Broker Check

Strategies for Inherited IRAs

August 17, 2022

New tax rules require most non-spouse beneficiaries of inherited IRAs to distribute 100% of the IRA within 10 years from the date of passing.  As with the sequence of returns with investing, the sequence of distributions can make a big difference, especially when dealing with inherited IRAs and the new 10-year rule.

While it is not standard practice to take distributions during down market cycles, as the distributed dollars would not have the opportunity to grow back if the markets recover, taking distributions from an Inherited IRA during down market cycles could be beneficial in cases where the owner of the inherited IRA does not plan on spending the money and therefore may continue to invest in a different type of account. By taking distributions in down years and reinvesting the proceeds immediately in an after-tax account, the beneficiary may be able to exhaust the IRA at a faster rate and lower value, therefore lowering the overall tax burden. Meanwhile, should the investments recover to their previous value, the increase in value may be subject to preferential tax rates and the owner of the account will have more flexibility to determine when the taxes are paid rather than being stuck with the 10-year rule for inherited IRAs.

Naturally, it is important to consult a tax professional before engaging in such a strategy.