Have an Inherited IRA? Here’s Your Guide to Making the Necessary Withdrawal Strategies for Your Account

When you inherit an IRA, it’s more than just a financial embarrassment, it’s a responsibility. The rules governing inherited IRAs are complex and can have a big impact on how much you end up getting after taxes, as well as how you manage your money over the long term. Whether you’re navigating the new SECURE Act regulations, balancing tax considerations, or planning for your retirement goals, having a thoughtful retirement plan is essential.

This article will guide you through the key factors to consider when taking distributions from an inherited IRA, ensuring you make the most of your inheritance while avoiding costly mistakes. Let’s break it down step by step, so you can align your decisions with your financial goals and obligations.

Rules for Distributing Your IRA Through an Inheritance

The distribution rules for inherited IRAs depend on several factors, including:

• Your relationship with the original account holder
• Whether it’s a Roth or a traditional IRA
• Whether your beneficiary passed before or after 2020 (due to changes introduced by the PROTECT Act)
• Whether or not the original account owner had already started taking Required Minimum Distributions (RMDs).

When you model your earned IRA in the Boldin Retirement Planner, you’ll see the distribution rules that should apply to your account. Understanding the rules is important to avoid penalties.

An inherited IRA may be subject to required annual distributions and/or a 10-year distribution period. And, while a 10-year distribution period may sound like a highway to tax-deferred growth, delaying distributions until year 10 has the potential to push you into a higher tax bracket and increase your tax bill.

Avoiding Penalties on Your Inherited IRA

Yu will want to follow the distribution requirements that apply to your account. Failure to do so can result in significant penalties (typically 25% of the missed distribution amount).

What Are Your Options for Taking Required Distributions from Your Inherited IRA

The Boldin Planner will also choose an automatic distribution plan for your inherited IRA. However, you have several options for making the necessary withdrawals. You may wish to exclude a program based on any of these criteria:

Tax issues: This is a big consideration. Required withdrawals from an inherited IRA can put you in a higher tax bracket. See below to find out more about reducing taxes on inherited IRA distributions.

Your financial goals: If taxes are not a concern, you may be able to withdraw money to prepare for your financial goals. Do you need immediate income? Or, can you let the account grow? Match your withdrawals to specific goals such as paying off debt, funding retirement, or covering major expenses.

Understanding Your Options for Reducing Taxes on Distributions from Inherited IRAs

Within the distribution rules of inherited IRAs, you may have options. You can withdraw money in different amounts and at different times. Also, the decisions you make about your distribution will have a big impact on taxes.

If you distribute the entire IRA in the first year, or delay the distribution until year 10, you may be pushed into a higher tax bracket for that year and suffer additional negative consequences. Looking for ways to spread inherited IRA distributions over a ten-year period can help you manage income taxes by taking advantage of lower tax brackets. And smart distribution strategies can reduce the income tax liability of an inherited IRA.

Strategies you may want to consider:

• Space out Distributions
  • Another strategy to consider is to split the distribution over a ten-year period. This allows you to benefit from a tax-deferred bonus while managing your taxes.
• Fill in the bottom brackets
  • You may want to experiment with using taxable distributions to “fill out” a marginal tax bracket each year but avoid going into the next, higher bracket.
• Look for low tax years
  • Waiting until retirement to take distributions may lower your overall tax bill.
• To minimize tax implications
  • You may be able to pay more taxes on inherited IRA withdrawals by increasing contributions to your retirement accounts. Maximizing your retirement contributions can help keep the tax impact of inherited IRA distributions to a minimum.
  • Another possible strategy to reduce the tax impact of an inherited IRA withdrawal is to increase donations to charity and/or a Sponsored Advised Fund.

Special Circumstances That May Require a More Customized Approach to Inherited IRA Withdrawals

If any of the following situations apply to you, you may need a customized approach to manage the impact of inherited IRA distributions:

• If you need to meet MAGI (Adjusted Gross Income) requirements. In any of the following, you’ll want to evaluate the impact of an inherited IRA distribution on your MAGI and create a strategy that enables you to meet your distribution needs while staying below your desired MAGI.
  • Tax Deduction
    • Student Loan Interest Deduction
  • Tax Credits
    • Education-related tax credits (American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC).
    • Premium Tax Credits (PTC) can lower monthly premiums when you buy health insurance through the Marketplace.
    • Child Tax Credit (CTC)
    • Earned Income Tax Credit
    • Conservator’s Credit
  • Retirement contributions
    • Your MAGI affects whether your contributions to employee-sponsored retirement accounts, such as traditional IRAs, are deductible, and whether you can contribute the maximum amount, a partial amount, or nothing at all to a Roth IRA.
• If you are 63 years old or about to turn 10 years old Inherited IRA distributions may increase your AGI above the IRMAA limits and increase your Medicare costs.
• If you receive Social Security benefits The percentage of Social Security benefits subject to tax is determined, in part, by your AGI.

If you don’t need money Under certain circumstances, money from an inherited IRA may not be needed, or you may want to avoid being taxed. IRA beneficiaries can choose to disclaim, or disclaim, the IRA and allow it to roll over to another beneficiary.

Want to Model These Boldin Strategies?

The Boldin Retirement Planner will evaluate the distribution rules you must follow in your account and model an automatic withdrawal strategy that meets the rules for inherited IRA distributions.

However, if you want to model other withdrawal strategies, you can override the automatic distribution by adding transfers between accounts.

• Use My Plan > Cash Flow to transfer funds from your legacy IRA to an account prioritized in your retirement strategy to manage your cash flow, taxes, and more.