Since the 2019 law change, if you inherit an IRA from someone who is not your spouse, you have 10 years to withdraw the funds. But most IRAs are comprised of pre-tax dollars. This means that when you take a withdrawal, you generally have to pay taxes. Especially for those who have the ability to control their income, good planning can result in paying a much lower tax rate.

My professional focus is retirement planning for individuals over age 55. Please visit our website or reach out for a complimentary planning session.

Ted Erhart, CFP®
Financial Planner
Anoka, Minnesota
www.norrislakeretirement.com

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Inheriting an IRA can come with a significant tax burden that can take a substantial chunk of your inheritance. However, there are several ways in which you can minimize these taxes and maximize the amount you receive from your inherited IRA.

1. Stretch-out distributions

One of the most effective ways to minimize taxes on your inherited IRA is to stretch-out distributions. This means that instead of taking the lump sum, you can choose to take minimum distributions over your lifetime. By doing this, you will not only reduce the amount of taxes you pay annually, but also give the inherited IRA time to grow.

2. Divide the inherited IRA

If you are an heir to an inherited IRA with multiple beneficiaries, you can choose to split the inherited IRA into separate accounts. This can give you the freedom to take distributions at different times and in different amounts, depending on your individual circumstances.

3. Choose the right beneficiary

Choosing the right beneficiary can also help minimize taxes on your inherited IRA. For example, if you are a spouse of the original IRA owner, you can roll over the inherited IRA into your own IRA. This will not only allow you to defer taxes until you reach the age of required minimum distributions (RMDs), but also enable you to name your own beneficiaries.

4. Direct trustee-to-trustee transfer

When transferring an inherited IRA, ensure that you do it as a direct trustee-to-trustee transfer. This method will allow you to avoid taxes on the amount transferred and ensure that the funds are deposited directly into your new inherited IRA.

5. Consider Roth IRA

Lastly, you may want to consider converting your inherited IRA into a Roth IRA. Though it may require you to pay taxes upfront, it can significantly reduce taxes in the long run. This is because Roth IRA distributions are tax-free, and you are not required to take RMDs, allowing the funds to grow tax-free.

In conclusion, minimizing taxes on your inherited IRA can be accomplished by choosing the right beneficiary, splitting the account, stretching-out distributions, using direct trustee-to-trustee transfer, and converting to Roth IRA. With careful planning and strategic decisions, you can keep more of your inherited IRA and secure a comfortable future for yourself and your loved ones.