Help clients draw down inherited IRAs tax-efficiently

Consider this scenario: Your clients inherit one or more individual retirement accounts (IRAs) after the original owner had begun taking required minimum distributions (RMDs). Under proposed IRS regulations, your clients would have to continue taking RMDs from the IRA annually and withdraw the entire IRA balance by the end of 10 years.

Will they pay the least in taxes by:

• Allowing the IRA to grow for nine years and taking the entire balance as one large distribution in year 10?
• Withdrawing the required minimum for nine years and the remaining balance in year 10?
• Or by taking it as 10 roughly equal annual distributions (adjusting for portfolio growth and inflation)?

While each client has different circumstances that could affect their situation, Vanguard has found that taking roughly equal annual distributions is favorable to the majority of inherited-IRA beneficiaries.¹

1 The strategy of taking roughly equal, annual distributions was found to be most tax-efficient in more than 99% of test cases. Tax planning: How to draw down an inherited IRA. Valley Forge, Pa.: The Vanguard Group, 2024.

Notes:

All investing is subject to risk, including the possible loss of the money you invest.

This information is general and educational in nature and should not be considered tax and/or legal advice. Any tax-related information discussed herein is based on tax laws, regulations, judicial opinions and other guidance that are complex and subject to change. Additional tax rules not discussed herein may also be applicable to your situation. Vanguard makes no warranties with regard to such information or the results obtained by its use, and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend you consult a tax and/or legal advisor about your individual situation.