HUNTSVILLE, AlabamaWAF)— The rules for inheriting retirement accounts like IRAs from a non-spouse can be complicated and costly if not handled correctly. Understanding these regulations is crucial to minimizing the tax burden.

Financial expert Jay McGowan of The Welch Group shares strategies for potentially saving taxes when inheriting these accounts.

Non-Spousal Rules: What You Need to Know

The IRS rules for inheriting IRAs from someone other than a spouse are complex and can vary depending on individual circumstances. However, a general guideline is that non-spouse beneficiaries must withdraw all funds from the inherited IRA within 10 years. This means you can’t just let the funds grow indefinitely, as you could face penalties if you miss the withdrawal deadline.

Although the rules may seem simple, they have many nuances. For example, the timing of withdrawals and how they align with your income levels are key to determining the taxes you’ll owe. McGowan emphasizes that understanding the implications of these withdrawals, such as the impact on ordinary income and tax deferral opportunities, is essential to creating an effective strategy.

Important Considerations

When planning to manage an inherited IRA, beneficiaries should consider several factors:

• Ordinary income: Withdrawals from inherited IRAs are generally treated as ordinary income, meaning they are taxed at your current income tax rate. This could push you into a higher tax bracket if not carefully managed.
• Tax deferral or minimization: Although the goal is often to defer tax for as long as possible, it is also essential to minimize the total tax impact. Finding the right balance is important to maximizing the value of the legacy account.
• Account Value: The size of the inherited IRA can influence your strategy. Larger accounts may require a different approach than smaller accounts due to their impact on your overall tax situation.
• Personal income: Your current and future income levels should be considered in your withdrawal strategy. If you anticipate a year of lower income, it might make sense to take larger distributions during that time to minimize your tax liability.

Planning Strategies to Save on Taxes

To effectively navigate these rules, McGowan offers several planning strategies:

• Plan for income changes: If you know your income will fluctuate over the next 10 years, plan your withdrawals based on these changes. Taking larger distributions during low-income years can lower your overall tax bill.
• Increase 401(k) or IRA contributions: To offset the tax impact of inherited IRA withdrawals, consider increasing contributions to your retirement accounts. This can help reduce your taxable income and balance out additional income from the inherited IRA.
• Consolidate charitable donations: If you are charitable, consolidating charitable donations into a single year when you receive a large distribution can maximize tax benefits. By giving more in a high-earning year, you may be able to significantly reduce your taxable income.

McGowan recommends consulting a financial advisor who can tailor a strategy to your specific situation and help you navigate the complexities of legacy IRA regulations.

To learn more about the Welch Group, click here.

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