• Discounts and special offers
  • Subscriber-only articles and interviews
  • Breaking news and trending topics

Already a subscriber?

By signing up, you accept Moneywise's Terms of Use, Subscription Agreement, and Privacy Policy.

Not interested ?

How an inherited IRA could impact your tax bill

If you’ve inherited a Roth IRA, the taxes have already been paid upfront. But if you’ve inherited a traditional tax-deferred IRA, withdrawals will be taxed as ordinary income.

So if you make $65,000 a year, withdrawing $35,000 from an inherited traditional IRA would bump up your taxable income to $100,000.

“Given that every penny withdrawn from an inherited traditional IRA is counted as taxable income you need to be strategic in how you will time your withdrawals,” Orman writes.

So, even though the IRS has waived the requirement for an annual RMD, Orman recommends spreading out your withdrawals lest you inadvertently bump yourself into a higher tax bracket for the year and trigger an extra-large tax bill.

If you’re in your early to mid-60s you should be particularly careful, Orman writes, since your monthly premium for Medicare Part B is based on your tax return from two years prior to enrolment.

In other words, while you’re eligible for Medicare at age 65, your premium will be based on your income from age 63, meaning a sudden massive bump in income for that tax year will be especially costly.

Find a financial adviser in minutes

Are you confident in your retirement savings? Get advice on your investment portfolio from a certified professional through WiserAdvisor. It only takes 5 minutes to connect with an adviser who puts you first.

Get Started

Other considerations

There are a few exceptions to the 10-year rule — most notably, when the person inheriting the account is a surviving spouse.

A surviving spouse can take distributions based on their own life expectancy, or roll over the account into their own IRA.

The same goes for children of the deceased who are still minors, but once they turn 21, they’re subject to the 10-year rule.

There are a few other exceptions, such as a beneficiary who is disabled or chronically ill.

And if the beneficiary is an estate, rather than an individual — and if the deceased wasn’t already taking the required RMD — then the account has to be emptied within five years, not 10.

Since withdrawals from an inherited IRA can impact your tax bill and even your Medicare Part B premium, it’s important to have a withdrawal strategy — and it could be worth talking to a financial advisor or tax expert to find out what will work best for you.

Sponsored

This 2 Minute Move Could Knock $500/Year off Your Car Insurance in 2024

Saving money on car insurance with BestMoney is a simple way to reduce your expenses. You’ll often get the same, or even better, insurance for less than what you’re paying right now.

There’s no reason not to at least try this free service. Check out BestMoney today, and take a turn in the right direction.

Vawn Himmelsbach Freelance Contributor

Vawn Himmelsbach is a journalist who has been covering tech, business and travel for more than two decades. Her work has been published in a variety of publications, including The Globe and Mail, Toronto Star, National Post, CBC News, ITbusiness, CAA Magazine, Zoomer, BOLD Magazine and Travelweek, among others.

Disclaimer

The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.