Q. I inherited a small IRA when my mother died. Is There Any Way I Can Avoid Income Taxes? I don’t currently need the income and can I keep it in an IRA?
A. Sorry to hear from your mother.
And unfortunately there are new rules on how inherited IRAs and you will not be able to avoid paying taxes on the money.
But you have some time.
If you inherited the IRA From your mother on or after January 1, 2020, you must withdraw all assets in the account within 10 years, said Jeanne Kane, certified financial planner at JFL Total Wealth Management in Boonton.
The SECURE Act, With its going into effect in 2020, you couldn’t extend the distributions over the course of your life, she said.
To add to the confusion, last week the IRS updated a release that covered when to make distributions. Finance professionals expected investors to not have to make minimum annual distributions during the 10 year period, but now it appears that annual distributions are indeed required.
If you’ve inherited a traditional IRA, you’ll pay tax on 100% of what you withdraw because the money wasn’t taxed when your mother put it in, Kane said.
“She put off paying taxes and now if you take the money out, you pay them,” she said.
There are different possibilities Manage your distributions, Keep an eye on taxes.
You could take the same print every year, she said.
“This makes sense if you expect your income to be constant over the next 10 years,” said Kane. “You distribute the tax rate evenly over 10 years.”
You could also take irregular distributions.
“If your income varies from year to year, in years when your income is lower and you are in a lower tax bracket, you can withdraw more so you pay less tax,” she said.
You can empty the entire account even after 10 years. Note, however, that these annual distributions are likely to be required.
Remember that if you think your income will go down in the future, e.g. For example, when you retire, you may want to wait for your payout at Year 10 or even the last couple of years. That’s because your retirement income may be lower and you may be in a lower tax bracket, Kane said.
If it’s a Roth IRA, you could run the money for the next 10 years to benefit from 10 years of tax-free growth, Kane said. Kane said if you are worried about taxes, there is a strategy you can use to neutralize the tax implications of inherited IRA withdrawals.
If you don’t contribute the maximum to your 401 (k) which is $ 19,500 plus another $ 6,500 if you are over 50, you can increase your contribution which will decrease your taxable income, she said.
“Take a distribution from your inherited IRA for the same amount. This increases your taxable income, ”she said. “Then the 401 (k) contribution offsets the income you get from the inherited IRA. It is tax neutral. “
You should discuss the details with a professional to understand the best withdrawal strategy for you.
Send your questions by email to Ask@NJMoneyHelp.com.
Karin Price Mueller writes that Bamboozled Column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com‘s weekly e-newsletter.