Ask Liz Weston

Get smart with your money

Taxes

Q&A: How long should I wait before withdrawing from my IRA?

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Dear Liz: My husband and I disagree over when to use pre-tax monies (e.g., IRAs). He’ll be 69, and I’ll be 67 in the coming year, so we aren’t required to take distributions yet, and he isn’t starting Social Security until 70.

He insists it’s better to use our regular assets to live on and let the IRA monies grow as long as possible. I’d rather save the regular assets (many of which have high capital gains) and leave them to our adult kids after we die.

The pre-tax funds are now $4 million. Now that our kids would have to empty the IRA accounts within 10 years (no more stretch IRAs), doesn’t that make it more reasonable to start using some of those funds now? I’m assuming the IRA balances would still be significant, even after taking required minimum distributions. I’ve gotten most of my IRA funds converted to Roth so we don’t have to take RMDs on that money, but he won’t consider conversions. Is he right about limiting our expenditures to money from the regular brokerage account? Once we start Social Security and RMDs, we’ll have to pay more taxes on any withdrawals compared to now.

Answer: A lot of savers got the message pounded into their heads that retirement accounts should be left to grow tax-deferred as long as possible. The idea was that you’d be in a lower tax bracket when you retired and were finally forced to start withdrawals. You could leave any remaining retirement money to your children and they could continue benefiting from tax deferral by extending distributions over their lifetimes.

As you note, this “stretch IRA” option is no longer available for most non-spouse beneficiaries, who must empty inherited retirement accounts within 10 years. Plus, good savers like you and your husband often face a higher tax bracket, not a lower one, when required minimum distributions begin. That further weakens the argument for delaying withdrawals as long as possible. Also, large-enough RMDs can raise your Medicare premiums and make more of your Social Security income taxable, compounding the overall cost.

From your heirs’ point of view, inheriting your Roth IRA or regular assets is a much better deal than inheriting a pre-tax IRA. Every withdrawal from the pre-tax IRA will be subject to income taxes. Not so the Roth, which offers tax-free withdrawals. Regular assets will get a new, stepped-up value at death so that no capital gains taxes will be due on the appreciation that occurred in the original owner’s lifetime.

You have a few years to make adjustments before you’re locked into RMDs. Roth conversions are one possibility, as are “proactive” withdrawals — starting distributions from your IRAs before they’re required. Additional options to explore include qualified charitable distributions (direct transfers from your IRA to a charity) and qualified longevity annuity contracts, which can provide a lifetime stream of income starting at age 85.

You’d be wise to consult a tax pro who can model different scenarios to figure out the best approach for your situation.

Q&A: IRS tax payment problem can be frustrating to fix

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Dear Liz: In a recent column, you advised people to pay IRS tax bills online. Have you done this yourself? The wording of the choices to click on can be confusing. I tried to help my son pay online last year. We evidently chose the wrong type of tax and it went to “la la land.” He got late letters and fines. It took quite a while to get it rectified because you are on hold for HOURS. Who has time for that? Next year I’ll have him mail it and take our chances.

Answer: I’ve made exactly the mistake you describe and am aware of how frustrating it can be trying to get the situation rectified. But dealing with mail theft and check fraud is frustrating too.

Both of us would have benefited from consulting a tax pro first to ensure we were clicking the right buttons. A tax pro can also help in straightening out a snafu. The IRS was understaffed and struggling to answer its phones even before the government shutdown, but the dedicated number for tax pros often has shorter wait times than the one for the general public.

Q&A: How to avoid or reduce taxes on required minimum distributions

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Dear Liz: I’m confused about required minimum distributions from my retirement accounts. I’d like to avoid taxes on my withdrawals, but it seems there is no way to avoid them. Please give me some guidance.

Answer: If you got a deduction for contributing this money, and you want to keep the funds you’re required to withdraw, then yes, you have to pay taxes on these distributions.

Required minimum distributions from retirement accounts currently have to start at age 73. There are a few exceptions. Roth accounts don’t offer deductions on contributions and also don’t have RMDs. You can postpone RMDs from a workplace plan such as a 401(k) or 403(b) as long as you’re still working for the employer that sponsors the plan, the plan offers this “still working” option, and you don’t own 5% or more of the company.

If you don’t need the money, you could consider donating your required minimum distribution to charity. Known as “qualified charitable distributions,” these donations can start as early as age 70½. As long as the money goes directly from an IRA to a qualified nonprofit, you can avoid paying taxes on the distribution. For 2025, the maximum qualified charitable distribution is $108,000 per individual. (You can’t make a qualified charitable distribution from a workplace plan, but you can roll some or all of the account into an IRA and make the donation from there.)

Sometimes RMDs can be large enough to catapult savers into a higher tax bracket and trigger higher Medicare premiums. If that’s the case, and you’re still a few years away from starting RMDs, consider talking to a tax pro about ways to manage the tax bill. Starting distributions early or converting some funds to a Roth IRA might be options.

Q&A: Only married couples in community property states get this tax benefit

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Dear Liz: I own a house with my longtime boyfriend. If one of us dies, how does the capital gains step-up affect the other?

Answer: The deceased partner’s share of the home will get a new basis for tax purposes. The survivor’s share will not.

Tax basis helps determine how much of a capital gains tax bill you might face when you sell a home or any other asset that gained value over time. Your basis is generally what you paid for the home, plus qualifying improvements.

Inherited assets typically get a step-up in tax basis to their current market value, which means that no one has to pay taxes on the appreciation that occurred during the original owner’s lifetime.

If you were married and living in a community property state such as California, then the entire house could get stepped up to the current market value when the first spouse dies. This is known as the double step up. But this applies only to married couples in community property states. Unmarried couples in community property states and couples in other states don’t get this benefit.

Q&A: Inherited IRA could increase tax bill and Medicare premiums

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Dear Liz: If someone inherits my retirement account, is there any way they can avoid having their Medicare premiums increased for one year?

Answer: A large-enough retirement account could affect their Medicare premiums for up to 10 years, not just one.

Normally inheritances aren’t taxable, but retirement accounts are the exception. Withdrawals from inherited retirement accounts are usually taxable as income, and most non-spouse inheritors must drain a retirement account within 10 years. Withdrawals from inherited Roth accounts aren’t taxable, but the accounts still must be drained by the inheritor within a decade.

If the inheritor is on Medicare, taxable withdrawals could boost income enough to increase their Medicare premiums, thanks to the income-related monthly adjustment amounts (IRMAA). This surcharge starts once modified adjusted gross income exceeds certain amounts, which in 2025 is $106,000 for single filers and $212,000 for married couples filing jointly.

Anyone who inherits a retirement plan should get advice from a tax pro, but that’s particularly important when withdrawals might affect tax brackets and Medicare premiums. The pro can help determine how quickly or slowly the money should be withdrawn to maximize how much the inheritor gets to keep.

Q&A: Maxing out retirement contributions? Beware of future tax issues

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Dear Liz: I work for a local government and am trying to decide when to retire. I will receive a pension and have put away as much money as I could afford in my 457 deferred compensation plan. I invested it in a Standard & Poor’s 500 index fund that has performed well and is now worth $1.3 million. I also have a non-sheltered brokerage account of seven figures and no debt. Last year, I contributed vacation time and money to maximize my 457 contribution of $46,000. This year (and next unless I retire), I am likewise maximizing my contribution and contributing $46,000 each year. But periodically our monthly expenditures have exceeded my monthly income after the contribution and I have had to dip into the brokerage account to make up the difference. Does that make financial sense to do if needed or should I consider scaling back my contribution?

Answer: When you’re behind on saving for retirement, maximizing your contributions to tax-deferred plans in your final working years can be a smart move.

You, however, have a large amount of savings as well as a pension, so you may face a different problem: higher future taxes. Diligent savers can find themselves pushed into a higher tax bracket when required minimum distributions (RMDs) kick in. RMDs used to begin at age 70-½, but now start at age 73 for those born between 1951 through 1959 and will rise to 75 for those born in 1960 and later.

Many people with large tax-deferred retirement accounts can reduce their lifetime tax bills by converting at least some of the funds to a Roth IRA. Conversions are taxable, but Roths don’t have required minimum distributions and future withdrawals from Roths can be tax free. Conversions can affect other aspects of your retirement, such as Medicare premiums, so you’ll want sound tax advice before moving forward. You also may want to consult a fee-only financial planner who can review your overall financial situation and help you shape your retirement income plan.