Tax rules prevent deferral of inherited IRA distributions, advisor says
An 86-year-old beneficiary inheriting from a sister who had commenced withdrawals cannot delay taxation, but strategic Roth conversions and charitable gifts may mitigate overall liability.
Financial advisor Brandon Renfro, writing for SmartAsset and Yahoo Finance, has addressed a query from an 86-year-old beneficiary who inherited an individual retirement account from their 90-year-old sister. The deceased account holder had already begun taking required minimum distributions before her death, and the beneficiary sought to avoid immediate taxation on the inherited funds, citing a lack of current income need.
Renfro clarified that the beneficiary qualifies as an eligible designated beneficiary because they are not more than 10 years younger than the deceased. This status distinguishes them from standard designated beneficiaries, who are typically required to distribute the entire balance within 10 years of the owner’s death. However, because the original account holder had already started taking required minimum distributions, the beneficiary is subject to specific distribution timelines.
Under these circumstances, the beneficiary must take annual distributions based on the longer of their own life expectancy or the sister’s life expectancy at the time of her death. Renfro confirmed that the beneficiary cannot avoid taxation on these distributions entirely, as the regulatory design of required minimum distributions is intended to ensure tax-deferred funds are eventually taxed.
To manage the resulting tax impact, Renfro suggested two primary strategies. The first involves converting the beneficiary’s own traditional IRA into a Roth account. While this requires paying taxes on the converted amount, it eliminates future required minimum distributions on that balance, potentially lowering the overall tax burden in subsequent years. The beneficiary could utilise funds from the inherited IRA to pay the conversion tax if sufficient liquidity exists.
The second strategy involves qualified charitable distributions. By directing required minimum distributions directly to charity, the beneficiary can exclude those amounts from their adjusted gross income. This method avoids taxation on the distributed funds without the need to take the cash and then make a separate charitable donation, which would not offer the same tax exclusion.
