Retirement Plan Withdrawal Strategies Based on New Legislation

Question:        I am the beneficiary of a traditional Individual Retirement Account that I inherited from my recently deceased 80-year-old father. What is the best strategy for withdrawing the funds?

Answer:          As you might suspect, there is no one strategy which works for all beneficiaries of inherited IRAs. Any IRA withdrawal strategy requires the consideration of a number of factors. These include, among others, the current marginal tax bracket of the IRA beneficiary, the beneficiary’s anticipated future marginal tax bracket and the beneficiary’s cash flow needs. One unknown factor is how tax legislation may change individual income tax rates in the future. In any case, each situation must be evaluated on its own merits.

Recent tax legislation ended the popular tax break for beneficiaries of inherited IRAs known as stretch IRA distributions. This allowed beneficiaries of retirement accounts of deceased owners to withdraw funds from the decedent’s IRA over the beneficiary’s remaining life expectancy as computed in accordance with IRS promulgated tables. With but a few exceptions, designated beneficiaries of inherited IRAs must now withdraw funds over a ten-year period. In a situation where a decedent died after commencing his required minimum distributions, the designated beneficiary must withdraw funds over the beneficiary’s remaining life expectancy with the balance of the funds required to be withdrawn by December 31 of the tenth year following the year of the decedent’s death.

The obvious advantage of the stretch IRA distribution option, particularly for younger IRA beneficiaries, was to permit smaller distributions in the early years, thereby allowing the preponderance of funds to remain in the decedent’s IRA and continue to generate earnings on a tax-deferred basis. Under prior minimum distribution tables, a 50-year-old individual might have had as long as 30 plus years to withdraw the decedent’s IRA assets. With the new ten-year rule, the opportunity for deferred distributions over an extended period of time is gone. The focus instead is on maximizing the after-tax return based on the more limited time period permitted for withdrawals.

Despite the uniqueness of each person’s tax situation, some general guidelines should be considered. If a beneficiary is currently in the maximum income tax bracket, there is no advantage to withdrawing from the decedent’s IRA more than the amount required to be withdrawn each year, so-called minimum required distributions or “RMDs”.  In such case, the better strategy may be to only withdraw the required funds for each of years 1-9 and then withdraw the balance of the funds by December 31 of the tenth year following the decedent’s death.

If a beneficiary is not currently paying tax at the highest marginal income tax bracket but may be in future years, the strategy may be just the opposite. In this case, the beneficiary may want to withdraw more than the annual RMDs to utilize his or her current lower income tax brackets. This may lower the overall tax burden on the income tax on IRA distributions.

A beneficiary’s anticipated retirement may be a factor as well, particularly if his or her income tax bracket will decrease once the beneficiary stops working. For a taxpayer planning on retiring before the end of the tenth year following the year of the decedent’s death, the optimal withdrawal strategy may be to only withdraw RMDs in pre-retirement years. If the beneficiary then retires and his or her income tax bracket decreases as a result, the beneficiary can then decide whether to increase IRA withdrawals or simply wait until year 10 before withdrawing the balance of the funds in the inherited IRA.  

The tax burden on IRA distributions can be significant as withdrawals from traditional IRAs are generally taxed as ordinary income, not as capital gains. Careful planning is required to achieve the most favorable after-tax return on retirement account withdrawals.

The Tax Corner addresses various tax, estate, asset protection, and other business matters. Should you have any questions regarding the subject matter or if you have questions, you want answered, you may contact Bruce at (312) 648-2300 or send an e-mail to

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