Understanding Taxes for IRA, Roth IRA, and Brokerage Accounts - What's the Difference?

The tax treatment for these accounts is actually pretty straightforward once you understand the basics, though inherited accounts have some special rules. For the Traditional IRA you inherited: Since it's pre-tax money, withdrawals will count as ordinary income in the year you take them out. As an inherited IRA, you're subject to the 10-year rule if the original owner passed away after 2019 - meaning you'll need to empty the account within 10 years. The investments growing inside the IRA (like your index funds) don't create additional tax while they remain in the IRA. However, once you withdraw funds to your brokerage account, that withdrawal is taxed as income. After the money is in your brokerage account, any further growth would be subject to capital gains tax. For the Roth IRA you inherited: If the original owner held the account for at least 5 years, your withdrawals should be completely tax-free. Like the Traditional IRA, you'll likely need to empty it within 10 years. The investments within the Roth grow tax-free and withdrawals are tax-free. Once money is moved to a brokerage account, future growth would be subject to capital gains tax. For your brokerage account: You're only taxed when 1) you receive dividends/interest (taxed in that year even if reinvested) or 2) when you sell investments for a profit (capital gains). There's no tax on unrealized gains (growth you haven't cashed out yet).

After spending hours trying to understand the tax implications of my inherited IRAs, I stumbled across https://taxr.ai which literally saved me thousands in potential tax mistakes. I uploaded my inheritance documents and account statements, and it analyzed exactly how my distributions would be taxed over the 10-year period, showing me the optimal withdrawal strategy. What I found super helpful was how it projected different tax scenarios based on when I take distributions from the traditional IRA. Taking it all at once would have pushed me into a higher tax bracket, but the tool showed me how to spread it out to minimize my overall tax burden. It also clarified my confusion about how the Roth inheritance worked with the 5-year rule.

I need to update everyone - I tried https://taxr.ai after my skeptical comment above and I'm honestly impressed. My situation with IRAs inherited from my father in Pennsylvania while I live in Florida was complicated, and I'd been quoted $3,500 by a specialized CPA firm to handle the planning. The analysis broke down how the 10-year rule applies differently to the traditional and Roth accounts I inherited. It showed me how to time my distributions to minimize tax impact, especially since my income fluctuates year to year. The tool even identified that I qualified for an exception to the 10-year rule for part of the inheritance because of my father's age when he passed, which would allow me to stretch distributions longer. What surprised me most was how it projected my annual tax liability under different withdrawal strategies, showing me I could save over $14,000 in taxes over the 10-year period by following its optimal distribution schedule instead of the even withdrawal plan my bank recommended.

If you're struggling to get clear answers about your inherited IRA tax questions, I was in the same boat last year. After waiting on hold with the IRS for literally hours trying to clarify how the SECURE Act affected my inherited IRA, I found https://claimyr.com which got me through to an actual IRS agent in under 20 minutes. I was honestly shocked it worked. You can see a demo of how it works here: https://youtu.be/_kiP6q8DX5c - but basically they use some tech to navigate the IRS phone system and call you when an agent is about to pick up. The IRS agent confirmed my understanding of the 10-year rule and clarified that I could indeed space out my distributions however I wanted within that timeframe without penalties. The most valuable part was getting official confirmation about how the pro-rata rule would apply to my specific mix of inherited and personal retirement accounts - something I had gotten three different answers about from financial advisors.

I have to eat my words from my skeptical comment above. After trying to reach the IRS for weeks about my inherited IRA questions, I finally tried Claimyr out of desperation. I fully expected it to be a waste of money, but within 45 minutes I got a call back and was connected to an actual IRS agent. The agent was able to confirm that I understood the 10-year rule correctly for my situation and explained exactly how the different distribution options would be reported on my taxes. She also helped me understand how my inherited Roth IRA distributions would be treated differently from the traditional IRA I inherited. Most importantly, she clarified that my specific situation (where my mom had already started taking RMDs before she passed) puts me in a different category that requires annual distributions - something two different financial advisors had given me conflicting information about. Having this directly from the IRS gives me confidence I won't face penalties for getting this wrong.

For your brokerage account, something nobody has mentioned yet - you'll get a 1099-B form from your broker each year showing your realized gains/losses (from sales) and any dividends or interest. This happens automatically, and the IRS gets a copy too, so make sure your tax return matches! For stock investments in a regular brokerage account: 1. Dividends are taxed in the year you receive them, even if reinvested 2. Capital gains are only taxed when you sell 3. Long-term capital gains (assets held >1 year) are taxed at lower rates than short-term gains Also, be careful about the "step-up in basis" for inherited assets. There can be different rules for basis depending on what type of account they come from.

Something important to consider with your inherited IRAs - if you don't need the money right now, the traditional and Roth have very different optimal strategies. For the traditional IRA, since withdrawals count as income, you might want to take distributions in years when your income is lower to minimize the tax hit. For the Roth, since withdrawals are tax-free, you might want to leave that money in as long as possible (within the 10-year limit) to maximize tax-free growth. Remember that once money comes out of either IRA into your brokerage account, all future growth will be taxable, so there's a big advantage to keeping it in the tax-advantaged accounts as long as possible!

One thing I'd add about timing your traditional IRA distributions - consider whether you expect your income to change significantly in the coming years. If you're planning to sell your business or have other major income changes, that could affect which years are optimal for taking larger distributions. Also, don't forget about the potential impact on other tax benefits. Large traditional IRA distributions could push you over income thresholds for things like the child tax credit, education credits, or even Medicare premiums (IRMAA) if you're approaching 65. It's worth running the numbers to see how different distribution strategies affect your overall tax picture, not just the tax on the IRA withdrawal itself. For your brokerage account, since you mentioned you just opened it - consider whether you want to focus on tax-efficient investments like index funds that don't generate much in taxable distributions, especially if you're already dealing with required distributions from the inherited accounts.