Navigating Inherited IRAs: Strategies for Minimizing Taxes

Inheriting an Individual Retirement Account (IRA) from a loved one can be a blessing and a challenge. While it provides a financial safety net, it also comes with tax implications that you must navigate carefully. If you've inherited your sister's IRA and don't need distributions yet, this article will guide you through strategies to minimize taxes and preserve the account's value.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in 2019, changed the rules for inherited IRAs. Now, non-spouse beneficiaries must withdraw the entire account within 10 years of the original owner's death. However, there are strategic ways to manage distributions and minimize your tax burden during this period.

1. Take only the required minimum distribution (RMD) each year: The RMD is calculated based on the account balance and your life expectancy. By taking only the RMD, you keep the rest of the money in the IRA, allowing it to continue growing tax-deferred. This strategy is particularly beneficial if you don't need the money immediately and want to preserve the account's growth potential.

2. Consider converting to a Roth IRA: If you expect your tax rate to be higher in the future, converting a traditional IRA to a Roth IRA can be beneficial. You'll pay taxes on the converted amount now, but qualified withdrawals from a Roth IRA are tax-free. This can be especially advantageous if you don't need the money immediately and want to avoid higher taxes in the future.



3. Coordinate with other assets: Consider the tax implications of your overall portfolio. If you have other taxable assets, you might want to withdraw from those accounts first, as they could be subject to higher tax rates if your income increases in the future.

4. Strategic timing of distributions: By taking smaller distributions in years when your income is lower, you can avoid pushing yourself into higher tax brackets. Additionally, if you have a spouse who is more than 10 years older, they can be the beneficiary and use the life expectancy method, stretching out distributions and potentially lowering taxes.

In conclusion, inheriting an IRA requires careful planning and strategic management to minimize taxes and preserve the account's value. By taking only the required minimum distribution each year, considering a Roth conversion, coordinating with other assets, and strategically timing distributions, you can effectively navigate the 10-year rule and make the most of your sister's IRA. Consult with a financial advisor to create a personalized strategy tailored to your specific situation and goals.