From Kiplinger · · 1m 30s
Inheriting an IRA? 5 Mistakes That Hand Uncle Sam a Bigger Share
Inherited IRA mistakes cost families millions in taxes by ignoring IRS rules.
In brief
Inherited IRA mistakes cost families millions in taxes by ignoring IRS rules. Inherited IRA owners face high taxes if they wait too long to withdraw funds under the 10-year rule. Originally reported by Kiplinger.
The SECURE Act changed IRA rules
Starting January 1, 2020, the SECURE Act ended the stretch IRA allowing heirs to spread withdrawals over lifetimes.
Lisa's hypothetical inheritance
Lisa inherits $500,000 traditional IRA at age 55 with $200,000 annual income.
10-year rule for inherited IRAs
Heirs must empty accounts by December 31 of the 10th year after the original owner's death.
Annual RMDs depend on original owner's death date
If the owner died before their required beginning date, heirs face no annual minimums for years one through nine.
Tax consequences of waiting
Withdrawing $984,000 after 10 years triggers $322,000 federal income tax at 33% average rate.
Tax savings with regular withdrawals
Taking $71,000 annually reduces tax to 23% average rate versus 33% for lump sum withdrawal.
Roth conversion timing matters
Parents should compare their tax rates with children's expected rates before converting IRAs.
Inherited Roth benefits
Inherited Roth IRAs allow tax-free withdrawals without annual RMDs for up to 10 years.
Five-year rule for Roth conversions
Earnings from Roth accounts may be taxable if opened less than five tax years before withdrawal.
Key fixes for inherited IRAs
Inheritors should confirm RMD rules, project income, and consider Roth conversions for tax savings.
The one thing
Inherited IRA owners face high taxes if they wait too long to withdraw funds under the 10-year rule.
