How Do I Avoid Paying Taxes on an Inherited IRA?

How do I avoid paying taxes on an inherited IRA

Beneficiaries who inherit retirement accounts have several options available to them that can reduce taxes paid, including working with a financial advisor to understand and implement these options. SmartAsset’s free tool connects beneficiaries with trusted, verified financial advisors in their area.

Staying current with changing laws and tax obligations when inheriting an IRA is vitally important. Here are some popular options:

Roll Over

Although IRAs offer special tax advantages, they still must pay taxes. Therefore, it’s wise to carefully consider any potential income tax implications when moving or withdrawing assets from such accounts.

If you are the spouse of an deceased IRA owner, any inherited account can be transferred directly into your own IRA or retirement plan account without incurring income tax consequences. However, only one rollover per year is permissible and no assets can be directly moved between two IRAs.

If you aren’t the spouse of the deceased IRA owner, it is imperative that you take necessary RMDs from any inherited accounts by December 31 of the year following their death or face an excise tax penalty of 50%. There are various strategies available for taking RMDs from an inherited IRA account:

Assume Ownership

Inherited retirement accounts can be complex affairs, but with some careful preparation beneficiaries can reduce tax implications. An experienced financial professional can assist in exploring all of your available options and assist your family.

Alternatively, if you are the sole beneficiary of an IRA (non-spouse), another way is to assume ownership. Doing this allows distributions to be spread out over your life expectancy without incurring an early withdrawal penalty of 10%; however, taking required minimum distributions (RMDs) by December 31 of the fifth year after death remains mandatory; but this option gives more freedom when withdrawing funds without incurring early withdrawal penalties. It could be useful for those wanting the flexibility of withdrawing money but don’t want the early withdrawal penalty of 10% early withdrawal penalty.


Beneficiaries whose spouse was the original account holder can keep their IRA tax-free by treating its assets as their own, while beneficiaries of non-spouse IRAs must clear out their accounts within 10 years or risk paying a 50% excise tax penalty; this rule applies to traditional, Roth, SIMPLE and SEP IRAs as well as employee sponsored retirement plans like 401(k).

Before cashing out an inherited IRA, it is wise to consult a financial advisor in order to understand all your options. Special rules associated with IRAs can create unwelcome tax liabilities that force your family into higher income tax brackets. A qualified tax professional can advise how best to utilize these funds, such as transferring them into an irrevocable trust that can extend payout periods while simultaneously lowering tax bills by moving pre-tax assets into post-tax money without incurring an early withdrawal penalty fee of 10% early withdrawal penalty fees – especially useful when dealing with younger beneficiaries who may benefit from lower tax rates in future years.

Transfer to a Roth

Assuming you inherit an IRA involves many considerations: your relationship to the original account holder, their age at death and any distributions taken may all play a part. Whatever the circumstance may be, it’s essential that you plan ahead and contact a financial professional for advice.

At times, it may make sense for beneficiaries of an inherited traditional IRA to convert some or all of it to a Roth. Before doing so, however, beneficiaries should carefully weigh all possible outcomes as this conversion may not always prove advantageous; for instance if it includes both nondeductible and deductible contributions then any withdrawals would likely be taxed at ordinary income rates.

IRAs that have been left to you through inheritance can be complex affairs with specific rules to abide by. As either the spouse of an IRA owner, or non-spouse beneficiary, there are options available to reduce taxes and penalties as much as possible. It is essential to fully comprehend how each option operates before making your decision.

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