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Ask an Advisor: My Dad Left Me $200k in an IRA, but I’m in the 35% Tax Bracket. How Should I Structure My Withdrawals?


I was left $200,000 in an IRA Beneficiary Distribution Account (BDA) when my father passed. I have 10 years to withdraw this money. I’m at the 35% federal tax rate currently and plan to make a similar annual income over the next 10 years. Taking the money out in one lump sum would not change my federal tax rate but neither would taking it out over 10 years. Is there a benefit to keeping this money in the IRA vs. withdrawing now, paying the taxes and then using it to invest in other financial instruments?

– Brad

At first blush, it may seem like the answer would be to withdraw it all now. The logic is that it would be better to have the compound growth occur in an environment in which the long-term capital gains tax rate would apply instead of ordinary income taxes. This is often the case when you expect your marginal tax rate to change. I don’t think this applies in your case since you anticipate being in the 35% tax bracket going forward.

Leaving the money invested in the IRA, on the other hand, can reduce tax drag and potentially leave you with more money at the end of 10 years. But like so much in financial planning, the answer to your question may depend on whether tax laws change in the future. (And if you need more help exploring questions like this one, consider working with a financial advisor.)

Evaluating Your Options

A man considers how to structure the withdrawals from an IRA he inherited.

To evaluate the two approaches, we’ll want to compare the after-tax value of the $200,000 at the end of 10 years in both scenarios. We can do this by comparing the extreme ends: withdrawing it all now or all of it at the end of 10 years. If either outcome is better – and we hold the same assumptions (return, taxes) constant over the 10-year periods – a variation of either option would produce a similar result, just to a lesser degree.

A range of withdrawal options may be available to you depending on whether or not your dad had already begun taking required minimum distributions (RMDs). If he had, be mindful that you are likely subject to an annual RMD requirement as well unless you meet one of the exceptions.

So, let’s get started.

Measuring the Outcomes

First, we need to understand how much you would have to invest in each scenario. If you withdraw $200,000 and 35% goes to taxes, you’re left with $130,000 to reinvest. Of course, if you just leave it in the inherited IRA, all $200,000 remains invested.

Next, we need to project how much the money is expected to grow over the next 10 years. We can pick any random annual return to use as long as we use the same for each. I picked 10% simply because it’s a round number. 

In the first scenario, $130,000 would grow to about $337,000 in 10 years, assuming a 10% annual rate of return. On the other hand, leaving the $200,000 in the IRA and seeing it grow 10% per year would leave you with approximately $519,000 before taxes.

Lastly, we must calculate the after-tax value of the money in each scenario.

Since you would have already paid taxes on the original $200,000 withdrawal in the first scenario, we’ll just have to calculate the capital gains tax you’d pay on the investment earnings. If we simplistically and generously assume the $207,000 gain from the first scenario is treated entirely as a long-term capital gain, you’d owe about $41,000 in taxes when you withdraw the money in 10 years. That would leave you with about $296,000, including the $130,000 principal. I used the 20% long-term capital rate here, although some of it may only be subject to the 15% rate (Even if all of it were, it wouldn’t change the outcome.)

In the second scenario, withdrawing $519,000 at the end of the 10 years would mean paying a 35% income tax on the entire balance, leaving you with $337,000 – $40,000 more than scenario 1.

Purely from a tax perspective, there may be cause for leaving it in the IRA for 10 years. (And if you need help running the numbers to answer similar questions, consider matching with a financial advisor.)

Leave It in the IRA?

A financial advisor shakes hands with clients whom he's helping manage an inherited IRA.

Not necessarily. You always want to think about how a certain approach fits within your overall financial plan. You also may want to consider possible variations to the assumptions we made in the above scenarios. Examples of such variations might include:

  • Your returns in each scenario may not be the same. There will likely be some tax drag on the money invested outside of the IRA. Of course, you may also have the opportunity to harvest losses.
  • Tax rates may go up in the future. You might decide to leave the money in the IRA only to find out that you’re in some new 70% tax bracket 10 years from now. You’d also have to consider how capital gains taxes might change.
  • Your tax situation could change. You might change jobs, face a layoff or go through some other experience that causes your income to drop, and with it, your tax rate to change.

The point here isn’t to introduce unnecessary complexity. Instead, I’m pointing out that regardless of what the numbers on the spreadsheet say, circumstances might change. You have to decide how you want to handle those prospects. (And if you need a financial advisor to walk you through, this tool can help you match with one.)

Bottom Line

Tax-advantaged accounts like an IRA Beneficiary Distribution Account provide some clear benefits for long-term savings. The best way to use them can vary and depend on individual circumstances. This includes current and future tax rates, but also preferences and assumptions about your income needs in the future.

Tips for Finding a Financial Advisor

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Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email and your question may be answered in a future column.

Please note that Brandon is not a participant in the SmartAdvisor Match platform, and he has been compensated for this article. Questions may be edited for clarity or length.

Photo credit: © Mitchell, © Mitchell