Tax on Inherited IRA: Essential Guide for Federal Employees

Have you recently inherited an IRA and are wondering about the tax implications? If you’re a federal or postal employee, understanding how the tax on inherited IRA accounts works is crucial. It helps you stay compliant with tax laws and avoid losing more money than necessary.

Let’s break this down in a way that’s simple and easy to follow.

What Is an Inherited IRA and Why It Matters

An inherited IRA, also called a beneficiary IRA, is a retirement account you receive when someone passes away. This could be a traditional IRA or a Roth IRA.

If you’ve received one of these accounts, you now have specific rules to follow. These rules depend on your relationship to the original owner and what kind of IRA you inherited.

Inherited IRA Rules: Spouses vs. Non-Spouses

Spouse Beneficiaries: What You Can Do

If you’re the spouse of the original account holder, you have more flexibility. You can:

• Treat it as your own: Roll it into your own IRA and let it continue growing tax-deferred.

• Open an inherited IRA: This lets you take distributions based on your own life expectancy.

• Follow RMD rules: If the deceased had already begun taking required minimum distributions (RMDs), you must continue them. If not, you can delay until you reach the required age.

Non-Spouse Beneficiaries: Know the 10-Year Rule

If you’re not the spouse, you’ll likely fall under the 10-year withdrawal rule introduced by the SECURE Act:

• You must withdraw all the money within 10 years of the original owner’s death.

• There’s no annual minimum, but waiting to take money out until year ten could push you into a higher tax bracket.

• Some exceptions apply—such as if you’re a minor child, disabled, or within 10 years of the deceased’s age.

Understanding the Tax on Inherited IRA Accounts

This part is critical—because not knowing can cost you.

Traditional Inherited IRA

• Distributions are fully taxable as regular income.

• Taking a large amount in a single year could bump you into a higher tax bracket.

Roth Inherited IRA

• Withdrawals are tax-free, but only if the account was open for at least five years.

• You still must follow the 10-year rule unless you qualify for an exemption.

If you’re managing your own retirement income and benefits, it’s important to strategize withdrawals to avoid tax surprises. That’s why knowing how the tax on inherited IRA works is so important.

3 Smart Moves for Federal and Postal Employees

Because your benefits package is different from most workers, here are some smart steps to follow:

1. Spread Distributions Across Years

Instead of cashing out the account in one year, spread your withdrawals. This keeps your total yearly income—and your tax bill—more manageable.

2. Balance It with Your Federal Benefits

You may already be receiving income from your FERS pension, TSP, or Social Security. Adding a large IRA withdrawal can push you into a higher tax bracket if you don’t plan properly.

3. Get Guidance from the Right Experts

A general financial advisor might not know the ins and outs of your federal retirement plan. But The Benefit Coordinators do. Our team helps federal and postal employees make smart decisions every day.

Mistakes That Can Cost You

Missing RMD Deadlines

If you forget to take required distributions, the IRS could hit you with a 50% penalty on the amount you should’ve taken out.

Taking Too Much at Once

You might think you’re being smart by pulling a lump sum, but you could owe thousands in taxes if it pushes your income too high.

Ignoring Beneficiary Updates

Make sure to regularly update your beneficiary forms. If something changes—like a marriage or a new child—you want your forms to reflect your current wishes.

Final Thoughts on Managing the Tax on Inherited IRA

Inheriting an IRA is both a gift and a responsibility. For federal and postal workers, it’s even more complex due to overlapping benefits and tax rules.

The good news? You don’t have to figure it out alone.

At The Benefit Coordinators, we help you understand how the tax on inherited IRA impacts your unique situation—and how to plan around it. You’ve worked hard for your benefits. We’ll help you protect what’s been passed down to you, too.

Need Help? Let’s Talk

We’ve helped thousands of federal and postal employees manage their benefits. If you’re unsure what to do with an inherited IRA—or how it fits into your bigger retirement plan—we’re here to help.

Visit us at thebenefitcoordinators.com to get started with a no-pressure consultation.

Note: Tax laws can change and personal financial situations vary. For accurate guidance, always consult with a tax professional or reach out to The Benefit Coordinators for personalized help.