Inherited IRA Beneficiaries
Whether you have an inherited IRA, or expect that you will in the future, it’s a good idea to start thinking about the most efficient way to handle it because inherited IRA distributions may have significant impacts on your cash flow, taxes, Medicare premiums, and more.
Depending upon the account type, beneficiary type, and original owner’s date of death, an Inherited IRA may be subject to required annual distributions and/or a 10 year distribution period. And, while a 10 year distribution period might sound like the highway to tax deferred growth, delaying distributions until the 10th year has the potential to push you into higher tax brackets.
You Have a Variety of Options for Managing Income Taxes on Inherited IRAs
While distributions from Inherited Roth IRAs will not impact your taxes, distributions from Inherited pre-tax IRAs certainly will. If you distribute the entire IRA in the first year, or delay distributions until the 10th year, 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 the ten-year period can help you manage income taxes by taking advantage of lower tax brackets. And smart distribution strategies can potentially reduce the total income tax liability of the Inherited IRA.
Strategies you may want to consider:
Space out Distributions
One strategy to consider is spacing out distributions over the ten-year period. This allows you to to benefit from tax-deferred appreciation while also managing taxes.
Fill up lower bracket(s)
You may want to explore using taxable distributions to “fill up” a marginal tax bracket each year but avoid moving into the next, higher, bracket.
Look for low tax years
Waiting until you retire to take distributions may lower your overall tax bill.
Offset the tax implications
You might be able to offset the additional taxes of Inherited IRA withdrawals by increasing contributions to your own retirement accounts. Maxing out your own retirement contributions can help keep the tax impact of Inherited IRA distributions to a minimum.
Another potential strategy to offset the tax impact of Inherited IRA withdrawals is by increasing contributions to charitable organization(s) and/or a Donor Advised Fund.
If any of the following circumstances apply to you, you may need a more customized approach to manage the impact of Inherited IRA distributions:
If you need to meet MAGI (Modified Adjusted Gross Income) requirements for any of the following, you’ll want to assess the impact of Inherited IRA distributions on your MAGI and create a strategy which enables you to meet your distribution requirements while staying below the desired MAGI.
Tax Deductions
Student Loan Interest Deduction
Tax Credits
Education-related tax credits (the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
Premium Tax Credits (PTC) which may lower monthly premiums when you buy health insurance through the Marketplace.
Child Tax Credit (CTC)
Earned Income Tax Credit
Saver’s 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 turn 63 during the 10 year period Inherited IRA distributions may raise your AGI above the IRMAA thresholds and increase your Medicare costs.
If you are receiving Social Security benefits The percentage of Social Security benefits subject to tax is determined, in part, by your AGI.
If you don’t need the money Under certain circumstances, the money from an inherited IRA might not be needed, or you may want to avoid the tax hit. IRA beneficiaries can choose to disclaim, or not accept, the IRA and allow it to pass it to another beneficiary.
Want to Model These Strategies in Boldin?
If you need to adjust withdrawals in Boldin you can override the default withdrawal strategy by adding transfers between accounts. Transfer funds from your Inherited IRA to the account that’s prioritized in your withdrawal strategy to manage your cashflow, taxes, and more.