Inherited IRAs: What You Need to Know
Someone you love has passed away.
In the whirlwind of grief and making funeral arrangements, you learn that you’ve been named as a beneficiary of their IRA or 401(k).
It might be a substantial sum – money that could significantly impact your financial future. But complicated questions come with any inheritance: What should I do with this? What are the tax consequences?
These 5 quick reminders can help alleviate much of the confusion:
- Understand the “10-year rule”
Most non-spouse beneficiaries are required to empty the inherited IRA within 10 years of the original owner’s death. This is called the “10-year rule.”
This accelerated timeline can create significant tax problems if not managed carefully.
- Don’t wait until year 10
Many people think they can leave the money untouched for 10 years, then take it all out in year 10.
Bad idea. Taking the entire balance in one year could push you into the highest tax bracket.
- Spread withdrawals strategically
Consider taking distributions over multiple years, timing them to avoid pushing yourself into higher brackets. This is where an experienced financial planner can provide invaluable guidance.
Some years you might take nothing (if your income is already high). Other years you might take larger amounts (if your income is lower).
- Coordinate with your own retirement accounts
An inherited IRA is separate from your own retirement savings. This means you need to think holistically about what accounts you should tap – and when – in order to minimize your tax obligations.
- Know the special considerations for Roth inherited IRAs
If you are a non-spouse and inherited a Roth IRA, the same 10-year rule applies – but the tax implications are very different.
Since Roth distributions are tax-free, you can leave the money invested as long as possible (up to the 10-year deadline) to maximize tax-free growth.
Just make sure you empty the account by the deadline to avoid penalties.
Need help with your inherited IRA?
At Meriwether, we help beneficiaries navigate the rules governing inherited IRAs and create strategic distribution plans.
We do this because we believe inheritances should benefit you and your family as much as possible – not create stress and unnecessary tax burdens due to poor planning.
If you’ve inherited an IRA and aren’t sure what to do next, let’s create a plan together.
This content is for educational purposes only and should not be considered personalized financial advice. Please consult with a qualified financial professional to discuss your specific situation and needs.