The 10-Year Clock: Planning Around an Inherited IRA
Do you know what you’re required to withdraw and when?
Imagine inheriting an IRA from a parent.
At first, you may be inclined to leave it alone. After all, you may not need the money today, and keeping it invested may seem like the obvious choice.
But years pass quickly.
For many adult, non-spouse beneficiaries who inherit an IRA from an owner who died in 2020 or later, the account generally must be fully distributed by the end of the 10th calendar year following the year of the owner’s death.
And the 10-year deadline does not always mean you can wait until year 10. If the original owner died on or after their required beginning date for RMDs, beneficiaries generally must also take annual RMDs, in addition to fully distributing the account by the end of year 10, subject to any applicable IRS relief.
With a traditional inherited IRA, distributions are generally taxable as ordinary income when received, although the taxable amount may differ if the IRA includes after-tax contributions. Inherited Roth IRAs are generally subject to beneficiary distribution requirements as well. Distributions are generally tax-free, although earnings may be taxable if the Roth IRA had not met the applicable five-year holding requirement.
Start With Two Questions
- When are you required to take distributions?
- When might it make the most sense to take them?
Waiting until the final years could mean taking much larger distributions over a shorter period. Those withdrawals may be added to your salary, investment income, Social Security benefits, or other taxable income.
Taking money sooner isn’t automatically better either.
Inherited an IRA From a Spouse?
Surviving spouses often have additional options that are not available to other beneficiaries. Depending on the account terms, beneficiary designation, and your circumstances, you may be able to remain the beneficiary, treat the IRA as your own, or roll it into your own IRA.
The choice can affect your distribution timing, taxes, and access to the funds. It is important to understand your options before making a decision.
Knowing the Rule Is One Thing. Planning Around It Is Another.
This is where thoughtful planning can make a difference. Rather than looking at your inherited IRA in isolation, we can help you consider it alongside your income, investments, retirement plans, and broader financial picture.
Your income may change over the next 10 years. You may be approaching retirement, anticipating higher- or lower-income years, or balancing other financial priorities that could influence the timing of distributions.
Don’t Let Year 10 Make the Decision for You.
A little planning today may give you more flexibility in deciding how and when to take distributions over the years ahead.
If you’ve inherited an IRA, or expect to receive one, now may be a good time to understand the rules that apply to your specific circumstances and build a distribution strategy around your financial picture, rather than just the deadline.
We can help you think through the timing, consider potential tax implications, and coordinate an inherited IRA with the other pieces of your financial plan.
Simply contact us to start the conversation.
This material is provided for general informational and educational purposes only and is not intended as tax or legal advice. Inherited IRA distribution requirements and tax treatment depend on individual circumstances, including the original owner’s date of death, age and RMD status, account type, beneficiary designation, and the beneficiary’s status.