I inherited my mother's $200k IRA in 2011.

I'm now 60.

I've been buying and selling mutual funds within the IRA, making a little profit, and also buying a specific stock.

How is it taxed if I take out any amount right now?


4 Answers 4


For an inherited IRA, there are a few options for taking distributions.

  1. Immediate distribution in a lump sum.
  2. Take a minimum required distribution (MRD) each year for the rest of your life (or until the money runs out) starting the year after inheritance.
  3. Distribute the entire amount within 5 years of inheritance (this allows you to spread out the tax burden)

You clearly haven't done option 1.

It sounds like you haven't done option 2 because otherwise you would probably know how it is taxed.

That leaves you with option 3. With option 3, you must distribute the entire amount within 5 years. For you, I'm not sure if that means you need to distribute the entire amount by the end of 2016 or 2017. If it was 2016, then you'll probably have to pay penalties.

Distributions from an inherited IRA are taxed as ordinary income regardless of your age or the distribution option you select.

  • The deadline for Option 3 is "December 31 of the year containing the fifth anniversary of the owner's death" which would be 12/31/16 if the mother passed away in 2011. Jan 14, 2017 at 4:22
  • Number 2 applies here. This year is no different than the last few years. Jan 14, 2017 at 23:44
  • 2
    @JoeTaxpayer Errr, no. It is only about two hours ago that the OP confessed (in a comment on my answer; he hasn't revised his question) that he has been taking RMDs each year all along. Jeff's answer was written based on the question asked which definitely left the impression that the OP had not been doing Option 2. Jan 15, 2017 at 0:13
  • @DilipSarwate - you are right. More and more, when I read questions here, I've learned not to assume anything. Jeff's assumptions made perfect sense, but OP's question was misleading. Had he given all the details up front, we'd have answered "no different than you've been doing". Jan 15, 2017 at 0:18

Distributions from an inherited IRA will be taxed as ordinary income and there are required minimum distributions for the inherited account.

Assuming you were 55 at the time of your mother's death, your life expectancy according to the IRS is 29.6 years. Your required yearly distributions on $200,000 would be roughly $6800. For each year that you didn't withdraw that, you would owe a 50% penalty of the distribution amount (~$3400). That's probably better than the tax hit you would take if you pulled it all in as income in a 5 year window (ie. all right now since you're at the end of the window).


All transactions within an IRA are irrelevant as far as the taxation of the distributions from the IRA are concerned. You can only take cash from an IRA, and a (cash) distribution from a Traditional IRA is taxable as ordinary income (same as interest from a bank, say) without the advantage of any of the special tax rates for long-term capital gains or qualified dividends even if that cash was generated within the IRA from sales of stock etc. In short, just as with what is alleged to occur with respect to Las Vegas, what happens within the IRA stays within the IRA.

Note: some IRA custodians are willing to make a distribution of stock or mutual fund shares to you, so that ownership of the 100 shares of GE, say, that you hold within your IRA is transferred to you in your personal (non-IRA) brokerage account. But, as far as the IRS is concerned, your IRA custodian sold the stock as the closing price on the day of the distribution, gave you the cash, and you promptly bought the 100 shares (at the closing price) in your personal brokerage account with the cash that you received from the IRA. It is just that your custodian saved the transaction fees involved in selling 100 shares of GE stock inside the IRA and you saved the transaction fee for buying 100 shares of GE stock in your personal brokerage account. Your basis in the 100 shares of GE stock is the "cash_ that you imputedly received as a distribution from the IRA, so that when you sell the shares at some future time, your capital gains (or losses) will be with respect to this basis. The capital gains that occurred within the IRA when the shares were imputedly sold by your IRA custodian remain within the IRA, and you don't get to pay taxes on that at capital gains rates.

That being said, I would like to add to what NathanL told you in his answer. Your mother passed away in 2011 and you are now 60 years old (so 54 or 55 in 2011?). It is likely that your mother was over 70.5 years old when she passed away, and so she likely had started taking Required Minimum Distributions from her IRA before her death. So,

You should have been taking RMDs from the Inherited IRA starting with Year 2012. (The RMD for 2011, if not taken already by your mother before she passed away, should have been taken by her estate, and distributed to her heirs in accordance with her will, or, if she died intestate, in accordance with state law and/or probate court directives). There would not have been any 10% penalty tax due on the RMDs taken by you on the grounds that you were not 59.5 years old as yet; that rule applies to owners (your mom in this case) and not to beneficiaries (you in this case).

So, have you taken the RMDs for 2012-2016? Or were you waiting to turn 59.5 before taking distributions in the mistaken belief that you would have to pay a 10% penalty for early wthdrawal? The penalty for not taking a RMD is 50% of the amount not distributed; yes, 50%. If you didn't take RMDs from the Inherited IRA for years 2012-2016, I recommend that you consult a CPA with expertise in tax law. Ask the CPA if he/she is an Enrolled Agent with the IRS: Enrolled Agents have to pass an exam administered by the IRS to show that they really understand tax law and are not just blowing smoke, and can represent you in front of the IRS in cases of audit etc,

  • I've been taking the RMD's for a few years now, Vanguard Funds recommended amount.
    – Doug Null
    Jan 14, 2017 at 21:41
  • Well, if you have been taking RMDs from the Inherited IRA, then you already must have discovered that what happens within the IRA does not affect taxation of the distribution which is treated as cash regardless of what was done to generate that amount. Jan 14, 2017 at 21:59

You've been taking the RMDs. Each year the RMD is calculated by taking the prior 12/31 balance and dividing by the divisor, calculated when you inherited, and dropping by 1 each year. Some great trades and your account balance goes up. That's great, but of course it sends the next RMD higher.

I'd understand how marginal rates work and use the withdrawal to "top off" your current bracket. This will help slow the growth and runaway RMD increases.

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