Dear Liz: I inherited my father’s IRA through a trust in 2010. Unbeknownst to me at the time, I’ve now found out I should have taken that money out over the following years, but I didn’t.
I turned 73 in May of this year, and I’d like advice on what I should do with that account.
Answer: Get thee to a tax pro. You’ve got some distributions to make, taxes to pay and penalties to mitigate.
Today’s rules for inherited IRAs require most non-spouse beneficiaries to empty the accounts within 10 years, thanks to the SECURE Act of 2019.
Before that, most beneficiaries could spread required minimum distributions over their own lifetimes.
Depending on the type of trust, you might have been required to take RMDs at the same pace your father was taking them. But either way, distributions were supposed to be made.
You (or better yet, your tax pro) will need to reconstruct the distributions that should have been taken since 2010, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.
Those distributions should be made as soon as possible, and then you (or better yet, your tax pro) can ask for relief from the possible 25% excise tax penalty that would otherwise be owed on the distributions you missed.
Your tax pro will need a copy of the trust, your dad’s date of death and the IRA’s Dec. 31 balances for every year since then.
Dear Liz: The letter writer who asked about Roth conversions should also consider that they or their spouse will eventually be a widow(er) and will be subject to the income tax “widow’s penalty.”
Roth conversions now protect the survivor against some of that tax bite.
Answer: The widow’s penalty refers to the higher financial burden many survivors face after losing a spouse as they change from “married filing jointly” status to “single” status.
While their incomes may drop, their taxes and other costs may rise.
Having at least some money in a tax-free account can help with this as well as a number of other situations in retirement, which is why it’s important to fund a Roth account during your working years if you can.
The main downside to Roth contributions is that you don’t get an upfront tax break for making them.
Conversions, though, are more complicated.
They trigger a tax bill and can have ripple effects, such as reducing eligibility for tax credits, financial aid or health insurance subsidies.
Late-in-life conversions can increase Medicare premiums and cause more of your Social Security checks to be taxable. That’s why conversions should only be considered after careful consultation with tax pros.
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Liz Weston, Certified Financial Planner, is a personal finance columnist. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
The post How can I avoid penalties for late withdrawal of an inherited IRA? appeared first on Los Angeles Times.
