GRANDPA'S IRA COULD TAX YOU
- Alexander S Colwell
- Mar 14
- 2 min read
Grandpa’s IRA could tax you…
If you haven’t heard by now, there are changes to how inherited Individual Retirement Accounts (IRAs) must be distributed. Under the SECURE Act 2.0, many (not all) non-spouse beneficiaries are required to fully distribute the account within the 10 years following the original account holder’s death. This rule applies to IRAs inherited from 2020 onwards.
How can you make Grandpa’s IRA less taxing? I’m glad you asked.
Distributions from an inherited traditional IRA are generally taxed as ordinary income in the year in which they are received. One way to mitigate this tax impact is to increase your pre-tax contributions to your employer-sponsored retirement plan, such as a 401(k), if you have not yet reached the contribution limits. In 2025, contribution limits for 401(k) plans is $23,500, with an additional catch-up contribution of $7,500 for individuals aged 50 and older, bringing the total possible contribution to $31,000 for those eligible.
You can increase your 401(k) contributions to reduce your taxable income, but you cannot directly transfer distributions from an inherited IRA into a 401(k) plan.
Here’s the tax-saving strategy:
Review Your Current Contributions: Determine how much more you can contribute through your employer’s plan.
Maximize Your 401(k) Contributions: Adjust your payroll deductions to reach the contribution limit, reducing your taxable income for the year.
Use Inherited IRA Distributions for Living Expenses: This can replace the income redirected to your 401(k) plan.
By following this strategy, you can offset the taxable income from inherited IRA distributions with increased pre-tax contributions to your 401(k), ultimately lowering your overall tax liability. This is just one of several ways to be more tax efficient with your Inherited IRA funds.
Alexander S. Colwell is an estate planning attorney and CPA. He practices in central Wisconsin. Connect with him here on LinkedIn.
*Disclaimer: Always keep in mind that contribution limits and tax laws are subject to change. It's advisable to consult with a financial advisor or tax professional to tailor this strategy to your specific circumstances and ensure compliance with current regulations.