If you’ve recently inherited an IRA or expect to in the future, you may be wondering how the new rules impact you. Under Secure Act 2.0, inherited IRAs have changed and that will affect how much tax you’ll owe. The biggest shift is that most beneficiaries must now liquidate the entire account within 10 years.
For high-income earners, this can be challenging. You’re required to take the money out, but you can’t convert an inherited IRA into a Roth to reduce future taxes. You might be wondering how you’ll take distributions without being pushed into higher tax brackets?
The Problem With Inheriting an IRA During Your Peak Earning Years
This situation comes up frequently in my line of work. In some cases, a parent in their 80s passes away, leaving behind a sizable IRA. If you inherit it, often in your late 40s or 50s, you’re probably right in the middle of your highest-earning years. You and your spouse may both be making more than you ever have.
If the account is worth $1 million, you might need to withdraw roughly $100,000 a year, plus any growth, to fully divest it within 10 years. Every dollar you withdraw is treated as ordinary income, and will sit on top of your salary, your spouse’s salary, and any other income you have. This can easily push you into a higher tax bracket, reduce your eligibility for financial aid for your children, and complicate your planning in ways you never expected.
Keep in mind that you can convert an inherited IRA into a Roth IRA to control taxes. Under Secure Act rules, you cannot convert inherited IRA money into an inherited Roth. You must take distributions within the 10-year window.
Using Tax-Advantaged Investments to Offset Inherited IRA Income
For many high-income individuals, the best strategy is tax-advantaged investments. These are investments designed to generate deductions, losses, or credits that help reduce your taxable income. They don’t eliminate the inherited IRA withdrawals but they can help to manage the taxes.
Some of the tools commonly used include:
- Oil and gas programs (263(c))
These are structured energy harvesting projects that offer deductions. - Bonus depreciation strategies (168(k))
Animal breeding programs, equipment-heavy businesses, car washes, gas stations, and certain real estate investments can all generate first-year depreciation deductions. - Real estate investments with pass-through losses
Projects that offer depreciation can help offset ordinary income, including income from inherited IRA distributions. - Buying a business
If the business includes significant furniture, fixtures, or equipment, the depreciation can create tax relief.
These strategies are not one-size-fits-all, and each comes with its own rules and risks. But for high-income earners who suddenly find themselves with an inherited IRA, these tools can reduce the tax burden if they are managed well.
Since inherited IRAs must be liquidated within 10 years, and you cannot convert them to Roth IRAs, this often means a decade of higher taxable income. But with the right planning, you can offset much of that impact. Understanding which tax-advantaged investments are available to you, and how they fit into your broader financial picture, can make a significant difference in your long-term tax burden.
If you haven’t spoken to a tax professional about this, it may be time to look for one.
Matt Chancey is a Registered Representative of Realta Equities, Inc Member FINRA/SIPC and an Investment Advisory Representative of Realta Investment Advisors, Inc. Neither Realta Equities, Inc,. or Realta Investment Advisory are affiliated with Tax Alpha Companies, Including Tax Alpha Title and Tax Alpha Solutions. Realta Wealth is a trade name for the Realta Companies co-located at 1201 N Orange Street., Suite 729 Wilmington, DE 19801.
Realta Wealth is the trade name for the Realta Wealth Companies. The Realta Wealth Companies are Realta Equities, Inc., Realta Investment Advisors, Inc., and Realta Insurance Services, which consist of several affiliated insurance agencies. Securities are offered through Realta Equities, Inc., member FINRA/SIPC and Investment Advisory Services are offered through Realta Investment Advisors, Inc., a US SEC Registered Investment Advisor co-located at 1201 N. Orange St., Suite 729, Wilmington, DE 19801.
This material is for informational purposes only and does not constitute investment, tax, or legal advice. All investments involve risk, including loss of principal, and past performance is not indicative of future results. Examples provided are hypothetical and do not guarantee future outcomes. Tax strategies discussed may not be suitable for all investors; consult a qualified tax professional regarding your situation. This is not a recommendation or solicitation to buy or sell any security or strategy.
Investments discussed may be speculative, illiquid, and involve a high degree of risk, including the possible loss of principal. Such investments are generally available only to qualified or accredited investors.