Tax planning
September 12, 2024
For people who have inherited IRAs in which required minimum distributions (RMDs) have begun, new IRS regulations will require them to continue taking RMDs annually and withdraw the entire balance within 10 years. Investors seeking to minimize their tax liability can benefit from distribution strategies that help keep them from moving into a higher bracket. However, for those who want to maximize after-tax wealth, the analysis needs to go beyond taxes.
Vanguard researchers evaluated three IRA distribution strategies—a lump sum taken in year 10, RMDs taken annually with the balance withdrawn in year 10, and roughly equal distributions taken in each of the 10 years—by testing them across a variety of inputs. Their findings, which are illustrated through a case study, show that for most investors, the strategy that results in the lowest tax liability is to take roughly equal annual distributions to avoid crossing over into a higher tax bracket.
But investors looking to maximize after-tax wealth need analysis that goes beyond taxes paid. There may also be exceptions to the equal-annual-distributions strategy depending on the investor’s tax bracket, income, and other unique circumstances.
To learn more, read Tax Planning: Minimizing Taxes on Inherited Distributions.
Notes:
All investing is subject to risk, including the possible loss of the money you invest.
This information is general and educational in nature and should not be considered tax and/or legal advice. Any tax-related information discussed herein is based on tax laws, regulations, judicial opinions, and other guidance that are complex and subject to change. Additional tax rules not discussed herein may also be applicable to your situation. Vanguard makes no warranties with regard to such information or the results obtained by its use, and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend you consult a tax and/or legal advisor about your individual situation.