Unless you are a spouse, you will not have many choices. Click the arrow to the left of the lines below that best describes your relationship and relative age to the deceased. Follow any indented arrows that best describe your situation.

Everything, except the spouse rollover, requires a distribution over either 10 years or a lifespan. (Note: it might not be your lifespan). If you are past the required beginning date (73 years old), even the spouse rollover requires a minimum distribution. (Remember, nothing is certain, except death and taxes. The best you can do is defer them.) The details above explained what your timeline is for distributing money from the inherited IRA, but how much money should you take each year?

Your annual distribution depends on your situation. There are at least three factors to consider for distributions – how much do you need to live on, how much taxes are you going to pay on distributions, and what do you want to leave for your estate. If you take more money in annual distributions, you typically pay more in taxes and end with less total money. If you take less money in annual distributions, you can pay less taxes and get more money over time. If you take a large lump sum out in the beginning, middle or end, it usually results in higher taxes. An inherited IRA can be inherited (again), so an inherited IRA could still become part of your estate. Depending on your age, a 10 year span may be too short to become part of your estate or long enough to ensure it becomes part of your estate.

The three typical situations that I identified where – needing a lot of the money now, minimizing taxes/maximizing your share, and never needing the money.

• If you need a lot of money now, you can remove some or all the money immediately from an inherited IRA without penalty.
  • You cannot spend all of the money; part of the money must be reserved for taxes.
  • Distributions will be taxed at your highest ordinary income tax bracket (or raise it to a higher tax bracket)
  • For large distributions (e.g., house, car, etc.), your taxes may be much higher than using options that distribute smaller amounts annually.
  • If the distribution is large relative to your income, you will need to pay quarterly estimated taxes or pay interest, in addition to the taxes due.
  • If you do not have money saved to pay the taxes on the distribution, plan distribute extra funds to pay taxes.
  • If you only need one large distribution, you may be able to reduce taxes by distributing the money you need at the end of this year and the money for the taxes at the beginning of the next year.
• If you need a small amount of money over a long time (or you want to minimize taxes on you distribution time limit), you have some options:
  • If you can distribute the money to an individual brokerage account without paying taxes, do that as fast as you can.
  • If you can distribute the money to a tax deferred account without paying taxes, do this as fast as you can, as long as you need more tax deferred money for retirement.
  • If your income is fairly constant every year (e.g., salary, pension, etc.), you usually pay the least taxes by taking roughly equal distributions over the distribution time (i.e., a life time or 10 years)
  • If your income is variable (e.g., commissioned salesperson), you might be able to pay less taxes by taking larger distributions in lower income years.
  • If you know your income is lower now than it will be in a few years (e.g., college student), you may want to take more our now and less out later.
  • If you know your income is higher now than it will be in a few years (e.g., retirement), you may want to take out less now and more later.
• If you never expect to need the money or want to leave it to someone else, you can take only the required minimum distributions for life to pay less taxes and leave as much as possible to be inherited (again). If you live too long, you may lose a lot of money to tax of the lump sum.

There are a few ways to avoid or minimize federal or state taxes, but you have to have flexibility in when and where you distribute the money. There are very few cases where you pay no taxes at all.

• If your ordinary income is less than the standard deduction plus personal exemption amount, you can avoid paying federal taxes and state taxes (in some states) on the difference between the standard deduction plus personal exemption amount minus your ordinary income (i.e., your leftover standard deduction plus exemption). This might not be enough to distribute all the money federal tax free. If you have capital gains, this could cause an increase in your capital gains taxes, but that should be lower than ordinary taxes.
• If you have enough earned income and are not fully funding your Traditional IRA or 401(k), your contributions to another tax deferred account can compensate for the distribution. You are just deferring the taxes again, but it gives the money more time to grow tax free.
• If you have a HSA compatible insurance that is not fully funded, your contributions can compensate for the distribution. The money in the HSA can be used tax free for certain medical expenses. After a certain age, it can be used just like a Traditional IRA. At a later age or retirement, you can no longer contribute to an HSA.
• Your other options are more about minimizing taxes. This include strategies mentioned earlier, such as:
  • Take more distributions in years you have less ordinary income.
  • Take distributions up to the edge of the next higher tax bracket.