Did You Inherit an IRA Recently? Here's How to Reduce Your Tax Bill!

Just inherited a traditional IRA and dreading the 10‑year payout rule? Episode 17 of The Perfect Retirement Plan? podcast shows you how to shrink that looming tax bill instead of sacrificing your windfall. 

Phillip Smith, Marine‑turned‑financial‑planner at Tidepool Wealth Strategies, unpacks the SECURE Act’s 10‑Year Rule, then introduces his IRA‑to‑401(k) Conduit strategy, a tax-efficient retirement planning strategy used to offset taxable inherited‑IRA withdrawals with boosted pre‑tax 401(k) contributions. You’ll hear a clear step‑by‑step example, learn how to avoid bracket creep, discover why HSA contributions add an extra tax shield, and spot common pitfalls people close to retirement face when inheritances collide with peak earnings. Whether you’re 55, 60, or a high‑income Gen X executor, this episode delivers practical, tax‑savvy tactics to keep more of your legacy working toward retirement goals. 

Hit play to better understand inherited‑IRA distribution planning, Roth conversion timing, 401(k) contribution limits, and proactive tax management. Then subscribe and ring the bell so you never miss new insights on retirement income, Social Security optimization, Medicare costs, and investment strategy. Know someone whose about to retire and Googling “avoid taxes on inherited IRA?” This episode may offer some help!

#InheritedIRA #RetirementPlanning #TaxPlanning #Retirement Advice #TaxesInRetirement #RetirementStrategies

Thanks for tuning in to this episode of The Perfect Retirement Plan, and remember: it's not about having the smartest financial advisor, the most money saved, or the highest probability of retirement success. The perfect retirement plan, for you – is the one you act on.

Phillip Smith, CRPC AIF |  Financial Planner
Tidepool Wealth Strategies
450 Country Club Road, Suite 350 | Eugene, OR | 97401

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Additional Disclosures: 
The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Wealth Services, LLC cannot guarantee or represent that it is accurate or complete.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. 

Transcript

Episode 17: "Inherited an IRA? Here’s how to reduce that massive tax bill”

Outline:

1. Introduction
2. Roadmap for the Episode
3. Understanding the 10-Year Rule: Why It Matters
4. The IRA-to-401(k) Conduit: How to Move the Money
5. A Step-by-Step Example
6. Key Benefits of This Strategy
7. Common Pitfalls to Avoid
8. Action Steps
9. Closing

Script:

[Introduction] 

“Hi, I’m Phillip Smith, financial planner with Tidepool Wealth Strategies, dedicated to helping late-career professionals navigate the tides of retirement planning with clarity and confidence. This is your retirement planning guide to money management, pursuit of long-term financial growth, and creating an adaptive strategy tailored to your unique and evolving journey. In every episode, I’ll share concise, actionable insights to help you plan a retirement of purpose, resilience, and confidence. Welcome to The Perfect Retirement Plan?.”

 [Main Content]

Hey, thanks for joining me for this episode! I’m Phillip, and today we’ll start with a little exercise.

Picture this: you get a call from your late uncle’s attorney. He’s left you a sizable IRA, let’s say $150,000. You feel grateful, of course, but then reality kicks in. You remember hearing something about a 10-year rule. You start Googling. And that’s when the panic sets in: ‘Wait…I have to empty this entire account within 10 years? And pay taxes on all of it?’ There’s panic because, if you’re like the millions of late-career professionals out there, you’re at a point in your life where you’re earning more than any other point in your career, and potentially paying more than you’ll ever have to again in taxes.

I’ve seen this exact scenario play out with clients. They inherit an IRA from a parent, sibling, or relative, and suddenly they’re staring down an unexpected increase in an already massive tax bill – especially if they’re still working. 

Cache: "Right, because nothing says ‘congratulations on your inheritance’ like a forced tax headache from Uncle Sam."

Exactly. But here’s the thing: most people don’t realize there’s a simple strategy that can neutralize the tax impact of an inherited IRA. If you do this right, you can move the money from one tax-advantaged account to another and avoid giving the IRS more than necessary. 

Don’t get me wrong, an inheritance is a blessing. BUT wouldn’t you prefer to keep as much of what was left to you as possible, if possible? That’s what we’re covering today: how to take an inherited IRA and make it work for you, instead of against you.

[Roadmap for the Episode]

So here’s what we’ll break down today. First, we’ll go over the 10-year rule - what it is, why it exists, and why so many people get caught off guard by it. Then, I’ll explain a strategy I call the ‘IRA-to-401(k) Conduit,’ which can help you move this money without a major tax hit. Finally, we’ll go through a step-by-step example so you can see exactly how this works in practice.

If you’ve inherited an IRA or think you might someday, this is an episode you don’t want to miss.

[Understanding the 10-Year Rule: Why It Matters]

So, let’s start with some basics. When you inherit an IRA from someone who isn’t your spouse, the IRS gives you 10 years to empty the account. That means by the end of year 10, every dollar must be withdrawn. If you haven’t done it by then, Uncle Sam will force you to take out the full amount, and you’ll owe taxes on all of it in that single year.

And here’s where it gets messy: If you’re in your peak earning years, say, late 40s or 50s, you might already be in a high tax bracket. Adding a chunk of taxable income from an inherited IRA? That’s a recipe for a huge tax spike.

Cache: "So, basically, if you wait until year 10, you might as well set aside a large part of your inheritance to hand straight to the IRS."

Yep. And a lot of people make this mistake. They don’t take any withdrawals in the first few years, thinking they’re delaying taxes, only to get slammed later. And that’s where something like the IRA-to-401(k) conduit strategy comes in.

Cache: “The IRA-to-401(k) Conduit: How to Move the Money With No Tax Impact”

Now, here’s the good news: If you’re still working and haven’t maxed out your 401(k) contributions, there’s a way to take those inherited IRA withdrawals without feeling the tax pain.

It works like this: Instead of taking a lump sum and paying taxes on it, you take smaller annual withdrawals from the inherited IRA and immediately increase your 401(k) contributions by the exact same amount. The goal? Offset the extra taxable income from the IRA withdrawal by reducing your taxable paycheck through increased 401(k) deductions.

Think of it like moving money from one piggy bank to another – except instead of paying taxes now, you delay them until retirement, when you can manage withdrawals more strategically.

To be clear on this, you’d still withhold taxes from your IRA distributions. But, if you’re paying attention, what you’ll see is that you pay less in taxes from your earnings, as detailed in your paystub or reported on your W-2.

[A Step-by-Step Example]

Let’s break it down with numbers. Using the amount we opened the podcast with, let’s say you inherited a traditional IRA with a balance of $150,000. You’re in your mid-to-late 50s, still working, and making good money. Without a plan, you’d be forced to withdraw the full $150,000 – we’re not even accounting for any growth – by year 10. 

But instead of waiting, you decide to spread it out evenly, taking $15,000 per year – or about 10% annually – from the inherited IRA.

If you just take the distributions, you’d owe taxes on an extra $15,000 of income. Maybe that means the difference between living in the 12% and the 22% marginal tax bracket, or moving from the 22% to the 24% - or making the lead from 24% to 32%.

But here’s the trick: if you haven’t maxed out your 401(k) contributions, then you increase your 401(k) contributions by the same $15,000 per year. Now, that money moves from your inherited IRA to your bank account, and you increase your 401(k) contributions for the year by the same amount. And, because 401(k) contributions are tax-deductible, your taxable income stays exactly the same.

Okay, real numbers. Your household income is $200,000 – near the top of the 22% Federal tax rate if you’re married filing joint. You take out $15,000 from the IRA, withholding 22% for Federal taxes – and whatever state income tax that applies where you live. Without the 401(k) contribution increase, your taxable income is now $215,000. 

However, if you increase your 401(k) contribution by a total of $15,000 for the rest of the year, then your taxable income is still $200,000 – not $215,000.

If you’ve maxed the 401(k), then my next recommendation is usually for clients to leverage an HSA, if they have access to one and if it makes sense with regard to their typical medical needs and expenses. HSA contributions through an employer are even more tax efficient, because in addition to reducing your Federal and state taxes each payroll period, they also reduce your FICA tax, which is an additional tax reduction of about 7.6%.

The result is zero additional taxes owed on the required IRA distribution. You’ve effectively transferred the money instead of cashing it out.

Cache: "So you’re basically dodging the tax hit while keeping the money working for your future. Why isn’t this common knowledge?"

It’s a good question. But you’re not exactly dodging the tax hit. You’re simply continuing to defer it until a later date – essentially buying yourself a longer timeline than the 10-year period. A lot of people just don’t think about offsetting taxable income this way. They assume taxes on inherited IRAs are unavoidable. This method allows you to keep control over when and how you pay taxes, which is key to smart retirement planning.

All of this having been said, I’m still very much in the pro-Roth camp of “eat taxes today and enjoy tax-free income tomorrow,” but how that can be applied to someone inheriting an IRA is a more nuanced and detailed discussion.

[Key Benefits of This Strategy]

So, just to recap, here’s why this strategy works so well:

1. You avoid a tax hit today. By using pre-tax 401(k) contributions to offset taxable IRA withdrawals, you effectively neutralize the tax impact.
2. Your money stays invested for longer. Instead of withdrawing and spending it, you’re rolling it forward into another tax-advantaged retirement account.
3. You control your tax burden in retirement. The money in your 401(k) isn’t taxed until you decide to take it out, giving you more control over your future tax rates.

This is especially powerful for people in their peak earning years because it helps to prevent an unnecessary jump into higher tax brackets.

Cache: “I assume there are Common Pitfalls to Avoid?”

Of course. Like any strategy, there are a few things to watch out for.

First, this only works if you haven’t maxed out your 401(k) contributions yet. If you’re already at the IRS limit, you don’t have room to offset income this way.

Second, you have to be consistent. If you take $15,000 from your IRA but only increase your 401(k) contributions by $5,000, you’re still going to owe tax on the difference. The numbers have to match up for the strategy to be fully effective.

And third, if you’re close to Required Minimum Distributions age, this may not be the best approach, since you’ll be forced to start taking money out later anyway.

Hopefully you find this helpful as you plan for your own financial future.

Next, let’s take some action on this. If you’ve inherited an IRA, or you think you might in the future, don’t let taxes eat up more than they have to. Here’s what to do next:

1. Check your 401(k) contribution limits. If you have room to contribute more, this strategy could work for you.
2. Run the numbers. Figure out how much you’d need to withdraw each year to spread out the tax impact.
3. Talk to a financial planner and/or your tax pro. Every situation is different, and having a tax-aware strategy can make a huge difference.

Taxes don’t have to be a shock. With a little planning, you can keep more of your money working for your future.

(Conclusion)

Until next time, remember: it’s not about having the smallest tax bill, the smartest financial advisor, the most money saved, or the highest probability of retirement success. The perfect retirement plan for you is the one you act on!

[Disclosure clip]

It’s disclosure time! This podcast is intended for educational purposes only and should not be used for any other purpose. The views depicted in this material should not be considered specific advice or recommendations for any individual, are not intended to be financial, tax, or legal advice and are not representative of Tidepool Wealth Strategies or Cetera Advisor Networks LLC. For a comprehensive review of your personal situation, always consult with a financial, tax or legal advisor. Neither Cetera nor any of its representatives may give legal or tax advice. 

Our office address is 450 Country Club Road Suite 350 Eugene Oregon 97401. Securities and advisory services are offered through Cetera Advisor Networks LLC, a broker-dealer and registered investment adviser, and member of FINRA and the S I P C. Cetera is under separate ownership from any other named entity.