Do you have an inherited IRA? Here’s your guide to strategizing the required withdrawals from your account

When you inherit an IRA, it’s more than just a financial windfall, it’s a liability. The rules governing inherited IRAs are complex and can significantly affect how much you end up with after taxes, as well as how your money is managed over the long term. Whether you’re navigating new SECURE Act regulations, balancing tax considerations, or planning your retirement goals, having a thoughtful withdrawal strategy is essential.

This article will walk you through the key factors to consider when taking distributions from an inherited IRA, ensuring you get the most out 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 commitments.

Rules for your inherited IRA distributions

The rules for distributions to 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 donor died before or after 2020 (due to changes made by the SECURE Act)
• Whether or not the original account owner has already begun taking required minimum distributions (RMDs).

When you design your inherited IRA in Boldin Retirement Planner, you’ll see the distribution rules that must 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. Although a 10-year distribution period may seem like a fast route to taxing deferred growth, delaying distributions until the 10th year could push you into higher tax brackets and increase your tax bill.

Avoid 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 (usually 25% of the lost distribution amount).

What are your options for taking required distributions on your inherited IRA?

The Boldin Planner will also select a default distribution plan for your inherited IRA. However, you have some options to make the required withdrawals. You may want to override the plan based on any of these criteria:

Tax implications: This is a big consideration. Required withdrawals from an inherited IRA can push you into a higher tax bracket. See below to learn more about minimizing taxes on distributions from an inherited IRA.

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

Understand your options to minimize taxes on distributions from inherited IRAs

Within the distribution rules for inherited IRAs, you may have choices. You may be able to withdraw funds in different amounts and over different time periods. The decisions you make about your distributions will have a significant impact on taxes.

If you distribute your entire IRA in year one, or delay distributions until year 10, you may be pushed into a higher tax bracket for that year as well as incur additional negative ripple effects. Looking for ways to spread inherited IRA distributions over a 10-year period can help you manage income taxes by taking advantage of lower tax brackets. Smart distribution strategies can reduce the total income tax liability of an inherited IRA.

Strategies you may want to consider:

• Space distributions
  • One strategy to consider is to space out the distributions over the ten-year period. This allows you to benefit from higher deferred taxes while also managing your taxes.
• Fill the bottom bracket(s).
  • You may want to explore using taxable distributions to “fill up” a marginal tax bracket each year but avoid moving to the next higher bracket.
• Look for low tax years
  • Waiting until you retire to receive distributions may reduce your overall tax bill.
• Offset tax implications
  • You may be able to offset the additional taxes of inherited IRA withdrawals by increasing contributions to your retirement accounts. Maximizing your retirement contributions can help minimize the tax impact of inherited IRA distributions.
  • Another potential strategy to offset the tax impact of inherited IRA withdrawals is to increase contributions to the charitable organization(s) and/or donor-advised fund.

Special circumstances that may require a more personalized approach to inherited IRA withdrawals

If any of the following circumstances apply to you, you may need a more personalized approach to managing the impact of inherited IRA distributions:

• If you need to meet MAGI (modified adjusted gross income) requirements. For any of the following, you will need to evaluate the impact of inherited IRA distributions on your MAGI and create a strategy that enables you to meet your distribution requirements while staying below the required MAGI.
  • Tax deductions
    • Student loan interest deduction
  • Tax credits
    • Education-related tax credits (American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC).
    • Premium tax credits (PTC) that may lower monthly premiums when you purchase health insurance through the marketplace.
    • Child Tax Credit (CTC)
    • Earned Income Tax Credit
    • Savings 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 or will be 63 years of age within the 10-year period Inherited IRA distributions may raise your AGI above the IRMAA thresholds and increase your Medicare costs.
• If you receive Social Security benefits The percentage of Social Security benefits that are taxable is determined, in part, by your AGI.

If you don’t need the money Under certain circumstances, the funds from an inherited IRA may not be needed, or you may want to avoid a tax hit. IRA beneficiaries can choose to surrender or not accept the IRA and allow it to pass to another beneficiary.

Would you like to model these strategies in Bouldin?

A Boldin retirement planner will evaluate the distribution rules you must follow for your account and model a hypothetical withdrawal strategy that meets the rules for your inherited IRA distributions.

However, if you want to design alternative withdrawal strategies, you can go beyond the default distributions by adding transfers between accounts.

• Use My Plan > Money Flows to transfer funds from your inherited IRA to the account prioritized in your withdrawal strategy to manage cash flow, taxes, and more.