Inherited ira

Don't take a lump sum distribution.

When you are subject to the 10-year liquidation rule for newly inherited IRAs,
to spread the tax impact most evenly over the ten years,
your divisor should be :   10 - N where N is the number of annual distributions you already took.

In other words, with four years gone by, you want to take out one sixth of the IRA,
If you are a young beneficiary or even a senior, this rule would generate much larger RMD than the RMD based on Pub590B formulas.

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Be aware that the proposed regulations from the IRS dictate that if the decedent died after their required beginning date for RMDs, both annual RMDs based on life expectancy and full distribution by the end of the 10th year following the year of death are required (which is different from what was published in the final version of 2021 IRS Pub 590-B). Annual distributions are not required only if the decedent died before the required beginning date for RMDs.

Also be aware that you can only move the inherited IRA to a beneficiary IRA by nonreportable trustee-to-trustee transfer, not by distribution and rollover.  Once you receive a distribution from the IRA it cannot be rolled over to continue to defer taxation.

Money in this traditional IRA is generally deferred income on which your grandmother had not yet paid taxes, so you as beneficiary are responsible for paying the taxes when distributed.

$88k (28.1%) federal tax plus $23k (7.4%) state tax on $313k of income is a combined marginal tax rate of about 35.5%, not 50%.  

It seems likely that your income presently falls in the 22% federal tax bracket and that you might be able to incur another $70k or so before reaching the 24% tax bracket.  Taking all of it in one year would likely push some of it into the 32% tax bracket.  You can verify that more precisely by entering an incremental amount of IRA income, say $1,000, and seeing how much your tax liability increases.  An increase of $220 in federal tax liability for a $1,000 increase would indicate that you have a 22% marginal federal tax rate on this portion of your income.

Note that in 2026 the tax rates are scheduled to revert to the levels that were in effect before the Tax Cuts and Jobs Act of 2017 temporarily lowered them, so the 22% bracket will go back to being a 25% tax bracket.  This suggests that it may be beneficial to take roughly equal amounts over the 4 years 2022 through 2025 for these amounts to be federally taxed at less than 25%, mostly at 22%.  Of course you'll also want to take into account your state marginal tax rate on these distributions, likely making the combined marginal tax rate about 29% if taken in equal portions over the 4 years prior to 2026.  This would save you about $20k in federal taxes over receiving the entire $313k in a single year, about the best you can do.

@Notch352 -  I did want to answer one of your first questions.  Remember, this is an IRA, which means your grandmother did not pay taxes on the money that was placed into the IRA.  In an Traditional IRA, those taxes get deferred....but they eventually must be paid.   And since you inherited the IRA, it's your obligation to pay it.  

It is best to stretch out the IRA over as many of the 10 years as you can - that can avoid bumping into a higher federal tax bracket - the smoother those distributions are, the less likely you will be forced into the next tax bracket.  THe more you try to take out in the 1st year, the higher your tax bracket will be.  it is a balancing act for sure! 

what year did Grandma die? assuming she died in 2020 or later, then the 10 year rule applies. if prior to 2020, then you could stretch out the distributions over your lifetime (based on an IRS table).

Because the original owner of the IRA never paid tax on the money, you must pay tax when you withdraw it. If you withdraw the entire $300,000 all at once, that will put you into the 32% federal tax bracket plus the 9% New York State tax bracket.  And I think you might also pay 3.8% net investment tax thanks to Obamacare.

You have 10 years to withdraw the money and pay tax on it. You may be able to reduce the tax you owe by taking smaller amounts out each year.  For example, if you are married filing jointly and your base income is about $100,000 per year, you should be able to withdraw about $80,000 per year from the IRA and pay 22% income tax instead of 32% income tax and you would not have to pay the 3.8% net investment tax.

If you use the after-tax portion to pay down your other debts, or you invest it to earn interest, you will be improving your financial situation in the long term even though you have to pay income tax on the amount that you withdraw.

Besides spreading out the distributions, you can use the distribution to max out your 401(k) contributions. Incr your contributions to (Maximum contribution less current contribution) and use the actual distr to live off of.Note: you can contribute 92% of your paycheck and still have the correct FICA taxes withheld resulting in $0 paycheck. Same with Trad IRA and Spouse Trad IRA - combined, it may get your MAGI down to where you can deduct 100% of Trad IRA contributions.