Inherited Traditional IRA Tax Policy

[rpozzy]

What is the current federal tax requirements for traditional IRA retirement investments passed on via inheritance after a deceased parent?  How much (% etc) taxes need to be paid, and in what increments and/or timeline? Inherited in 2021. I'm afraid to touch the money, so it's been sitting in an account for me at the investment company, not invested, not being deposited, out of fear of this affecting my tax bracket. I am low income and rely on state Medicaid and am afraid I will lose these benefits if deposit some of these funds to my bank account to help pay home bills. I have to be careful I deposit enough to cover whatever the taxes will be too. I've been told I "need to speak with a Tax Advisor" but I don't have money available for that, and I don't even know what kind of questions I should be asking them anyhow. 

[Cindy4]

Hi @rpozzy !

The rules differ if you are an "Eligible Designated Beneficiary" or a "Designated Beneficiary".

"Eligible Designated Beneficiary" means you are either a:
* Minor child of the original account holder
* Chronically Ill
* Permanently disabled
* Not more than 10 years younger than the original account holder

In this case you can open an Inherited IRA using a "life expectancy" method, or "10-year method", or you can take a lump sum distribution, which would possibly cause you the issues you are concerned about.

If you are not an "Eligible Designated Beneficiary" then you are a "Designated Beneficiary". You have ten years from when the account holder died to distribute all the assets. So, you could break up the distributions over those ten years. If the account holder was subject to take the Required Minimum Distributions - RMD- then you will have to take those.

In any event the tax impact will be determined by any other taxable income that you receive in any of the years that you take the distributions. It will be taxed at your marginal rate for that year based on your total taxable income.

Here's a resource that may shed further light on your situation:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary#:~:text....

Hope this helps!

Cindy