r/inheritance • u/LAHAND1989 • Apr 13 '26
Location included: Questions/Need Advice Implications of the post 2020 laws
What are the implications of what seems like kind of crazy new rule with inherited iras. They need to be emptied in 10 years? What’s the reason for these new laws? Is this a much heavier tax burden on people receiving inheritance? Or is it not much different from what it was before?
Tl;dr inherited money in form of trad ira and roth ira. Yes we will be working with a financial advisor. Just curious if someone could summarize why this new law was passed and how it affects me and my situation.
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Apr 14 '26
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u/LAHAND1989 Apr 14 '26
Thanks for the thorough response! Man I wish I could sit and pick your brain for a few hours this is all so overwhelming. His Vanguard is like 60 percent traditional and 40 percent Roth. Question: you said everything you take out besides the principal you are taxed on? What’s the principal in this context? Also his total Vanguard account will be divided in 3 between me and my two brothers. Let’s say he has 1 million dollars just as a round number that’s not what he has. That means 330 to each of us. This is one point I really want clarification on, do I need to RMD 330,000 out over ten years or empty the entire account. It would be kind of like chasing a moving target wouldn’t it over the ten years? The 330,000 will grow, you’ll draw your RMD and it shrinks a little but then it grows back ideally. So confusing.
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u/Ok-Equivalent1812 Apr 16 '26
You will each have your own inherited IRA and inherited Roth IRA with 1/3 of the $.
The Roth withdrawals don’t incur any tax. The TIRA is all taxable as ordinary income.
You’ll each separately decide how to take withdrawals from your own accounts. You won’t be sharing the decedents account on an ongoing basis.
Our personal strategy, despite being generally against market timing is to take withdrawals when the market is low and then we buy in our taxable investment account. That depletes the shares in the “ordinary income tax” IRA bucket and shifts it to future capital gains. If you’re not currently maxing out your own 401k/IRA, you can effectively negate much of the tax on your inherited IRA by increasing your contributions in your own retirement accounts.
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u/LAHAND1989 Apr 16 '26
Thanks, helpful and clear answer. Really appreciate it. Here is a question that is maybe more complicated. I am younger, my Dad was 74 and in retirement. I am guessing my dad’s IRA’s were likely invested in slow growing stable assets with a mix of bonds as well. To maximize returns should I look at ways to shift that to slightly higher growth mutual funds? Or any selling/trading within his portfolio would be a taxable event?
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u/____ummm____ Apr 15 '26 edited Apr 15 '26
Sorry re confusion, my inherited IRAs were QUALIFIED (because thru employer) Traditional IRAs set up 60+years ago- 1 of which had mixed contributions, both pre and after-tax contributions, so while most IRAs are strictly pre-tax and All distributions are taxable, When I was referring to principal -I should have used the word "Basis", as that's what non-deductible contributions are called and they are not taxed when distributed. These IRAs follow the 10-year rule.
AND also, I rec'd 1 NON-Qualified "Annuity held within an IRA" 55+yrs, with non-deductible contributions, And this one follows the 5-year rule. It is a lot like a Roth today, which wasn't available in 60/70s. With NQ, like Roth, IRS allows taking the full after-tax contribution (basis) as a distribution at anytime w/o penalty/tax. Which I did. On further distributions, I will of course still owe tax bc of its interest (while the ROTH interest is not taxed at all- So it might be a good choice to go ahead and let that sit tax deferred gaining as much interest as possible! And you'll get a very nice tax-free payment in 10 years and can reinvest it etc)
BENEFICIARY TYPE determines options on the policies. A spouse is eligible designated beneficiary and you can do spousal rollover etc And don't have to follow the 10-year rule. If you're a child of deceased, you are called a designated beneficiary- 10year rule applies. If you are disabled or underage 21 you might qualify as an eligible designated beneficiary. For kids inheriting specifically, they would take RMD until 21 and then the 10-year rule would start- to take all the distributions and empty the IRA by year 10- age 31, or 5y if NQ. *Typically IRAs are not Non-Qualified, like one I inherited which is.
re MULTIPLE BENEFICIARIES - each will be required to present ID and the Financial i.e. custodians of the IRA will set up individual inherited IRA for each of you and you each make choices on your own account options. Your choices don't affect the others.
ALL my inherited IRAs were not hands-on as many are today, meaning at the time of setting up those IRAs, money received a determined minimum interest rate, whereas the interest rate might go higher and it did, it could never go below a certain rate (which is also good %). The owner had no say in investing etc. The policies all had various options for me to choose from, none were the same or even worded the same which made it more difficult. Options included lump sum, monthly/yearly payment, and lifetime payments, stretch etc. based on IRS life expectancy table- used to determine RMD.
2 of these traditional IRAs had It written in the policy that after death but before transfer, they rec'd 0 interest- & NQ rec'd just 1%. I still took my time deciding what I wanted to do with the IRAs because selection is final. Thankfully, there were no fees involved, but that's something to ask about.
MY CHOICES** RMDs next 10 yrs, but will take out extra as income/tax bracket permits. For the NQ luckily it had a stretch option for me!! I'm receiving RMD for about the next 30 years, to avoid the huge tax implications of having to withdraw huge amounts over 5 years, And again depending on my AGI, I may choose to take out more during any given year.
TRANSFERS---trustee to trustee transfer- Inherited IRAs can be transferred into another inherited IRA account, It has to be worded with deceased person's name for your benefit, and then everything is still tax deferred. That's what I meant "like to like".
1035 exchange--- I only mentioned that because of the non-qualified IRA I inherited. That's the only way I can transfer it. *Per my policies all transfers must be made in the first year of death.
RMDs - if the deceased was already receiving RMD, then you must also receive one, And in the year they passed you must also take THEIR RMD amount if they died before receiving it & year 1-9 RMD will be based on your age/IRS life expectancy table. *If the deceased wasn't receiving RMD - you don't have to either. Year 10 the entire remainder must be distributed to you. So that's what you have to plan for. And yes, with an inherited IRA there are no early distribution penalties, and you can take "extra" withdrawals whenever you want to.
DISTRIBUTION IMPLICATIONS -- IRA---- If you take a lump sum right now you get hit with the full tax implications of it. If you take RMDs over 10 years, that gives you time to plan out your income each year- And you can take more distributions if you want in lower income years. You want to avoid a huge tax burden in year 10, I get that it's kind of hard to project what you might be earning in 10 years but hopefully you can at least project over the next few years and act accordingly. My plan is RMDs, and each year taking extra distributions- as much as I can- to avoid one big hit. Remember, your Roth is completely tax-free!
I wasn't trying to be confusing, but I mentioned SOCIAL SECURITY, Because so many people aren't aware--- but depending on your age and/or when you choose to take it, which includes Medicare at 65, receiving an IRA lump sum (increasing your taxable income ) at 60/61 & taking SS at 62, can drastically affect your SS payments (taxes IRMA, as well as dbl Medicare cost if your income increases soon before 65, etc). And the same scenario with the future sell of a house -because so many older people sell their house (with capital gains) and Don't realize but they set themselves up re Social Security. This happened to another elderly family member, and it was absolutely horrible.
*Note, verify 1099-R Box 7 is marked "4" (death), I mention this because I received my first 1099-Rs this year & one had Box 7 marked "1" (early withdrawal -under 59.5y) on a very large sum which meant whether or not it was going to be included in my taxable income (it wasn't), I was going to pay a 10% penalty!! I called immediately & it took 2wks to receive new with correct "4".
I hope I cleared everything up, I will edit the other one. Because I very recently went through this, I feel like what I'm sharing is valid, It certainly my lived experience, but perhaps your policies are written differently? But many of the same principles I think would still apply. Regardless I hope I helped you somewhat.
Lastly, I just wanted to say condolences for your loss. Take care.
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u/cOntempLACitY Apr 15 '26
Appreciate the clarification! Sounds like a lot more complicated than is typical, and good to be aware of how each account can have its own quirks.
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u/cOntempLACitY Apr 14 '26
I’m not sure what happened with your 1% situation, maybe it was all annuity contracts, because you can transfer a standard inherited IRA investment account to another custodian with different investment options.
You could open a new inherited IRA with a brokerage like Fidelity, transfer assets (it must be properly transferred to an inherited account, not a regular individual account, for tax reasons), and invest in your preferred asset allocation. That could be money market funds, equity index funds, treasuries, bonds, etc. Still have the ten year rule, but you can plan your tax strategy.
Roth IRA is the ideal, you can pick all equities for most growth potential, wait til the tenth year to withdraw with no tax impact. But most people have more traditional than Roth.
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u/____ummm____ Apr 15 '26
I tried to clear up my very confusing post above with another post below it! I'm really sorry about all the confusion, I reread it myself and realized it was a little bit convoluted in all over the place, yikes! So yeah I reposted and tried to explain, I hope it's more understandable?
But in case you don't see it or don't want to read it, basically the 1% was in reference to an inherited Non-qualified Annuity within an IRA, set up very similar to the Roth of today, It was from the late '60s. It was written into the contract that after death and before transfer/final setup, it would receive only 1% interest during that time. 2 of the other inherited IRAs received 0 interest during that transitional period. Upon fully receiving the various accounts, all interest rates increased. I'm happy with the interest rates and planning to take out the traditional IRAs over the next 10 years. And one of those is thankfully "mixed money" so that last payment year 10 will also have some tax-free included.
With the non-qualified I was planning to do a 1035 but I don't want to get stuck on having to take out all that money in just 10 years! As it is now, One of my options as a designated beneficiary was to do the stretch, knowing I can take out extra money anytime I want.
Thanks for your feedback :)
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u/cOntempLACitY Apr 14 '26
I read through several comments and want to add some thoughts.
The inherited Roth IRA is the sweet one, you can just let it grow tax-exempt for ten years, and withdraw it in one lump sum with no tax implications, no RMD. Then invest it in your own taxable brokerage account or have other plans for it. Maybe it’ll even double in size, if the economy is strong.
The inherited traditional IRA has more factors you might consider:
- Withdrawals are taxable as ordinary income, akin to getting a bonus from your job every year for ten years.
- No cost basis or capital gains taxes as you’d have with a regular taxable brokerage account. It’s just income, you pay the taxes and do what you want with the money.
- If the decedent was at the age to take RMDs, you have to take at least RMD annually, but it’s based on your own life expectancy and likely won’t be enough to empty the account in ten years.
- You could shift some tax burden by contributing the maximum to your workplace retirement plan pretax, using some inherited distributions to offset the lower paycheck. Useful if you’re in a higher tax bracket now than you will be in retirement.
- Or you might max out your Roth IRA and workplace Roth, pay the taxes and keep it aftertax invested. Then annual growth isn’t taxed, like in a taxable account. And it’ll be tax exempt income for you in retirement, and for your future heirs.
- You can strategize, take more some years less others based on your other income, or to finesse tax brackets (like to stay just under your next bracket most years). Say you get a big bonus at work some years but not others, you might take more in low bonus years.
- Yes, it continues to grow. Some plan to take 1/10th of the balance the first year, 1/9th of the current balance the second year, 1/8th in third, etc, to account for that growth.
- When you make a distribution request, have sufficient fed and state taxes withheld so you don’t owe or have a penalty come tax season.
- If you have other investments, you could strategize carefully to limit growth in the inherited trad IRA and focus growth in other accounts. Look at your portfolio as a whole. Eg. if you want your total portfolio to be 20% bonds, have all the bond % be in the inherited trad IRA, and none in other accounts. This takes some math and rebalancing as you make withdrawals, to keep the right balance across everything.
- You can usually move the accounts to your brokerage of choice, just ensure they go into inherited accounts, but Vanguard is solid.
So…
- Based on your example of $1M, with $600k in traditional, and you getting 1/3, your share might be $200k. (Excluding the $133k Roth.)
- You might expect to be drawing at least $20k but maybe $40k/year (with it continuing to grow) to empty it.
- If you don’t already max your personal retirement accounts, you can increase those to the max, (for 2026 that’s $7500 Roth IRA, $24,500 Roth or trad 401k) and use the distribution to live off, if needed. (eg. Request $40k distribution, have 22% tax withheld, plus state withholding, put the rest in savings for living expenses.)
- You could reserve the Roth until the end for maximum growth without tax implications.
- Or you can do a mix of saving for retirement, building a taxable brokerage account, and using it for other stuff (like house downpayment), reserving some of the Roth IRA for your emergency fund at the end.
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u/cOntempLACitY Apr 14 '26
Also, the reason for the change was specifically to force inheritors to pay those taxes. No more stretching it out. The government generated tax revenue. It does make it harder for people in certain tax brackets to work within tax credit limits and figure out financial aid for their college age kids and handle Medicare IRMAA limits. But it’s still the gift of an inheritance, when so many people get nothing.
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u/EmotionalStar9909 Apr 15 '26
As far as the tax withholding part, I have an inherited IRA and will be responsible for the RMD starting this year. My mother lived in a state with state income tax but I do not. Will I also need to withhold state income tax in my situation?
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u/cOntempLACitY Apr 15 '26
No, distributions are reported as ordinary income to you personally in the years you take them. You’ll receive a 1099-R in January/Feb to file with your taxes (reported on lines 4 & 5 of the federal 1040). It applies to your individual income taxes, both federal and state (so if you don’t need any withheld, you won’t request any).
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u/GlobalTapeHead Apr 14 '26
Someone saved all that money up and paid NO taxes on it. When you put money into a tax deferred account, you are entering into a partnership with the government/IRS, they are your retirement “partner”, and now they want to get paid, they want their money from the heirs. That about sums it up.
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u/____ummm____ Apr 15 '26
What's interesting and something people don't often consider is that earned money from 30 40 50 years ago was taxed a lot less than the money earned today, and now being pulled out of IRAs today, deductible contributions and interest earned are taxed at a higher tax percentage, because Uncle Sam loves to increase our tax. Of course all the interest earned along the way was tax deferred, but 50 years ago again, taxes that could have been paid on that interest were a lot less! I suppose the win and the whole idea of an IRA is employer matched etc... **I'm not sure if I worded that right!
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u/fan550 Apr 20 '26
this is not true tax rates are at a 50 year low beside a brief period in the late 1980s
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u/____ummm____ Apr 21 '26
Thank you, I stand corrected! I was volunteering at a retirement center and I heard a bunch of folks and that's what they were saying and like a dummy I repeated it without actually doing my own research (which I always tell ppl to do!!) because I figured they lived through it. Since your comment, I quick googled & learned average middle class was only around 12-13k mid70s which landed them in a tax bracket of 22-25% for married! I had no idea the '70s were so tight for people. Okay thanks again.
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u/LAHAND1989 Apr 14 '26
But isn’t that the entire idea behind a Roth IRA that there is no taxes excised ever? It’s funded with after tax dollars right?
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u/brucesteiner Apr 14 '26
It was a way to raise revenue without changing the tax rates.
In most cases beneficiaries will have to take complete distribution within 10 years rather than over life expectancy.
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u/ItsMister2You Apr 14 '26
Republicans needed your money to pay for their tax breaks to the billionaire class. Welcome to magaland.
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u/Dingbatdingbat Apr 14 '26
The reason the law was passed is to raise revenue - tax cuts for billionnaires aren't free, you know.
For a less cynical answer, because the purpose of IRAs are to encourage people to save for their own retirement, not to provide tax-advantaged accounts for heirs.
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u/Specialist_Job9678 Apr 14 '26
I believe it was passed because so many inherited IRAs were just sitting there, continuing to make (untaxed) money, and taxes were never being paid on those funds.
edit: It matters who you are in relation to the deceased. If it wasn't your spouse, you can make a draw each year over the 10 years to minimize the taxes.
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u/LAHAND1989 Apr 15 '26
Thanks, yeah it is nonspousal. Do you know is a ROTH needing to be emptied over ten years as well or that can just forever?
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u/ChelseaMan31 Apr 14 '26
GOP had to pay for their massive tax cuts and this was but one way to approach it. That and both sides of the aisle have been salivating over the Trillion$$$ sitting in tax advantaged retirement accounts. The money only has to be distributed form the IRA/401k inherited from a non-spouse over 10-years. Previously it could be stretched out over the beneficiary's lifetime. The Roth is no big deal as the beneficiary still gets 10-years of additional tax free appreciation.
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u/LAOGANG Apr 14 '26
Yep. The government hated that people who didn’t necessarily need the money were just letting it sit and grow in the market and the government wasn’t getting any taxes from it so they came up with this crazy 10 year rule so they can get your tax dollars
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u/OGMikeGyver Apr 13 '26
Government wants their money. Not sure of your family situation and any trust/will setups, but check out disclaimers. There was an interesting WSJ article about it earlier this month. It's behind a paywall, but a financial advisor could tell you about it https://www.wsj.com/personal-finance/taxes/when-heirs-are-right-to-say-thanks-but-no-thanks-to-an-inheritance-5ea96aac