Managing Distributions from Inherited IRAs

In 2020, the SECURE Act changed the distribution requirements for non-spousal beneficiaries of IRAs.  The new rules are fairly complicated and there are special cases, but for most who inherit (or inherited) an IRA from a non-spouse after 2020, the rules are as follows:

• If the decedent died prior to beginning their forced IRA distributions, the beneficiary is not required to take annual distributions, but has to fully deplete the account in 10 years.

• If the decedent died after they began their forced IRA distributions, then the beneficiary must take annual distributions based on their life expectancy in years 1-9 and fully deplete by year 10.

Strategies to Minimize the Tax Impact of Inherited IRA Distributions

Fortunately, those who inherit IRAs have some flexibility on the timing of their required distributions. Unfortunately, the flexibility only lasts for 10 years.  And remember, you can always take more out of the IRA each year than is required, but not less!  Therefore, there are a myriad of options and opportunities to optimize the tax impact of these inherited IRA distributions. 

Here are a few questions to consider that could impact the timing of your inherited IRA distributions:

• Do you expect your taxable income to fluctuate any time over the next 10 years?   Will you retire?  Will you sell a business?  Will there be any major changes?  If so, you may consider taking higher distributions during those years in which you expect your income to be lower.

• Will required minimum distributions from your own IRA commence in the next 10 years?  What impact will these have on your taxable income?  Are there options for minimizing the tax impact, through using qualified charitable distributions or other tax reduction strategies

• Will you begin Social Security over this 10 year period?  Remember, Social Security is taxable up to 85% of the benefit.  Therefore, this may push income (and taxes) higher once the benefit begins.

• What impact will your required distributions have on your Medicare premiums?  Because the cost of Medicare premiums increases as your taxable income exceeds certain thresholds, it may be appropriate to accelerate inherited IRA distributions in order to avoid an increase in Medicare premiums.

• Will overall tax brackets change during this time period?  We believe that tax rates will change in 2026 with the expiration of the TCJA (see article on page 2).  This may impact the decision on the timing of your inherited IRA distribution. 

• Are there planned charitable donations?  If you have planned a charitable donation, you may want to consider lining up the donation to the charity (or donor advised fund) in the years that you expect a larger inherited IRA distribution. 

If you have an inherited IRA to consider, the best thing to do is try and think about the next 10 years and what may be in store for you personally.  Form there, you can build a muti-year tax plan that will optimize your income tax.  And we are here to help!