How Are Inherited IRA's taxed? || When Must Beneficiary IRA Distributions Start?

How Are Inherited IRA's taxed? || When Must Beneficiary IRA Distributions Start?

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In this video, I want to talk about how inherited IRA's work for non-spouse beneficiaries. If you are someone who has an inherited IRA from someone who is not your spouse, you have 10 years to distribute the entire IRA account and pay the taxes. This new rule went into place after the SECURE ACT was signed late in 2019. Now, if you had an inherited IRA BEFORE Jan 1 2020, the old rules for distributing your inherited IRA are still in effect. Let me give you the old Inherited IRA rules first, and then we will discuss the new inherited IRA rules and when must inherited ira distribution rules start.

Old Inherited IRA Distribution Rules (Pre Jan 1, 2020):
1. 5 Year Rule-You can take 5 equal distributions from your inherited IRA over 5 years
2. Stretch Option-You can stretch the inherited IRA over your lifetime and take a calculated Required Minimum Distribution (or RMD) from the inherited IRA every year over your life (If you pass away and your inherited IRA is inherited by your beneficiary, they then must distribute the entire balance in that year).

New Inherited IRA Rules (Post Jan 1, 2020)
1. 10 Year Distribution Option-You must distribute the inherited IRA over a 10 year span. Does not matter how you distribute the inherited IRA, it just needs to be distributed over 10 years and the taxes paid.

There are 3 exceptions to the 10 year inherited IRA rule:
1. A Special Needs Trust Inherits the IRA (No 10 year rule)
2. You are disabled or Terminally Ill (No 10 year rule)
3. Minor (You are a minor child of the deceased)

Now that we understand HOW the inherited must be distributed, let's talk about the taxes on the distributions from the inherited IRA. If you are on Social Security or Medicare, you want to make sure that you are monitoring your inherited IRA distributions so not to effect your Medicare taxes (IRMAA Tax). If your retirement income exceeds certain levels, your Medicare part B premium can be increased over a 12 month period only coming down once you file your next years tax return and show lower income. That is why it is so important to do tactical tax planning if you inherit an IRA from a non-spouse when you are on social security or Medicare.

Another situation to be aware of is if you inherit an IRA when you are working. Any distributions you take out of the inherited IRA could push your traditional income into another tax bracket (meaning you pay more taxes) and could push you above the allowable limit for contributing to retirement plans. Again, that is why it is so important to do tactical tax planning if you have an inherited IRA.

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Retirement & Financial Planning Resources:
-Have You Ever Been Bitten by an Elephant?: The Definitive Guide for Retiring Well by David & Drew Blackston: https://amzn.to/3pnm62l
-Retirement Planning Guidebook by Wade Pfau: https://amzn.to/3FqxMpI
-Common Sense Investing by Jack Bogle: https://amzn.to/3H1Gn3p
-The Intelligent Investor by Benjamin Graham: https://amzn.to/3mpNDyd
-A Beginner's Guide to the Stock Market: Everything You Need to Start Making Money Today by Matthew Kratter: https://amzn.to/3qmkHtk
-The Blessed Life by Robert Morris: https://amzn.to/3Ehxq4f


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