My inherited IRA is raising my tax bill. What can I do?


Q. I have an inherited IRA from my aunt who died in February 2017. At the time, I chose the five-year time frame for payout. I’ve taken out about two-thirds of the money. I am reluctant to take any more because I am making great money in my employment and the taxes will be highest now. Can I amend the five-year payout time?
— Beneficiary

A. Congrats on the high-paying job.

It’s good that you’re considering the tax consequences of the inherited IRA.

In many respects, inherited IRAs are similar to regular IRAs, said Andrew Novick, a certified financial planner and estate planning attorney with The Investment Connection and Brookner Law Offices in Bridgewater.

They both grow on a tax-deferred basis and distributions are generally taxable income, so it is preferable to leave as much in the account for as long as possible, he said.

Account holders of both regular IRAs and inherited IRA are also subject to certain required minimum distribution (RMD) rules. The RMD rules are complicated, especially for inherited IRAs.

“Passage of the SECURE Act in 2019 changed the RMD rules for inherited IRA, which makes the situation even more complex,” he said. “However, since your aunt died in 2017, the distribution options for your inherited IRA will be based on the rules before the SECURE Act.”

Under the “old” rules, non-spouses had an option for the entire account to be distributed by the end of the fifth year after the original account owner’s death, Novick said. There is no annual distribution requirement so long as the inherited IRA is completely distributed by the end of the fifth year, he said.

While regular IRAs discourage taking distributions prior to age 59½ by levying a 10% penalty, the early withdrawal penalty doesn’t apply to inherited IRAs, he said.

Alternatively, under the old rules, if a non-spouse inherits an IRA, distributions can be based on the new account owner’s life expectancy.

“In this case, distributions are required annually and are calculated by taking the prior year-end account value and dividing by your life expectancy,” he said. “Similar to regular IRAs, you can always withdraw more than the RMD. but failure to take the RMD results in a substantial 50% penalty.”

In almost all cases, taking distributions based on one’s life expectancy means the account can be “stretched” over many years. To use this method, you need to start taking distributions in the year after the original account owner’s death, Novick said.

For the initial RMD, you determine your life expectancy by looking up your age on the IRS’ single life expectancy table.

He offered this example: A 46-year-old inherited IRA owner, using the new 2022 IRA single life expectancy table, has a 40-year life expectancy. If the prior year-end balance of the inherited IRA balance was $100,000, the RMD is $2,500, which is just 2.5% of the account. This calculation is repeated annually with a modification. Instead of going back to the IRS life expectancy table each year — which is generally the procedure for calculating RMDs in regular IRAs — you subtract one from your life expectancy each year. So in this example, the divisor in year two is 39, then 38, then 37, and so one.

Novick said when you inherit an IRA, you do not have to declare your distribution method. Your choice is made based on your actions.

You say that you’ve already distributed two-thirds of the account.

Did this include taking distributions annually starting in the year after the death of the original account owner?

If yes, Novick said, you may have been withdrawing more than the annual RMDs based on your life expectancy already and can simply take the appropriate annual RMD going forward.

If the answer is no, then you are probably stuck with the five-year rule, he said.

“I say `probably’ because you have three years to amend a prior tax return so it may be possible to amend one or more of your prior tax returns, pay the penalty for failure to take the appropriate RMD based on your life expectancy in those years, and then start taking the appropriate annual RMD under the `stretch’ method in future years,” Novick said. “Even if amending a prior return is an option, you need to determine if it will even be worth the effort.”

It’s worth speaking to a qualified tax preparer who can calculate the best way for you to move forward.

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This story was originally published on May 24, 2022. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.