Kelly R. from Phoenix, AZ asks: Hello Mitch, I recently inherited an IRA and some other assets from a deceased parent, and I’ve been trying to keep everything organized. As I look for information about making withdrawals from the IRA, I’ve been confused as to what the actual rules are. Can you clarify, please?
Mitch’s Response:
Thanks for writing, Kelly. There was indeed some confusion surrounding new rules for inherited IRAs, which were written into the SECURE Act of 2019. I’ll clarify the rules for you here.
Let me start with what I consider the bottom line: “non-eligible designated beneficiaries” have a 10-year window to withdraw all the money from an inherited IRA. As an adult child of your deceased parent, you are a non-eligible designated beneficiary – meaning you must adhere to this rule. Spouses, minor children, and/or disabled beneficiaries do not have to follow the 10-year rule.1
The confusion had to do with Required Minimum Distributions, or RMDs. If your deceased parent had already started RMDs, you will have mandatory yearly withdrawals instead of having the flexibility to withdraw all of the cash however you wanted—as long as it was within a 10-year period.
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Before the 2019 rule change, beneficiaries could spread IRA distributions out over their entire lifetimes, so the legal change is significant.
As you make your plans for distributions, an important note to make is that IRA distributions are taxable as ordinary income, so be sure to factor that into your annual tax planning. If you’re still working and earning income, and you also decide to take a distribution from your Inherited IRA (or if you’re required to do so given the RMD rule) your tax bill may be higher this year than it was last year, and you could even be bumped into a higher tax bracket. That might mean needing to make higher quarterly estimate payments, for example.
Another possibility is that if you sell a house, or perhaps a business, or maybe even take gains in an investment account, and you also have to take a withdrawal from an Inherited IRA, it could add to your tax liability for the year. To stay on top of all the implications, it could make sense to speak with a tax professional to prepare for the impact.
One idea to consider as you make plans for Inherited IRA distributions: just because you are required to withdraw the money, it doesn’t mean you have to spend it! You can invest it instead. Once you withdraw the funds from the IRA, you can transfer it to an investment brokerage account or even another retirement account, and invest the money in accordance with your long-term goals and objectives.
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Disclosure
1 CNBC. April 22, 2024. https://www.cnbc.com/2024/04/22/here-are-key-things-to-know-before-tapping-an-inherited-iras.html
2 ZIM may amend or rescind the “8 Steps Towards a Stress-Free Retirement” guide for any reason and at ZIM’s discretion.
3 ZIM may amend or rescind the “8 Steps Towards a Stress-Free Retirement” guide for any reason and at ZIM’s discretion.
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