Delaying Tactics on IRA Taxation

When you inherit an IRA, you may be able to extend tax deferral. Suppose Al Smith dies with a traditional IRA. Al has named his son Bob as his sole beneficiary. If he desires, Bob can take any or all of the money from that IRA, and pay income tax.

If Bob doesn’t need the cash, he can leave the money in the IRA, where it can grow, untaxed. To continue the tax deferral, Bob can transfer the account to an IRA in the name of "Al Smith (deceased) for the benefit of (f/b/o) Bob Smith."

Then Bob can take required minimum distributions (RMDs). If Bob is 58 years old when RMDs begin, an IRS table puts his life expectancy at 27 years. That year, Bob must withdraw at least 1/27 of the money in the IRA he inherited, and pay income tax.

If Bob withdraws only 1/27 of the account, most of the money can remain in the tax-deferred IRA. Over the next 26 years, Bob may withdraw much more than the amount he inherited in the IRA, because of tax deferral on the earnings.