Inherited an IRA? The Do’s and Don’ts Every Gen Xer Needs to Know
If you inherited an IRA from a parent, the IRS likely started a 10-year countdown. If you wait too long or make the wrong move, you could accidentally create one of the largest tax bills of your life.
An inherited IRA isn’t just money. It’s also a set of rules, and those rules changed in recent years. The key is understanding how they apply to you before making decisions.
The 3 Questions That Determine Your Inherited IRA Rules
| Question | Why It Matters |
|---|---|
| Who inherited the IRA? | Spouses usually have more flexibility. Most Gen X beneficiaries are non-spouse heirs and face stricter rules. |
| Had the original owner started RMDs? | This determines whether annual withdrawals may be required during the 10-year period. |
| What is your 10-year deadline? | Many beneficiaries must empty the account by the end of year 10, which impacts tax timing. |
The Biggest Mistakes to Avoid
- Don’t cash out the entire IRA at once. This can push you into a higher tax bracket.
- Don’t wait until year 10 to deal with it. That often creates a large tax bill.
- Don’t assume you can convert it to a Roth. Non-spouse beneficiaries generally can’t do this.
- Don’t ignore annual withdrawal rules if they apply.
- Don’t forget to plan for tax withholding.
What to Do in the First 30 Days
| Step | What to Do | Why It Matters |
|---|---|---|
| 1) Title the account correctly | Set up the account as an inherited IRA. | Preserves tax treatment and avoids unintended distributions. |
| 2) Ask key questions | Confirm your 10-year rule, RMD status, and annual withdrawal requirements. | These answers determine your entire strategy. |
| 3) Build a withdrawal plan | Spread withdrawals intentionally based on your tax situation. | Helps reduce taxes and avoid last-minute decisions. |
Frequently Asked Questions
Do I have to withdraw an inherited IRA within 10 years?
Many non-spouse beneficiaries must withdraw the full balance within 10 years, depending on their situation.
Can I take all the money out at once?
Yes, but it’s usually not recommended because it can push you into a higher tax bracket.
Do I have to take withdrawals every year?
In some cases, yes. If the original owner had started RMDs, annual withdrawals may be required.
Can I convert an inherited IRA to a Roth IRA?
Non-spouse beneficiaries generally can’t convert an inherited IRA to a Roth.
How are inherited IRA withdrawals taxed?
Withdrawals from a traditional inherited IRA are taxed as ordinary income.
What is the best withdrawal strategy for an inherited IRA?
Many people spread withdrawals over several years to manage taxes, but the right approach depends on your situation.
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