Inherited a $500K IRA? Here's How to Cut Your Tax Bill
Tapping an inherited IRA for college costs sounds smart, but the tax rules are tricky. Here's what you need to know.
You just landed a $500,000 inherited IRA and your first instinct is to put it to work for your kids' college tuition. Smart thinking — but the IRS has opinions about that, and ignoring them will cost you.
Here's the core problem: inherited IRAs don't work like your own retirement account. You can't just let it sit and grow for decades anymore. Under the SECURE Act, most non-spouse beneficiaries are locked into a 10-year drawdown rule, meaning the entire account must be emptied within a decade of the original owner's death. Every dollar you pull out gets added to your ordinary income for that year — and on a $500,000 account, that tax hit can be brutal if you're not strategic about timing your withdrawals.
Read more Why the Fed's Rate Decision Today Matters at Every Age →
Now, can you use those withdrawn funds for education? Absolutely — there's nothing stopping you from writing a tuition check once the money lands in your bank account. The key distinction is that the 10% early-withdrawal penalty that normally hammers retirement savers under age 59½ does NOT apply to inherited IRAs regardless of your age. That's actually a rare win. But the income tax on the distribution? That's unavoidable, full stop.
The smart play is to spread withdrawals across all 10 years rather than front-loading or back-loading them. If you pull too much in one year, you could rocket into a higher tax bracket and lose a chunk to Uncle Sam that proper planning would have saved. Coordinate with your financial advisor to model out which years your income will be lowest — those are your windows to take bigger distributions without getting crushed on the tax side.
Bottom line: you can absolutely fund your three kids' education with an inherited IRA, but the tax drag is real and the clock is ticking. Plan the withdrawals deliberately, not reactively. Continue reading at MarketWatch.com
