The First 3 Years of Retirement: 7 Financial Decisions That Matter More Than You Think
The first three years of retirement can create valuable planning opportunities. Learn how withdrawals, Roth conversions, Social Security, Medicare, RMDs, and investment decisions can work together to shape your long-term retirement plan.
The first three years of retirement can offer valuable planning opportunities, particularly when your paycheck has stopped but Social Security and required minimum distributions have not started. Decisions about withdrawals, Roth conversions, investments, and Medicare often affect one another. Greenbush Financial Group recommends looking at these early retirement decisions as one coordinated plan rather than a series of separate choices.
Why the First Three Years Matter
When your paycheck stops, you suddenly have to decide where your income will come from.
Should you spend cash? Sell investments? Take money from your IRA? Start Social Security?
These decisions are connected.
An extra $50,000 IRA withdrawal, for example, can increase taxable income, reduce your Roth-conversion opportunity, affect capital-gains taxes, potentially increase future Medicare premiums, and reduce future RMDs.
The first few years of retirement may also be some of your lowest-income tax years. If you do nothing, some of those opportunities can disappear.
Consider Mark and Susan.
They are both 64 and retiring with $1.8 million:
$1.2 million in traditional 401(k)s and IRAs
$200,000 in Roth IRAs
$300,000 in a brokerage account
$100,000 in cash
They expect to spend about $90,000 per year after tax and have not started Social Security.
Their situation illustrates seven decisions that can shape the next several decades.
1. Decide Where Your Retirement Paycheck Comes From
There is no universal rule that says you should spend taxable accounts first and Roth accounts last.
Instead, ask:
Which combination of accounts gives us the income we need without creating unnecessary taxes?
Mark and Susan might fund part of their first year's spending from cash, dividends, and their brokerage account rather than automatically taking $90,000 from an IRA.
That could keep their taxable income lower and leave room for another strategy, such as a Roth conversion.
Retirees should also consider directing dividends and interest to cash instead of automatically reinvesting them.
A reasonable cash reserve depends on the household, but maintaining roughly 12 to 24 months of expected portfolio withdrawals in cash and short-term investments can provide flexibility during a market decline.
Key Insight: Your withdrawal strategy should be based on taxes, markets, and future income, not simply which account has the easiest transfer button.
2. Take Advantage of the Retirement Tax Window
For many retirees, there is a gap between their final paycheck and the beginning of Social Security and RMDs.
That can create unusually low taxable-income years.
Mark and Susan have $1.2 million in tax-deferred retirement accounts. If they leave that money untouched, it could grow substantially before RMDs begin.
Instead, suppose they convert $75,000 per year to Roth for their first three years.
They move:
$225,000 from tax-deferred accounts into Roth accounts.
They pay tax today, but future growth on those dollars occurs inside the Roth, and those converted dollars no longer contribute to their future traditional IRA RMD balance.
If $225,000 subsequently grew at 5% for eight years, it would become roughly $330,000.
The goal is not to convert as much as possible. A conversion can affect tax brackets, capital-gains taxes, Medicare premiums, and other parts of the plan.
The better question is:
How much can we convert at a tax rate we are comfortable paying today compared with the tax rate we may face later?
3. Coordinate Social Security With IRA Withdrawals
Social Security should not be considered separately from investment withdrawals.
Suppose Mark is the higher earner and has a $3,200 monthly benefit at full retirement age. Delaying until age 70 could increase that benefit by approximately 24%, before future cost-of-living adjustments.
But delaying means Mark and Susan need to fund those years from somewhere else.
That can be useful.
They might spend taxable assets while completing Roth conversions before Social Security begins. Later, the larger Social Security benefit reduces the amount the portfolio needs to provide.
There is also a survivor consideration.
If Mark dies first, Susan generally does not continue receiving both Social Security benefits. The higher benefit can therefore become particularly important to the surviving spouse.
Key Insight: Delaying Social Security is not always best. Health, longevity, taxes, portfolio size, and survivor needs all matter.
4. Coordinate Roth Conversions, Capital Gains, and Medicare
This is where retirement tax planning becomes a balancing act.
Suppose Mark and Susan own an investment worth $60,000 with a $30,000 cost basis.
Selling it creates a $30,000 long-term capital gain.
During a low-income retirement year, some or potentially all of that gain could qualify for the 0% federal long-term capital-gains rate, depending on their other income.
That could allow them to diversify the portfolio while increasing the cost basis of their taxable investments.
But there is a catch.
If they complete a large Roth conversion first, that additional income can reduce the amount of capital gains eligible for the 0% rate.
Medicare creates another consideration.
Medicare generally uses income from two years earlier when determining IRMAA surcharges. A large Roth conversion or capital gain today could therefore increase Medicare premiums later.
That does not automatically make the transaction a bad idea.
Sometimes paying additional tax or Medicare premiums today creates greater long-term savings.
The important part is knowing the tradeoff before making the decision.
5. Prepare for RMDs Before You Have RMDs
One of the biggest retirement mistakes is waiting until RMDs begin to start planning for them.
Mark and Susan already have $1.2 million in tax-deferred accounts at age 64.
If those accounts continue growing, future RMDs could create more taxable income than they actually need.
Before RMDs begin, they have more control through:
Roth conversions
Strategic IRA withdrawals
Social Security timing
Charitable planning
This becomes even more important when one spouse dies.
The surviving spouse may eventually file as single while still owning much of the same IRA assets. That means narrower tax brackets and lower Medicare IRMAA thresholds.
A Roth conversion today should therefore sometimes be evaluated against the survivor's future tax rate, not just the couple's current rate.
6. Have a Plan for a Bad Market in Year One
Imagine stocks fall 25% six months after Mark and Susan retire.
Their expenses do not fall 25%.
Where does their income come from?
This is why retirement portfolios should be designed differently from portfolios that are still accumulating.
If Mark and Susan need $50,000 annually from their portfolio and maintain $75,000 to $100,000 in cash and short-term investments, they may have roughly 18 to 24 months of withdrawals available without relying heavily on stock sales.
During a major decline, income could come from:
Cash
Short-term bonds
Dividends and interest
Investments that held up better
The goal is to avoid being forced to sell stocks after a major decline simply because the monthly bills are due.
This is called sequence-of-returns risk. Poor returns early in retirement can be particularly damaging when withdrawals are occurring at the same time.
That does not mean retirees should abandon stocks. A retirement lasting 25 or 30 years still needs long-term growth.
The objective is to balance short-term spending needs with long-term growth.
7. Plan for the Expenses and Life Changes That Do Not Fit the Spreadsheet
Retirement rarely follows a perfectly predictable annual budget.
Suppose Mark and Susan decide to spend $100,000 remodeling their home.
Taking $100,000 from an IRA could create a much larger tax bill, reduce Roth-conversion capacity, affect capital-gains taxation, and potentially increase future Medicare premiums.
Paying cash, selling taxable investments, taking an IRA distribution, or financing the project can each produce a different result.
The same planning applies to an RV, new vehicle, vacation home, or other major purchase.
Retirement is also a natural time to review:
Beneficiaries
Wills and trusts
Powers of attorney
Account titling
Long-term-care funding
Emergency reserves
Charitable giving
Charitably inclined retirees may also benefit from donating appreciated securities, using donor-advised funds in certain situations, or eventually making qualified charitable distributions from IRAs after reaching the eligible age.
One practical question is especially useful for married retirees:
If one of us died tomorrow, could the other person manage everything?
The surviving spouse should know where accounts are held, how income is generated, where estate documents are located, and who to contact.
Option A vs. Option B: What Coordination Can Change
Consider Mark and Susan's first three years.
Option A: Autopilot
They withdraw whatever they need from their IRAs, claim Social Security relatively early, complete no Roth conversions, and wait until RMDs begin to worry about taxes.
Their plan may still work.
But several planning opportunities may disappear.
Option B: Coordinated Planning
Instead, they:
Fund some spending from cash and taxable investments
Convert approximately $225,000 to Roth over three years
Delay the higher earner's Social Security when appropriate
Realize selected capital gains during lower-income years
Monitor Medicare IRMAA
Maintain short-term reserves for market declines
They might actually pay more tax during their first three years.
That can be intentional.
They are potentially trading a higher tax bill today for smaller future RMDs, more Roth assets, a larger Social Security benefit, and greater flexibility for the surviving spouse.
That is the difference between minimizing taxes this year and managing taxes throughout retirement.
How Much Can You Safely Spend?
There is no single withdrawal percentage that answers this question.
Your sustainable spending depends on:
Portfolio size
Social Security and pensions
Taxes
Investment allocation
Inflation
Healthcare expenses
Longevity
Large future purchases
For Mark and Susan, the better question is not simply whether $90,000 is a safe percentage of $1.8 million.
It is:
How much does the portfolio need to provide before Social Security begins, and how much will it need to provide afterward?
Retirement income changes over time. Your spending plan should account for those changes.
The First Three Years: A Simple Checklist
Year One
Determine how much you can spend, establish where your retirement paycheck will come from, build cash reserves, review the portfolio, and calculate whether a Roth conversion makes sense.
Year Two
Recalculate taxes, Roth-conversion capacity, capital gains, Medicare exposure, and Social Security timing based on what actually happened during year one.
Year Three
Stress-test the plan for a major market decline, future RMDs, long-term-care costs, large purchases, and the death of either spouse.
What Opportunities Disappear If You Do Nothing?
This may be the most important question.
Doing nothing during the first few years of retirement may not create an immediate problem.
But you may lose:
Lower-income years for Roth conversions
Opportunities to realize gains at favorable tax rates
Additional Social Security growth
Opportunities to reduce future RMDs
Years of planning while both spouses can use joint tax brackets
The cost may not show up today.
It may appear 10 or 15 years later.
Final Thoughts
The first three years of retirement are about more than replacing your paycheck.
Withdrawals affect taxes. Taxes affect Roth conversions. Roth conversions can affect Medicare. Social Security affects future withdrawals. Today's IRA balance affects future RMDs. And all of those decisions can look very different after one spouse dies.
There is no universal withdrawal order or Roth-conversion strategy.
At Greenbush Financial Group, we believe the opportunity is in coordinating these decisions around the household's complete retirement plan.
The first few years of retirement give you something valuable: choices.
The goal is to use those choices before they begin disappearing.
Rob Mangold
About Rob……...
Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.
Frequently Asked Questions
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Which account should I withdraw from first in retirement?There is no universal order. The best approach may combine cash, taxable investments, traditional retirement accounts, and Roth accounts based on taxes, spending needs, future RMDs, and Social Security.
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Should I take Social Security or spend investments first?It depends on longevity, taxes, portfolio size, and survivor needs. Spending investments first can sometimes create additional Roth-conversion opportunities while allowing Social Security benefits to grow.
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Should I convert my IRA to Roth before RMDs?A partial Roth conversion may make sense if your current tax rate is attractive compared with the rate you or a surviving spouse could face later.
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How much should I convert to Roth?Consider tax brackets, capital gains, Medicare IRMAA, state taxes, and future RMDs. The appropriate amount should generally be recalculated each year.
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What happens if the market crashes right after I retire?Cash and short-term investments can provide spending money without requiring immediate stock sales. This is one reason retirement portfolios should be structured around both withdrawals and long-term growth.
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Why should I worry about RMDs years before they begin?The years before RMDs often provide the most flexibility to reduce future tax-deferred balances through Roth conversions and strategic withdrawals.
This article is for educational purposes and uses simplified hypothetical examples. Tax laws, Medicare rules, investment returns, and individual circumstances can change. The examples are not intended as individualized tax, investment, or legal advice.
Retirement Tax Traps and Penalties: 5 Gotchas That Catch People Off Guard
Even the most disciplined retirees can be caught off guard by hidden tax traps and penalties. Our analysis highlights five of the biggest “retirement gotchas” — including Social Security taxes, Medicare IRMAA surcharges, RMD penalties, the widow’s penalty, and state-level tax surprises. Learn how to anticipate these costs and plan smarter to preserve more of your retirement income.
Even the most disciplined savers can be blindsided in retirement by unexpected taxes, penalties, and benefit reductions that derail a carefully built plan. These “retirement gotchas” often appear subtle during your working years but can cost tens of thousands once you stop earning a paycheck.
Here are five of the biggest surprises retirees face—and how to avoid them before it’s too late.
1. The Tax Torpedo from Social Security
Many retirees are surprised to learn that Social Security isn’t always tax-free. Depending on your income, up to 85% of your benefit can be taxed.
The IRS uses something called “provisional income,” which includes half your Social Security benefit plus all other taxable income and tax-free municipal bond interest.
For individuals, taxes begin when provisional income exceeds $25,000.
For married couples, it starts at $32,000.
A well-intentioned IRA withdrawal or capital gain can push you over these thresholds—causing a sudden jump in taxes. Strategic Roth conversions and careful withdrawal sequencing can help smooth this out over time.
2. Higher Medicare Premiums (IRMAA)
The Income-Related Monthly Adjustment Amount (IRMAA) is one of the most overlooked retirement costs. Once your modified adjusted gross income (MAGI) exceeds certain limits, your Medicare Part B and D premiums increase—often by thousands of dollars per year.
For 2025, IRMAA surcharges begin when MAGI exceeds roughly $103,000 for single filers or $206,000 for married couples. The catch? Medicare looks back two years at your income. A Roth conversion, property sale, or large one-time distribution can unexpectedly trigger higher premiums two years later.
Proactive tax planning can prevent crossing these thresholds unintentionally.
3. Required Minimum Distributions (RMDs)
Once you reach age 73, the IRS requires you to start withdrawing from pre-tax retirement accounts each year—whether you need the money or not. These RMDs are taxed as ordinary income and can increase your tax bracket, raise Medicare premiums, and reduce your eligibility for certain deductions.
The biggest mistake is waiting until your 70s to plan for them. Roth conversions in your 60s can reduce future RMDs, and charitable giving through Qualified Charitable Distributions (QCDs) can offset the tax impact once they begin.
4. The Widow’s Penalty
When one spouse passes away, the surviving spouse’s tax brackets and standard deduction are cut in half—but income sources often don’t decrease proportionally. Social Security may drop by one benefit, but RMDs, pensions, and investment income remain largely the same.
The result is a higher effective tax rate for the survivor. This “widow’s penalty” can last for years, especially when combined with RMDs and Medicare surcharges. Couples can reduce the long-term impact through lifetime Roth conversions, strategic asset titling, and beneficiary planning.
5. State Taxes and Hidden Relocation Costs
Many retirees move to lower-tax states hoping to stretch their income, but state-level taxes can be tricky. Some states tax pension and IRA withdrawals, others tax Social Security, and a few impose taxes on out-of-state income or estates.
Additionally, higher property taxes, insurance premiums, and healthcare costs can offset income tax savings. A comprehensive cost-of-living comparison is essential before relocating.
Our analysis at Greenbush Financial Group often reveals that the “best” retirement state depends more on quality of life, healthcare access and total cost of living than on income tax rates alone.
How to Avoid These Retirement Surprises
Most retirement gotchas come down to timing and coordination—especially between taxes, Social Security, and healthcare. A few key steps can make a major difference:
Run retirement income projections that include taxes and IRMAA thresholds.
Consider partial Roth conversions before RMD age.
Sequence withdrawals intentionally between taxable, tax-deferred, and Roth accounts.
Evaluate the long-term impact of home state taxes before moving.
Review beneficiary and trust structures regularly.
The earlier you identify potential traps, the easier they are to fix while you still control your income and withdrawals.
The Bottom Line
Retirement is more complex than simply replacing a paycheck. The interplay between taxes, healthcare, and income sources can turn small decisions into costly mistakes. By spotting these gotchas early, you can preserve more of your wealth and enjoy a smoother, more predictable retirement.
Our advisors at Greenbush Financial Group can help you identify your biggest risk areas and design a plan to minimize the tax and income surprises most retirees never see coming.
FAQs: Retirement Planning Surprises
Q: Are Social Security benefits always taxed?
A: No. But depending on your income, up to 85% of your benefits may be taxable.
Q: How can I avoid higher Medicare premiums?
A: Manage your income below IRMAA thresholds through strategic Roth conversions and tax-efficient withdrawals.
Q: What happens if I miss an RMD?
A: You could face a 25% penalty on the amount not withdrawn, reduced to 10% if corrected quickly.
Q: Why do widows and widowers pay more in taxes?
A: Filing status changes from joint to single, cutting brackets and deductions in half while much of the income remains.
Q: Are all retirement states tax-friendly?
A: No. Some states tax retirement income or have higher overall costs despite no income tax.
Rob Mangold
About Rob……...
Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.
What Happens When You Inherit an Already Inherited IRA?
When you are the successor beneficiary of an Inherited IRA the rules are very complex.
When someone passes away and they have a retirement account, if there are non-spouse beneficiaries listed on the account, they will typically rollover the balance in the inherited retirement account to either an Inherited Traditional IRA or Inherited Roth IRA. But what happens when the original beneficiary passes away and there is still a balance remaining in that inherited IRA account? The answer is that a successor beneficiary inherits the account, and then the distribution rules become complex very quickly.
Beneficiary of an Inherited IRA (Successor Beneficiaries)
As a beneficiary of an inherited IRA, it's important to understand that the options available to you for taking distributions for the account will be determined by the distribution options that were available to the original beneficiary of the retirement account that you inherited it from, which vary from beneficiary to beneficiary.
Non-spouse Inherited IRA Rule
The IRS changed the rules for non-spouse beneficiaries back in 2019 with the passing of the Secure Act, which put original non-spouse beneficiaries in two camps: beneficiaries that inherited a retirement account from someone that passed away prior to January 1, 2020, and beneficiaries that inherited retirement accounts some someone that passed January 1, 2020 or later.
We have a whole article dedicated to these new non-spouse beneficiary rules that can be found on our website but for now I will move forward with the cliff notes version.
Stretch Rule vs 10-Year Rule Beneficiaries
As the beneficiary of an inherited IRA, you must be able to answer two questions:
Was the original beneficiary subject to the “RMD stretch rule” or “10-year rule”?
If that beneficiary was required to take an RMD in the year they passed, did they already distribute the full amount?
Original Beneficiary was the Spouse
A common situation is that a child has two parents - the first parent passes away, and the balance in those retirement accounts are then inherited by the surviving spouse and moved into the surviving spouse’s own retirement accounts. A spouse of an original owner of a retirement account has special rules available to them which allow them to roll their deceased spouse’s retirement accounts into their own retirement accounts and treat them as their own. When their children inherited the remaining balance in the retirement accounts from the second to parent, they are considered non spouse beneficiaries and are most likely subject to the new 10-year distribution rule unless they qualify for an exception.
Non-spouse Beneficiary 10-Year Rule
If the original beneficiary of the Inherited IRA received that account from someone that passed away after December 31, 2019 and they are a non-spouse beneficiary, they are most likely subject to the new 10-Year Rule which requires the original beneficiary to fully deplete that retirement within 10 year of the year following the original decedent’s death.
Example: Sue, the original owner of a Traditional IRA passes away in 2022, and her daughter Katie is the sole beneficiary of her IRA. Since Katie is a non-spouse beneficiary, she would be required to fully deplete the IRA by 2032, 10 years following the year after that Sue passed away.
But what happens if Katie, the original beneficiary of that inherited IRA passes away in 2026, and she is only 4 years into the 10-year depletion cycle? In this example, when Katie set up her inherited IRA, she named her two children Scott & Mara as 50/50 beneficiary on her inherited IRA account. Scott and Mara would move their respective 50% balance into their own inherited IRA account but as beneficiaries of an already inherited IRA, the 10-year rule does not reset. Scott & Mara would be bound to the same 10-year depletion date that Katie was subject to so Scott & Mara would have to deplete the Inherited IRA (2 times inherited) by 2032 which was Katie’s original 10-year depletion date.
10-Year Rule: The basic rule is if the original beneficiary of the inherited IRA was subject to the 10-year rule, as the new beneficiary of that existing inherited IRA, you get whatever time is remaining in that original 10-year period to fully deplete that Inherited IRA. It does not matter whether the inherited IRA that you inherited was a Traditional IRA or a Roth IRA, the same rules apply.
Original Beneficiary was a “Stretch Rule” beneficiary or the Spouse
For original non-spouse beneficiaries that inherited the retirement account from an account owner that passed away before January 1st, 2020, they have access to what is called the Stretch Rule. Those non-spouse beneficiaries are allowed to move the original owners balance of the retirement account to their own inherited IRA and they are not required to deplete the account in 10 years.
Instead, those non-spouse beneficiaries are only required to take an annual RMD (required minimum distribution) each year, which are small distributions from the Inherited IRA each year, but they could effectively stretch the existence of that inherited account over their lifetime. But it’s also important to note, that some non-spouse beneficiaries that inherited a retirement account from someone who passes on or after January 1, 2020, may have qualified for a stretch rule exception which are as follows:
Surviving spouse
Person less than 10 years younger than the decedent
Minor children
Disabled person
Chronically ill person
Some See-Through Trusts benefitting someone on this exception list
If the original beneficiary of the inherited IRA was eligible for the stretch rule, and you inherited that inherited IRA from that individual, you would NOT be eligible for the Stretch Rule, you would be subject to the 10-year rule, but you would have a full 10-years after the owner of that inherited IRA passes away to fully deplete the balance in that inherited IRA that you inherited.
When we are talking about beneficiaries of an already inherited IRA, it does not matter whether you were their spouse or non-spouse because the spouse exceptions only apply to the spouse of the original decedent.
Example: John inherited a Traditional IRA from his father who passed away in 2018. John was a non-spouse beneficiary, but since his father passed before 2020, he was eligible for the stretch provision which allowed John to roll over the Traditional IRA to an inherited IRA in his name and he was only required to take annual RMD’s each year but was not required to deplete the account in 10 years. John passes in 2025, his daughter Sarah is the beneficiary of the Inherited IRA, since Sarah inherited the inherited IRA from John who passes after December 31, 2019, Sarah would be required to deplete the balance in John’s inherited IRA by 2035, 10-year following the year after John passes.
RMD of Beneficiaries of Inherited IRAs
Now we have to move on to the second question that beneficiaries of Inherited IRAs need to ask, which is “does the successor beneficiary of an inherited IRA need to take annual RMD’s from the account each year?” The answer is “it depends”.
It’s common for beneficiaries of Inherited IRAs to be subject to both the 10-year rule and be required to take annual required minimum distributions from the account. Whether or not the beneficiary needs to take an RMD will depend on the whether or not the original beneficiary of the account was required to take RMDs. The basic rule is if the current owner of the Inherited IRA was required to take annual RMD’s from the account, you as the beneficiary of the Inherited will be required to continue to take RMD’s from the account. The IRS has a rule that once an owner of an IRA or Inherited IRA has started taking RMDs, they cannot be stopped.
If the answer is “Yes:”, the person that you inherited the Inherited IRA from was already taking RMD’s from the Inherited IRA account, then you as the beneficiary of that inherited IRA would be subject to whatever time is left in the 10-year rule, and you would also be required to take RMDs from the account each year.
Don’t Forget To Take The Decedent’s RMD
RMD’s are usually required to begin the year after an individual passes away which is true of Inherited IRAs but as the beneficiary of an retirement account, where the decedent was required to take an RMD for that year, you have to ask the question: did they satisfy their RMD requirement before they passed away.
If the answer is “yes”, no action is required in the year that they passed away unless they were in year 10 year of the depletion cycle.
If the answer is “no”, then you as the beneficiary of that existing Inherited IRA are required to take the undistributed RMD amount from that inherited IRA in the year that the decedent passed away.
Example: Kelly inherits an Inherited IRA from her mother Linda. Linda originally inherited the IRA from her father when he passed in 2022. At the time that her father passed, he was 80, which made him subject to RMDs. When Linda inherited the account from her father, since he was subject to RMDs, Linda was subject to the 10-year rule and annual RMDs. Linda passed in 2024, her daughter Kelly inherits her Inherited IRA, and Kelly would be required to fully deplete the inherited IRA by 2032 (Linda original 10 year rule date), she would be required to take annual RMD’s from the account because Linda was receiving RMDs, and if Linda did not receive her full RMD in 2024 when she passed, Kelly would have to distribute any amount that Linda would have been required to take in the year that she passes.
A lot of rules, but all very important to avoid the IRS penalties that await the taxpayers that fail to take the proper RMD amount or fail to adhere to the new 10-year rule.
Summary of 3 Successor IRA Questions
When you are the beneficiary of an inherited IRA, you must be able to answer the following questions:
Was the person that you inherited the inherited IRA from subject to the 10-year rule?
Was the person that you inherited the Inherited IRA from required to take annual RMDs?
Did the decedent take their RMD before they passed?
What was the age of the decedent when that passed?
The last question is important because there are potential situations where someone is the original beneficiary of an Inherited IRA subject to the 10-year rule, based on the age of the original owner when they passed and the age when the original beneficiary when they inherited the IRA may not make them subject to the annual RMD requirement. However, if the original beneficiary passes away after their “Required Beginning Date” for RMDs, the beneficiary of that inherited IRA may be subject to an annual RMD requirements even though the original beneficiary was not.
The IRS has unfortunately made the rules very complex for beneficiaries of an Inherited IRA account, so I would strongly recommend consulting with a professional to make sure you fully understand the rules.
General Rules Successor IRA Rules
If you are a successor beneficiary:
If the owner on the inherited IRA was subject to the stretch rule, you as the successor beneficiary are now subject to the 10-year rule
If the owner of the Inherited IRA was subject to the 10-year rule, you have whatever time is remaining within that original 10 year window to deplete the account balance.
Whether or not you have to take an RMD in the year they pass and in future years, is more complex, seek help from a professional.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQs):
What happens when a beneficiary of an inherited IRA passes away?
When the original beneficiary of an inherited IRA dies, the account passes to a successor beneficiary. The successor inherits both the account and the distribution rules that applied to the original beneficiary, meaning the timing and requirements for withdrawals depend on how the first beneficiary inherited the IRA.
Do successor beneficiaries get a new 10-year window to deplete the inherited IRA?
No. If the original beneficiary was subject to the 10-year rule, the successor beneficiary only has the remaining time left in that original 10-year period to fully deplete the account. The clock does not reset when the account passes to a new beneficiary.
What if the original beneficiary was following the stretch rule?
If the first beneficiary inherited the IRA before 2020 and was allowed to “stretch” distributions over their lifetime, the successor beneficiary must follow the 10-year rule instead. They have a full 10 years from the year after the first beneficiary’s death to empty the account.
How do required minimum distributions (RMDs) work for successor beneficiaries?
If the person you inherited the IRA from was already taking RMDs, you must continue taking them each year and still meet the 10-year depletion rule. Once RMDs have begun on an IRA or inherited IRA, they cannot be stopped.
Do successor beneficiaries need to take the decedent’s final RMD?
Yes. If the previous account holder had not yet taken their full RMD for the year in which they passed away, the successor beneficiary is responsible for distributing that remaining amount before year-end to avoid IRS penalties.
Does it matter if the IRA was Traditional or Roth?
The same successor rules apply to both Traditional and Roth IRAs. The difference is that distributions from inherited Roth IRAs are tax-free if the account has met the five-year rule, while withdrawals from inherited Traditional IRAs are taxed as ordinary income.
What key questions should successor beneficiaries ask?
Successor beneficiaries should confirm:
Was the prior owner under the 10-year rule or stretch rule?
Were they already taking RMDs?
Did they complete their RMD for the year of death?
What was their age at death?
