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Inherited IRA Redistribution

I inherited an IRA totaling ~$30k in California.  The IRA is subject to the 10 year rule and has been sitting mostly in cash for the last 2 years.  I'm looking to invest the total amount either in the current IRA or another investment portfolio, but I'm unsure if I should withdraw everything now or if I should take smaller withdrawals over the next 8 years.

 

What distribution strategy would minimize the amount of taxes I pay?  If I decide to redistribute the money to my own personal IRA, would withdrawing the maximum contribution limit each year be the better strategy?

 

Thank you for your advice 🙂

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3 Replies

Inherited IRA Redistribution

Well, firstly, you can move money around inside the inherited IRA as much as you like, but you can't move it to a different IRA (such as your own IRA) without doing a withdrawal and paying the tax.  Once the after tax money is in your account, it is the same as any other money and you can do anything you want with it.  But importantly, you can't rollover money from an inherited IRA to your own IRA, so any new money you put into your own IRA is going to be limited by all the usual rules for contributions to an IRA (you must have compensation from working, $7000 limit per year or $8000 if over age 50, and so on.)

 

There is another rule you did not mention.  If the original owner was older than their RMD beginning year, then you must take RMDs in each of the years before year 10.  You can always withdraw more, of course, but you must withdraw at least the minimum amount.  This is a new rule that is starting in 2024, but is retroactive to 2020, except that you won't be penalized for failing to take RMDs from 2021-2023.  But you must start in 2024.  The RMD is calculated based on your life expectancy number as of the date the previous owner died, minus one year for every year after.

 

As to the rest, you haven't told us enough about your situation.  If you are retired and don't have compensation from work, you can't put any money into any IRA, so if you withdraw from the inherited IRA, you can put it into savings or a non-IRA stock broker account, but you can't put it into an IRA.  You will generally pay less tax if you spread the withdrawals out, but the amount here is so small it may not make a difference.  You need to look at your tax brackets.  For example, if you are single, you pay 12% on taxable income up to $47,000 and 22% on income up to $100,000.  (That's after your standard or itemized deductions.)  Suppose your income is $50,000, minus $14,000 standard deduction = $38,000.  You could withdraw up to $9000 and still be in the 12% bracket, but if you withdrew more, the extra amount would be taxed at 22%.  But if you make $150,000 and are in the 24% bracket, you could withdraw the entire $30,000 and still be in the 24% bracket.

https://taxfoundation.org/data/all/federal/2024-tax-brackets/

 

Of course, if you are working now but expect to retire in 5 years, then your tax rate will probably be a lot lower 6 years from now than today, which would be an argument to wait.  

 

There's no right answer and that's not even all of the factors, but it should get you started. 

 

TomD8
Level 15

Inherited IRA Redistribution

@Opus 17  wrote:  "This is a new rule that is starting in 2024, but is retroactive to 2020, except that you won't be penalized for failing to take RMDs from 2021-2023.  But you must start in 2024."

 

The IRS has pushed back the Inherited IRA "penalty" rule to 2025.

IRS Delays Inherited IRA Rules to 2025: What You Need to Know | Kiplinger

 

 

**Answers are correct to the best of my ability but do not constitute tax or legal advice.

Inherited IRA Redistribution

I should add that if you want to move the money to a different IRA custodian, you can do that via a simple direct transfer, but the new account will still be an "inherited IRA" and subject to those rules.   If you take it out for any reason, you pay the taxes first. 

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