Inherited IRA affects on Social Security and Taxes

[Bret-TX]

I'm 65 and recently retired.  My income from employment this year was about $40,000.  I started receiving a monthly pension payout of about $1000 a month so at this time I anticipate close to $50,000 income for the year.  I have not signed up yet for social security but would anticipate about $2,500 per month should if I sign up early in 2024.  I'm concerned about an inherited IRA of ~$100K that I have to pull within the next eight years.  Any guidance on how best to schedule the draws from that IRA and starting Social Security disbursements to wisely minimize tax hits to the extent possible?

Thank you!

[kthomasusa1]

Congrats on retirement! I bet you have worked long and hard for this time.

Re the matter at hand, if you wait another couple years to get your social security, you might take some of your inherited IRA now, while you don't have that social security income. Then when you have exhausted your inherited IRA, you can start taking SS income. There are a couple ways to take the inherited IRA...so check with your custodian holding that assets to see what the options are for you to determine what is best.

Good luck to you.

Kelly C, CPA

[Opus 17]

That's what financial planners are for, really, not people who know how to fill out tax forms.

Your "full retirement age" is probably 66 and 10 months.  If you take retirement before that age, your benefit will be reduced, and your benefit will also be reduced if you continue to work.  After your full retirement age, your benefit won't be reduced from working.  The longer you delay retirement (up to age 70) the higher your SS benefit will be, but you really have to think about your health and life expectancy, and whether you would be better off getting $X for 30 years or $X plus for 27 years (for example).

The IRA will be taxable, plus it can make your SS benefit taxable as well.  The math here gets complicated and I suspect that financial planners for older persons have pretty good calculators, better than I have.  But I can imagine that in a year you don't draw from the IRA, you might pay zero or 10% tax on the SS benefit, and in a year you draw from the IRA, you would pay 22% on the IRA plus 22% on the SS benefit.  That would suggest that you should empty the IRA before you apply for social security.  But there are many other factors at play so don't take that as advice, just one possible scenario.

Also, if the original owner of the IRA died after their RMD beginning year, you are required to take an RMD over the 10 years (or the remaining 8 years) in addition to the requirement to draw down the account to zero by 10 years.  The RMD rule is not final, so you won't be penalized for missing the RMD for 2021, 2022 or 2023, but expect that you will need to take an RMD starting in 2024 for sure. 

[Cindy4]

Hi @Bret-TX !

You may be able to roll the inherited IRA over if it was from your spouse, and you already have an existing IRA.  You can possibly defer distributions and tax impact.

Hope this helps!

Cindy

[heidis1]

Hi  Bret-TX,

Here a couple things to consider:

- As a non-spouse beneficiary inheriting an IRA from a parent, you have two options: You either can withdraw the account as a lump sum, transfer it into an inherited IRA in your name or do a combination of the two.

- You can move inherited IRA to Roth IRA. You can convert some or all of it to a Roth IRA.

Although you will pay taxes on money you convert, all future withdrawals will be tax-free as long as the account is open at least five years and you are at least 59½ years old at the time.

Here are links that may help:
Tax Tips for Retirement 

What are you distribution options? 

What to Do With an Inheritance 

Thank you for asking.

[Opus 17]

@heidis1 

I don't believe a non-qualified beneficiary is eligible to rollover or do a Roth conversion on an inherited IRA.  It must always stay an inherited IRA and must be cleaned out within 10 years.  The beneficiary could withdraw money, pay tax, and contribute to a Roth IRA, but that would be subject to annual contribution limits and they must have compensation from work to enable the Roth contribution.  The beneficiary is also subject to the new/forthcoming RMD rules.