Inherited an IRA? Don’t Make This Tax Mistake

What Is the Biggest Tax Mistake People Make With an Inherited IRA?

The most expensive inherited IRA mistake is withdrawing the entire account at once. Because traditional IRA distributions are taxed as ordinary income, a large withdrawal in one year can push you into a higher tax bracket and create a significant tax bill.

Non-spouse beneficiaries usually have up to ten years to withdraw inherited IRA funds under current rules. Spreading withdrawals over several years allows you to coordinate distributions with your income and potentially reduce the overall tax impact.

Why This Inherited IRA Mistake Happens

The Smarter Way to Handle an Inherited IRA

Under current SECURE Act rules most non-spouse beneficiaries must withdraw the account within ten years. That does not mean you must withdraw everything immediately. Strategic withdrawals allow you to control taxes and potentially keep yourself in lower brackets.

Ways to Reduce Taxes After a Large IRA Distribution

If a large inherited IRA withdrawal already occurred the tax event usually cannot be reversed. However several strategies may help soften the impact in that tax year.

• Maximize contributions to retirement plans such as a 401(k), SEP IRA, or Solo 401(k).
• Fund a Health Savings Account if eligible.
• Use a donor-advised fund for charitable giving.
• Harvest investment losses to offset gains.
• Coordinate deductions if you have business income.

Quick Self Check Before Moving Money From an Inherited IRA

• Have I opened an Inherited IRA instead of transferring funds to my bank?
• Do I understand the ten-year distribution rule?
• Have I projected the tax impact of withdrawals?
• Am I coordinating distributions with my annual income?
• Have I spoken with a financial advisor or tax professional first?