- Watch out for Income Taxes
- Spouses are Different
- Required Minimum Distributions for Non-Spouses
- No Penalty for withdrawals if you’re under 59 ½
Watch out for taxes when withdrawing from an IRA you inherited – important planning strategies for IRA Beneficiaries.
When you inherit an IRA, you are responsible for paying the income taxes on the amount of money you withdraw from the IRA. The amount of money you withdraw will be added to your ordinary income and taxed at your highest marginal tax rate. Please be careful before cashing in a $300,000 Inherited IRA to make a large purchase – your taxes could easily be over $100,000.
The good news is that as an owner of a beneficiary IRA you have several strategies and tax benefits available. If you are the spouse of the person who passed away, then you become the owner of the IRA and if the person who passed is under 72 (the new Required Minimum Distribution Age) then you are not required to make any withdrawals and the funds will be treated as a normal IRA for distributions.
If you are not the spouse, then you are subject to the new rules regarding withdrawals. When the SECURE Act was passed, it now requires non-spouse beneficiaries to withdraw the entire balance of the IRA within 10 years. You can take as little as $0 in any year, but you are required withdraw the full amount by the 10th year. This is a major change and presents a potentially significant amount of taxes liability.
You are not required to take a distribution until the year following the year the IRA owner passed away, but if the person who died was over 72, then their required distribution for the year they passed away must be satisfied.
There are no early withdrawal penalties if you’re under age 59 ½, this is important to note in the case of a spousal IRA. If you need access to the funds before you’re 59 ½, then you may want to consider rolling the IRA into a Beneficiary IRA instead of a Traditional Spousal IRA. In a Beneficiary IRA you will have to completely withdraw all the funds within 10 years, but there would not be an early withdrawal penalty.
Depending on the amount of the IRA that you just inherited it might make sense to seek the advice of a professional to help craft the most tax efficient strategy for your individual situation.