Mini Case Study: Strategic Tax Planning Following a Large Inherited IRA Distribution
One of our clients recently faced a significant tax event after using her IRA funds to buy a house in another state.
Here’s what the situation looked like:
To purchase a new house in Iowa, our client withdrew $425k from an inherited IRA. Her plan was to sell her inherited California residence, and use those proceeds to replace the withdrawn IRA funds within 60 days to not face early withdrawal penalties. Unfortunately, the home sale was delayed, making that strategy unavailable.
Because the withdrawal occurred, she was facing a $119,500 tax bill ($93k federally and $26,500 at the state level).
Rather than waiting until it was too late, we prepared a tax projection to determine her expected liability and identify planning opportunities before year-end.
Our analysis showed:
No estimated tax payments are required for 2026, as she will not incur underpayment penalties based on her current withholding and safe harbor calculations.
An available strategy for tax savings of $89,996: We identified an opportunity to strategically reduce her taxable income by utilizing other funds available to her to pay back some of the IRA withdrawal within the 60 day limit. This was done to manage her income and put her in a tax bracket where marginal rates were drastically lower, saving her almost $90,000 in tax!
Having this projection completed well before year-end allows our client to understand her tax exposure, avoid unnecessary tax, and evaluate planning opportunities while there is still time to act.
Large IRA distributions often create unexpected tax consequences, especially during a year of change. Through proactive planning we can model different scenarios, identify strategies to reduce tax liability, and help clients make informed financial decisions instead of reacting after the year is done.
Send me an email (Madison@swrpteam.com) or book a time on my calendar (https://calendly.com/madison-swrpteam/30min) if you’re dealing with a similar situation and need a trusted Advisor that can help.
This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.