10 Jun When do I have to start taking money from this inherited IRA?
Q. I recently inherited an IRA worth about $50,000 from my aunt. She was only 55 and not taking out any money from the account. When do I have to start taking money from it, and how much?
A. We’re sorry to hear about your aunt.
There are several considerations here.
For your question, we’re going to assume the entire amount in the account was tax-deferred, which is common for people who have saved into retirement plans.
The good news is that you inherited this account, but you also inherit the responsibility for paying some amount of tax on this for each distribution from the account, said Peter Hoglund, a certified financial planner with Wealth Enhancement Group in Warren.
When your aunt had the account, the income tax due was deferred until a later date, Hoglund said.
“When you withdraw funds you must declare these as income and pay taxes, the same as your employment income,” he said. “There is also a time limit. The designated beneficiary — that’s you — must withdraw the full amount by the tenth calendar year after your aunt’s passing.”
You do have some ways to be strategic on this, he said.
With an inherited IRA, the IRS waives early withdrawal penalties and doesn’t force you to take any Required Minimum Distribution each year, he said.
“Since this will be considered income, you want to be thoughtful if you have a high-earning career or years where you can make larger bonus income,” Hoglund said. “Trying to make the distributions in years where your other income is lower is a good start to pay the least amount of tax.”
If you do not currently rely on a tax professional, this is a good opportunity to start working with one.
“Having a professional offer guidance year-by-year on distributing the inherited IRA account could help you avoid thousands of dollars of unnecessary income tax and help you keep more of what your aunt hoped to leave to you,” he said.
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This story was originally published on June 10, 2022.
NJMoneyHelp.com 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.