Inheriting a Parent’s IRA: Tax Planning Opportunities

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If you have inherited an individual retirement account (IRA) from a deceased parent, whether before or after they began taking required minimum distributions (RMDs), you have an opportunity to manage the withdrawals in a tax-efficient manner.

According to IRS rules, if the parent passed away before reaching RMD age (72 years old), you generally have to empty the inherited IRA within 10 years without any required annual payouts. However, if your parent had already started taking RMDs, you must continue taking annual RMDs based on your life expectancy for the first 9 years, emptying the account by the 10th year.

In either case, you can have flexibility in how much you withdraw each year. With progressive income tax rates – meaning higher percentages of your income are taxed at higher brackets – strategic IRA withdrawals can optimize your tax liability. The 10-year window offers a chance to project future income and tax scenarios to find opportunities.

For example, let’s say you want to change careers or take time off from work. With lower taxable income in those years, withdrawing more IRA funds than the minimum could take advantage of lower marginal tax rates and provide additional cash flow during your transition. Depending on your situation, this window could even enable a sabbatical by using inherited IRA funds – as long as it doesn’t compromise your long-term retirement savings.

While the IRS issued recent notices (2022-53 and 2023-54) delaying finalized regulations on inherited IRAs, proactive tax planning is key to minimizing your liability. Failing to plan could result in losing out on tax optimization. You can make the most of this inheritance with some analysis and monitoring for chances to time withdrawals favorably.

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If you have questions about personal tax planning and decreasing your tax liability, JLK Rosenberger can help. For more information, call us at 949-860-9893 or click here to contact us. We look forward to speaking with you soon.