If you inherited an IRA account, take steps to avoid costly mistakes.
An Individual Retirement Account (IRA) allows money to grow tax-deferred in America, until the funds are withdrawn. When the account owner passes away and the IRA is inherited by a non-spouse beneficiary, the heir must take mandatory distributions, which are taxable. Unlike traditional IRAs, where owners can choose to withdraw minimum distributions (RMDs) throughout their lifetime, letting the remaining assets continue to grow tax-free, inherited IRAs must be fully withdrawn within ten years. This relatively new rule presents both challenges and strategic opportunities for beneficiaries.
When and How Much Should You Withdraw?
If you withdraw all funds from the inherited IRA at once, the sizeable influx of income can create a large tax bill. Withdrawing a set percentage annually (usually 10%) ensures the account is emptied within ten years.
An heir may want to delay withdrawals as long as possible, allowing for potential tax-free growth inside the IRA, but that can result in larger distributions – and more tax – later. Alternatively, heirs can spread withdrawals unevenly over ten years based on their individual tax situation in order to minimize the tax impact of mandatory withdrawals.
For inherited Roth IRAs, non-spouse beneficiaries must also empty the account within ten years. However, withdrawals are generally tax-free in the U.S. if the account has been open for at least five years, since the original owner already paid taxes on the money before it was deposited in the Roth IRA. This flexibility allows for strategic planning without tax concerns.
If you inherited a non-Roth IRA and know that your income (and tax bracket) may rise in the next ten years, it may be wise to consider withdrawing the funds sooner, when you are in a lower tax bracket.
Personalizing Your Strategy
Every financial situation is unique, and so is managing an inherited IRA. Managing the withdrawal timeframe of an IRA is best done with input from both an investment advisor and tax professional — who can give you advice in Israel and the U.S. Whether using distributions for daily expenses or reinvesting for future growth, it’s crucial to align your strategy with your personal financial goals and tax circumstances… in both countries. Selling the assets immediately and transferring funds to Israel can trigger a substantial tax bill.
In order for inherited IRAs to maintain their tax-free status, they need to be held by an American financial institution. For this reason, seek expert advice tailored to your situation. Contact us at (02) 624-2788 if you are inheriting an IRA or sign up for a free Cross-Border Financial Evaluation at profile-financial.com/call.
Douglas Goldstein, CFP® is the director of Profile Investment Services, Ltd. www.Profile-Financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation on how to set up your American assets to meet your financial goals. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.
Published October 8, 2024.