tax. Or you can use an IRS payment plan to spread your payments out over several months or even several years.

Dana Miranda is a Certified Educator in Personal Finance®, author, speaker and personal finance journalist. She writes Healthy Rich, a newsletter about how capitalism impacts the ways we think, teach and talk about money.