Dear Tax Talk,
I have inherited an IRA worth $62,000 and another IRA worth $22,000. This December will mark the first full year after my parents’ death. What are the inherited IRA RMD rules?

I know I must take a required minimum distribution of 20%, but is there anything I can do to offset the tax burden? I am self-employed and the Affordable Care Act makes me state how much income I will make to determine my payments. This additional $14,000 double-taxes me with health care penalties I had not planned for. I am 56 years old and not sure if lifetime can be applied.
— Mark

Dear Mark,
The required minimum distribution, or RMD, is a factor of your age and the life expectancy set forth in IRS Publication 590-B. As a 56-year-old, the life expectancy per the IRS chart is 28.7 years. So you divide the total in each IRA by this amount to get the RMD for each IRA. Simply put, the amount you calculated is much higher than what this calculation would produce in your specific case.

To put pencil to paper, we’ll take the $62,000 IRA that you inherited. As a beneficiary, you are required to calculate the RMD based on your life expectancy, not your father’s. That said, you would take the $62,000 and divide by 28.7 years, which equals $2,160.28. You have to do the same for each IRA. So the RMD for the 2nd IRA you inherited would be: $22,000 / 28.7 = $766.55.

As you can see, the sum of these amounts is nowhere near the $14,000 that you mention. Also, it’s important to note that the “double tax” you are referring to is really a misnomer. What I presume you mean is that the additional income you are required to include from the IRAs may put you in a higher bracket as it relates to the ACA Obamacare income qualification chart. Since the actual income you will be required to include is less than what you had anticipated, this may no longer be an issue.

Inherited IRA RMD rules for nonspouse beneficiaries

The rules for inheriting IRAs are complex, and one wrong move can result in serious income-tax consequences. Generally, beneficiaries who are not the spouse of the deceased have 2 choices with an inherited IRA:

  • They can take distributions over their own life expectancy — known as the stretch option — which allows the IRA funds to continue to grow for as long as possible.
  • They must liquidate the account within 5 years of the original owner’s death.

Learn about 8 ways to go wrong with an inherited IRA.

In any event, the income you are required to distribute is income to you, and you must distribute this regardless of how it affects either your taxable income or your eligibility for the ACA premium tax credit.

Having said the above, without knowing all of the relevant details in addition to what you mentioned, it is impossible to say with exact certainty what the precise course of action should be. You may want to consider meeting with a tax professional to help you make the best decision.

Thanks for the great question, and all the best to you with your financial planning in the future.

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