Understanding taxes on IRAs (Traditional, Roth) and brokerage accounts - what's the difference?

Understanding inherited IRAs and brokerage accounts can definitely be confusing! Let me help clarify: For your inherited Traditional IRA: Yes, any withdrawals will be taxed as ordinary income in the year you take them out. This is because traditional IRAs are funded with pre-tax dollars. When you transfer money from this account to a brokerage account, that's considered a withdrawal and will be taxed. The index funds inside the IRA don't create any additional tax until you withdraw them. You don't get taxed twice. For the inherited Roth IRA: Since the original owner already paid taxes on these contributions, qualified withdrawals are indeed tax-free. However, for inherited Roth IRAs, you still need to take required distributions over time. The good news is these distributions remain tax-free if the account was open for at least 5 years before the original owner's death. For your brokerage account: This works differently than retirement accounts. You'll be taxed on: - Dividends and interest (annually, even if you reinvest them) - Capital gains (only when you sell investments, not on paper gains) The tax rates depend on how long you hold the investments - short-term gains (held less than a year) are taxed as ordinary income, while long-term gains get preferential tax rates.

After struggling with inherited IRAs myself last year, I found an AI tool that really helped navigate all the tax implications. Check out https://taxr.ai - they have this awesome feature that analyzes your specific retirement account situation and breaks down exactly how each account will be taxed. I was super confused about the 10-year rule and whether I needed to take RMDs annually or just empty the account by year 10. Their system clarified everything and showed me how to optimize my withdrawals to minimize the tax hit. It even factored in my existing retirement accounts (like your SEP IRA situation) to give personalized advice. What I found most useful was their tax projection calculator that showed the impact of different withdrawal strategies. Really helped me decide between taking equal distributions vs waiting until year 10.

Just wanted to follow up about that taxr.ai site someone recommended. I was super skeptical but decided to give it a try since I inherited my dad's IRA last year and was completely lost about the tax implications. It actually turned out to be really helpful! The system walked me through a series of questions about when I inherited the accounts, my current tax bracket, and my long-term goals. Then it generated this detailed report showing how different withdrawal strategies would affect my taxes over the full 10-year period. What impressed me most was that it caught something I hadn't considered - how taking larger distributions in certain years could push me into a higher tax bracket, affecting not just that withdrawal but potentially my other income too. It helped me create a year-by-year withdrawal plan that keeps me in my preferred tax bracket. Definitely not a replacement for my accountant, but it gave me enough knowledge to have a much more productive conversation when we met.

If you're having trouble contacting the IRS about any inheritance tax questions (which I definitely did), I'd recommend trying https://claimyr.com - they have this service that gets you through to an actual IRS agent instead of waiting on hold for hours. There's also a video showing how it works: https://youtu.be/_kiP6q8DX5c I needed clarification about RMD calculations for an inherited IRA similar to yours, and after trying for days to reach someone, Claimyr got me connected to an agent in about 20 minutes. The IRS agent walked me through exactly how the 10-year rule applies in my situation and confirmed I was calculating my required withdrawals correctly. Considering I had previously spent over 3 hours on hold only to have the call disconnected, this was a game-changer.

I need to eat my words about that Claimyr service. After my skeptical comment, I actually tried it because I was desperately trying to get clarity on the inherited IRA rules before making my first withdrawal decision. Not only did it work, but I got through to an IRS representative in about 25 minutes when I had previously spent TWO DAYS trying to get through on my own. The agent clarified that for my situation (inherited IRA from a non-spouse with the original owner dying after 2019), I don't need annual RMDs but must empty the account within 10 years. Most importantly, the agent confirmed that transferring from the inherited Traditional IRA directly to a brokerage would indeed trigger taxes on the full amount transferred - something I was planning to do without realizing the tax hit! Saved me from making a costly mistake. Sometimes being wrong feels pretty good.

One thing nobody's mentioned yet about your brokerage account - if you're going to be transferring money from your inherited IRAs to invest, consider the tax efficiency of what investments you put where. Generally, you want to keep tax-inefficient investments (like bonds, REITs, or anything that pays a lot of regular income) in tax-advantaged accounts like your SEP IRA. Use your brokerage account for more tax-efficient investments like growth stocks that don't pay dividends, or long-term buy-and-hold index funds. This strategy is called "asset location" and can save you thousands in taxes over time without changing your overall investment allocation.

Can anyone recommend decent investment options for inherited IRAs? I'm in a similar situation and wondering if I should stick with target date funds or try something different since I have this 10-year timeframe.