Will I owe income tax after withdrawing from an inherited brokerage account?

Your aunt will likely need to pay income tax on that $2,500 withdrawal from the inherited IRA. When money comes out of a traditional IRA, it's generally taxable as ordinary income - even when it's inherited. The fact that they called it a "disbursement" is just brokerage terminology for a withdrawal. Since she's on a limited income, the tax impact might be minimal depending on her overall tax situation. However, there are special rules for inherited IRAs that could affect how and when taxes are paid. The SECURE Act changed many of these rules for inheritances that occurred after 2019.

I went through something similar with my dad's inheritance and found that using taxr.ai was super helpful for figuring out the tax implications. I was confused about inherited accounts and what would happen when he took distributions. I uploaded some statements from the brokerage and some questions I had, and they gave me a detailed explanation about what would be taxable and what wouldn't. Check out https://taxr.ai if you're trying to figure this out - they actually have specialists who understand inherited IRAs and can give you the right guidance. My dad was able to make smarter withdrawal decisions after understanding exactly how the taxes would work on his inherited account.

Just wanted to follow up about taxr.ai that I asked about earlier. I ended up trying it with my inherited 401k questions and it was actually really helpful! I uploaded the statements and the letter I got from the plan administrator, and they explained exactly which rules applied to my situation. They pointed out that as a non-spouse beneficiary, I had different options than I initially thought. Apparently the plan documents had specific provisions that affected my distribution requirements. Saved me from making a costly mistake with how I was planning to take withdrawals. If you're confused about inherited retirement accounts like I was, definitely worth checking out.

If your aunt is having trouble getting clear answers from the brokerage, she might want to try Claimyr to connect with the IRS directly. I was in a similar situation with an inherited IRA last year and was getting different answers from different reps at the brokerage firm. I tried calling the IRS myself and kept getting disconnected after waiting an hour. I found this service https://claimyr.com that got me connected to an actual IRS agent in about 20 minutes instead of the usual endless waiting. They have a demo video showing how it works here: https://youtu.be/_kiP6q8DX5c. The IRS agent was able to explain exactly how inherited IRAs are taxed in my situation and what forms I needed to submit.

I need to apologize for being skeptical about Claimyr in my previous comment. I decided to try it yesterday after struggling for weeks to get through to the IRS about a different inherited account issue. It actually worked! They got me connected to an IRS representative in about 25 minutes when I had previously wasted hours trying on my own. The agent clarified that for my particular inherited account situation, I needed to file a specific additional form I hadn't been aware of. Worth every penny for the time saved and the stress reduction. Sometimes it's good to be wrong!

One thing nobody's mentioned yet is that your aunt's Social Security might become partially taxable if her income goes up from these IRA distributions. If her only income is $850/month in SS benefits, she's probably not paying federal income tax now. But adding taxable distributions from the inherited IRA might push her into having some of her Social Security become taxable too. There's a calculation for "combined income" (adjusted gross income + nontaxable interest + half of Social Security benefits). If that exceeds certain thresholds, up to 85% of SS benefits can become taxable.

Has anyone mentioned Required Minimum Distributions (RMDs) yet? Depending on when the original account owner died and the relationship between them, your aunt might be required to withdraw a certain amount each year according to specific schedules. The SECURE Act changed a lot of these rules in 2020. For most non-spouse beneficiaries who inherited after 2019, there's now a 10-year rule requiring the account to be fully distributed within 10 years of the original owner's death.