Hey all!
I inherited an IRA from my great grandfather about 10 years ago. He was well past retirement age and already took distributions from it. I’ve been taking RMD from it as well each year.
I want to use a chunk of it to pay off credit card debt, but the custodian is unsure if, because of the age, I’ll be hit with any penalties or “double tax” besides standard additional income.
Does anyone know? Thanks!
I inherited an IRA in 2014, will I be penalized beyond additional income tax for taking money from it?
byu/DrDiv intax
Posted by DrDiv
7 Comments
There are no penalties for distributing money from an inherited IRA.
No and find a new custodian.
You should be good to withdraw whatever you need as a non-spouse beneficiary. The RMD is a Minimum, so you don’t just let it ALL grow tax-deferred for 50 more years… They are not a limit or cap. You can withdraw more, even the full balance.
Just be sure to think about tax brackets if its a considerable amount and you could split it up across say 2 tax years (liking taking half now and half in January), to stop any of it from leaking into a higher bracket.
If you withdraw 100k, for a round example, and you are 50k below the next bracket, then half of the money could be taxed at a different rate. E.g. if your household income is about $150k, then $100k would put the top half of that money into the 32% bracket, and you’d pay 8% more tax, or ~$4000 extra tax versus taking two $50k chunks in separate tax years. Whether that dance applies, or is worth it, is just some quick arithmetic.
(Edited for clarity on RMD)
But you will have to pay taxes on the withdrawals
You are supposed to liquidate the IRA within 10 years of receiving it. You should have taken it all out by now.
Don’t take tax advice from this custodian.
Take out as much as you need but be aware you will pay tax, just like you pay tax on the RMDs. There is no penalty.
Check with your cpa, but in 2014 the rules were different. I suspect your distributions are done on the basis of your life expectancy. I don’t believe you would be subject to a 10% penalty, for distributions prior to 59.5. That being said, it is generally more advantageous to use other funds to pay off a credit card, as your IRA distributions will be a taxable event, at your State and Federal marginal tax rates, and you lose the ability to get tax deferred gains on those funds till you are in your 70’s, and even then, the RMD’s initially are only about 3.7% of the balance of your IRA’s. What is the interest rate on the credit card?