07 Dec How much can I take from inherited IRA without hurting my taxes?
Q. My father passed away in 2020, my Mom in 2016. They left two IRAs to me, a Roth and a traditional. These are to be used for my two children’s college tuition. My daughter will start college in 2021 and my son in 2023. I understand there is the 10 year rule to withdraw the Inherited IRAs. I don’t want to wait until the final year as my children will need this money sooner. How much can I withdraw each year and stay in my current tax bracket?
A. There are several things at play here, but it’s all going to be based on your tax returns each year.
First, any IRAs you inherited in 2016 fall under different rules than the one you inherited in 2020.
In prior years, you would have to take Required Minimum Distributions from the traditional IRAs over your lifetime. They didn’t have to be emptied in a 10-year time frame.
The 10-year distribution rule is a new one that’s part of the SECURE Act, which applies to IRA accounts and defined contribution retirement plan accounts, such as 401(k) and 403(b) plans
A non-spouse beneficiary who inherits a retirement account in 2020 or later must take out all the funds by the end of the tenth year.
You can completely control when you take out the funds, as long as you empty the account by the end of the tenth year.
You also get to control how much you take out each year, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.
He said there is no limitation on the amount that may be withdrawn from the accounts.
But your tax question is more complex.
“The distributions from the traditional IRA will be taxable at your marginal tax bracket,” Karu said.
So if you want to make sure you don’t end up in a higher tax bracket, you need to analyze how much you should take out based on your overall tax status. We recommend you work with a tax preparer so you can calculate the correct amount.
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This story was originally published on Dec. 7, 2020.
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