Inherited an IRA? Discover the crucial distinctions that could save you a fortune in taxes with Hunter Brockway.

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Did you inherit an IRA, or do you have an inherited IRA? This simple twist of words could mean the difference of tens or hundreds of thousands of dollars, depending on certain situations. In this video, we’re going to go over how to properly inherit a tax-deferred retirement account. Hi, I’m Hunter Brockway, founder of Boca Retirement Strategies, here to help set you up for a successful retirement while spending more money and avoiding being killed in taxes.

It is likely not the case that someone is out to get you, but without proactive planning, the wrong designation could lead to you leaving a huge tip to the IRS. If you’re watching this video because you’ve lost someone resulting in you inheriting a retirement account, my condolences for your loss.

The Pitfalls of Inheriting an IRA Inheriting an IRA is when an individual takes the full balance as a distribution and gets killed in taxes all at once because they didn’t have someone to educate them on their options. This is all too common. An individual finds out they have inherited a large and potentially unexpected amount of money, they have no prior experience with this situation, and they end up with a check for the full amount. The individual now has money they didn’t previously have, but they’ve missed an enormous opportunity. The much preferable alternative to simply cashing the check and being killed in taxes is to set up an inherited IRA. No, you cannot put it into another existing IRA.

Understanding the Secure Acts and Inherited IRA Rules Following the Secure Acts, the rules on what someone is required to do with an inherited IRA changed. Under current rules, in most cases, the beneficiary will have 10 years to distribute the entire balance. There are exceptions for spouses and a select few others, who are what the IRS is now calling an eligible designated beneficiary. It is important for these types of beneficiaries to claim the IRA as their own. There are also separate sets of rules for trust non-eligible beneficiaries.

Strategies for Minimizing Tax Burden Having an inherited IRA means creating a plan to take advantage of the 10 years available to distribute the money. It means shrinking the slice of the pie that the IRS is going to hold onto. We can take a proactive approach and spread this over time or into lower income years, lowering the amount an individual is going to pay both in taxes and potential Medicare surcharges.

Illustrating the Power of Spreading Out Income Here’s a simple example to illustrate the power of spreading out the income. Bob and Sue inherit a $1 million IRA. Before taking any distributions, their taxable income is $83,500, putting them in the 22% marginal bracket, that is, until rates go up in 2026. If they take the additional $1 million all at once, they will pay an additional roughly $325,000 in federal taxes. They happen to be on Medicare, and their premiums will also more than triple for a year. However, if they take the income evenly over 10 years, the total tax bills are reduced to roughly $240,000, which includes the increase in tax rates when the Tax Cuts and Jobs Act expires in 2026. With just a little bit of planning, their Medicare premiums will only be impacted by a fraction of what they would have been in the first scenario.

The Importance of Proactive Planning Be proactive, not reactive. For this to be successful in practice, your relationship with your financial advisor should always be built deeply, viewing them as a center for all financial matters in your life. If the adviser only finds out about an inherited IRA after you have taken action, it might be too late. This is just one example of why Boca Retirement Strategies reviews tax returns every year and talks about taxes every year. Our clients know that they can and should come to us for everything money-related in their life.

Taking Action and Preparing Beneficiaries Taking proactive planning might at times feel unnecessary or burdensome, given how far away things might feel, but you should prepare your beneficiaries so they know what’s coming and what they should do.

Contact Information and Services Offered I’m Hunter Brockway, founder of Boca Retirement Strategies. If you’re interested in having a 411 and 911 in your corner to help with life’s events like this, you can book a no-cost, no-obligation call on our website at BocaRetirement.com, or email us at contact@bocaretirement.com. We are based in South Florida, Western Massachusetts, and work with clients scattered through the U.S.