I have an inherited beneficiary IRA of $76,000 from my grandparents (who died over 20 years ago). I have been doing RMDs each year. I owe a very large amount in taxes this year.
What are the pros and cons of taking money out from the inherited IRA to pay the IRS?
Should I withdraw money from inherited IRA?
byu/Fabulous_Lack_3040 intax
Posted by Fabulous_Lack_3040
5 Comments
Pros and cons? Pro is it is a requirement, hence the “R” in “RMD.” You can have taxes withheld from the distributions, though.
Curiously, does the 10 year rule not apply to you because of when your grandparents passed?
Taking $ from the IRA is a taxable event. So, next year you may have the same scenario. Really no way to beat the IRS here. What I don’t get is an inherited IRA must be drained within 10 years. Were you a minor when you inherited it?
Please read the post. OP inherited this from grandparents over 20 years ago. That makes it a stretch IRA. The post-2020 [Secure Act] rules did not apply 20 years ago.
To answer the question, yes, you can withdraw more to free up cash for your taxes. You should be careful though. Taking out too much in one year can bump up your tax bracket. Even if you are currently in the 12% bracket, you might have to pay 22% tax on the withdrawal.
[Edit to clarify. Secure Act]
If you have enough free cash elsewhere, use that first. Mainly because if your IRA portoflio is in stocks, you’re probably in a 10% drawdown right now. Of course, that could get worse before it gets better, but you have until the end of the year to find out.
I think overall the strategy should be to use as little of the IRA money as you can while still paying the taxes on time.
The cons are that it’s additional taxable income, which you need to analyze based on your personal situation and the ripple effects of a higher AGI than you are used to.
There’s investment decisions as well which I won’t address.
Pros are the peace of mind of having it done. Paying after April 15th brings penalties and interest. Penalties generally start at 5% per month. Interest starts at 1/2 percent per month.