Given that every penny withdrawn from an inherited traditional IRA is counted as taxable income you need to be strategic in how you will time your withdrawals,
Previously, if you inherited an IRA account, the annual required minimum distribution (RMD) was typically based on your life expectancy. Now - notwithstanding a few exceptions - you must **withdraw all funds within 10** years after you inherited the IRA (and, in some cases, five years).
How you time your withdrawals can make a big difference in your total tax bill. For example if you make $65,000 a year, withdrawing $35,000 from an inherited traditional IRA would bump up your taxable income to $100,000.
Other considerations
- There are a few exceptions to the 10-year rule — most notably, when the person inheriting the account is a surviving spouse.
- A surviving spouse can take distributions based on their own life expectancy, or roll over the account into their own IRA.
- The same goes for children of the deceased who are still minors, but once they turn 21, they’re subject to the 10-year rule.
- There are a few other exceptions, such as a beneficiary who is disabled or chronically ill.
- If the beneficiary is an estate, rather than an individual then the account has to be emptied within five years, not 10.
- Withdrawals from an inherited IRA can impact your Medicare Part B premium, it’s important to have a withdrawal strategy.
Given the complexities involved, consulting with a financial advisor or tax professional can provide invaluable insights tailored to your specific situation. By crafting a thoughtful withdrawal strategy, you can mitigate tax burdens and ensure that your inherited IRA serves as a stable asset for your financial future.
