I have an inherited IRA from a 90-year-old sister who had begun distributions before her death. I don’t need or want her distributions yet. Is there a more practical way I can currently avoid the distribution taxes on these funds without adding her distributions to mine until later? I am 86 and currently taking my own required minimum distributions (RMDs).
Inherited IRA distribution rules are nuanced enough that your options aren’t necessarily obvious. I’ll start by reviewing those rules so you can see what you have to navigate. We can then talk about a few options you may want to consider for dealing with the IRA that you’ve inherited from your sister. (And if you need more help managing an inherited IRA or other assets, speak with a financial advisor.)
Inherited IRA Distributions
The rules that govern what someone can do with an inherited IRA are very direct. The problem, sometimes, is that it isn’t always clear which rules apply to you. It’s important to clarify that because you may have different options depending on your relationship to the deceased, and whether or not they had already reached the age at which they were required to take minimum distributions.
I like to think of it as a flowchart. At a high level, start by thinking about whether you are a spousal or non-spousal beneficiary. Then determine whether you’re an “eligible designated beneficiary” or “designated beneficiary.” Finally, see whether or not the original account owner had already begun RMDs.
Spouses are provided more leeway when they inherit IRAs, with the most beneficial treatment usually being that they can simply take the IRA as their own with the same distribution rules as if it had always been their account. In other words, spousal beneficiaries don’t have to begin or continue distributions.
Non-spouses, on the other hand, don’t have that option. In most cases, if you aren’t a spouse then you’re more than likely required to distribute the entire balance within 10 years of the person’s death. But not always. (A financial advisor can help walk you through the process of inheriting an IRA.)
Rules for Non-Spousal Beneficiaries
An eligible designated beneficiary can be any of the following:
- Minor children of the deceased
- Chronically ill
- Permanently disabled
- Not more than 10 years younger than the deceased
Anyone who doesn’t meet any of the above requirements is simply considered a designated beneficiary. You meet that final requirement, and so are an eligible designated beneficiary.
Your options then depend on whether or not the original account holder had already started RMDs. Since your sister had started RMDs, you have two options:
- Take a lump sum distribution
- Roll the money into an inherited IRA and then take RMDs based on whichever is longer: your life expectancy or her life expectancy at the time of her death.
Of course, neither of these options provides you with the solution you want, which is to avoid the taxes on your distributions. (But a financial advisor can help you manage and potentially limit your overall tax liability in retirement.)
Options for Your Distributions
You can’t avoid the distribution taxes entirely. That’s by design as the entire point of RMDs is to ensure that tax-deferred money eventually makes its way back out into the wild where it can be taxed. But you can be proactive about taking them in a way that suits you best. (And if you want to talk through scenarios like this one with a financial advisor, our free tool can match you with one.)
Some options you may want to consider include:
- Doing a Roth conversion. You can’t convert the inherited IRA, but you can convert your own IRA into a Roth account. You’ll have to pay taxes on the conversion, but then you won’t be required to take RMDs from the Roth, lowering your total RMDs going forward. You could even convert your entire balance, and then take a larger distribution from your inherited IRA to pay the tax bill (allowing more to go into the Roth) provided there’s sufficient money in there.
- Giving to charity. If you are already giving to charity, consider utilizing qualified charitable distributions (QCDs). These allow you to direct your RMD to charity and avoid taxation entirely. This is not quite the same as simply taking the distribution and then donating cash. QCDs aren’t an itemized deduction and are not included in your adjusted gross income (AGI).
Unfortunately, there isn’t much you can do to avoid the RMD on your sister’s IRA outside of QCDs. However, you may be able to reduce your RMDs going forward by utilizing Roth conversion opportunities for your account.
Tips for Managing Inherited IRAs
- A financial advisor can help you manage inherited assets, including IRAs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you inherit an IRA and want to manage it yourself, it’s a good idea to do a deep dive into the rules surrounding this type of inheritance. Be sure to review our guide on the rules for inheriting traditional and Roth IRAs.
Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAdvisor Match platform, and he has been compensated for this article. Questions may be edited for clarity or length.
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