Losing a loved one is difficult, and managing an inherited IRA can add financial complexity. Whether inheriting a Traditional or Roth IRA, understanding the rules is crucial. Here’s a streamlined guide to help you make informed decisions in 2025:
1. Know the Distribution Rules
Distribution requirements depend on the type of IRA and your relationship to the deceased. Key considerations:
· 10-Year Rule vs. RMDs: Most non-spouse beneficiaries must empty the account within 10 years, but some must also take annual RMDs. You can find out which applies to you by reading this blog post.
· Account Separation: RMDs from one inherited IRA can’t be used to satisfy another unless identical rules apply.
· Updated RMD Tables: If you began RMDs before 2022, ensure you’re using the revised life expectancy tables.
2. Understand Beneficiary Categories
Your status affects how you can withdraw funds:
· Minor children: Switch to 10-year rule once they reach the age of majority.
· Disabled/Chronically ill: May qualify for lifetime RMDs if officially classified as such at the time of inheritance.
· Multiple beneficiaries: To avoid defaulting to the oldest beneficiary’s distribution schedule, set up separate accounts by Sept. 30 and transfer funds by Dec. 31 of the year following death.
3. Be Aware of Tax Impacts
Taxes on inherited IRAs vary:
· RMD Taxation: Plan for potential increases in income and withholding needs.
· After-Tax Contributions: Track basis and conversions using IRS Forms 5498/8606. Be aware of any 5-year clock rules still in effect.
· Possible Deduction: If estate tax was paid, you might be eligible for a deduction on distributions.
4. Align Distributions with Your Goals
Make inherited assets work for you:
· Use RMDs strategically: To build savings, reduce debt, or invest.
· QCDs: If 70½ or older, use distributions to support charities and fulfill RMDs tax-efficiently.
· Tax Bracket Planning: If subject to the 10-year rule, consider spreading out withdrawals to avoid a tax spike in year 10 (aka the “tax squeeze”).
5. Watch for Complex Situations
Some scenarios require extra planning:
· Annuities in IRAs: Check with the provider on specific payout rules.
· Trust or Estate Beneficiaries: May face the 5-year rule and higher trust tax rates unless structured as a qualified see-through trust.
Final Thoughts
Inherited IRAs can either enhance or complicate your finances. The first year is critical for making tax-smart decisions. Consulting a fiduciary financial advisor can help tailor a strategy to your goals and avoid costly missteps.
At Financial Symmetry, we’re here to guide you through every step of this transition, so your inheritance can support your future.
Download our Inherited Traditional IRA & Inherited Roth IRA Issues Guide here.
