Question: Sienna from Montgomery: I just inherited an IRA from my father who recently passed (at age 82). How do I deal with taxes?
A: We’re sorry for your loss. Losing a loved one is hard enough, let alone trying to deal with the financial aftermath. It’s important to approach a situation like this with a clear head, so understand that you don’t have to do a thing with this money just quite yet. Then, once you’re ready, here’s what to know.
Prior to 2019, you would have been able to ‘stretch’ the funds in that IRA so you could spread out the distributions (and taxes) over the course of your lifetime. But the SECURE Act changed the rules. Now, a non-spousal beneficiary must liquidate an inherited retirement account within 10 years of the original accountholder’s death (though there are a few, limited exceptions to this rule). And while the Treasury Department had previously indicated that the beneficiary could take out any annual amount over the course of those 10 years, it just pulled a switcheroo back in late February: The new proposal now states that if the original owner had already begun taking Required Minimum Distributions (RMDs), the beneficiary must take RMDs between years one and nine, then withdraw the remaining balance in year ten.
This change in interpretation means that, as the beneficiary, you’ll have even less flexibility with this money since you’ll be forced to take withdrawals every year – regardless of your financial circumstance. And since this money is taxed as ordinary income, this could very possibly bump you into a higher tax bracket. This makes developing a sound tax planning strategy even that much more important. (Note: If you were inheriting a 401(k), rules can vary from plan to plan, so those stipulations would play into a decision like this as well.)
Unfortunately, this situation is still fluid – the Treasury Department could change its mind again. So here’s the Simply Money Point: This is one of those circumstances in which we would highly recommend seeking the guidance of a fiduciary financial advisor or a tax professional. And, hopefully, the Treasury Department will issue some final guidance by the end of the year.