ER strategies with an inherited IRA

[FrankiesGirl]

I am set to RE very, very soon and pretty much know how to manage my drawdowns at this point, but wanted to see if anyone had any insights on the wild card that is a substantial inherited IRA (it was a pretty nice size when I received it, but have grown it quite a bit since I inherited).

I am taking the MRDs already, having taxes withheld at 20% so as to ensure I don't get a surprise at tax time. So far the MRDs are small enough to not really hurt my overall withdrawal plan or incur any issues tax-wise, but it's grown so much that I'm having to take thousands more each year, and will keep growing, and I just found out I'm not allowed to do a Roth conversion out of an inherited IRA (which was my first inclination, darn it).

I can take out more than the MRD penalty free as long as I pay taxes on the amounts. I thought about just using this as my main source of living expenses the first 10 years (instead of tapping the taxable's cap gains/dividends), but it will mean paying out about 7% average to taxes (while still staying in the 15% taxable bracket). And I'd like to minimize the tax payouts as much as possible - if it wasn't for that account and the potential growth, I'd be able to pay no taxes ever again (via GoCurryCracker's method).


TL/DR:
Basically, I have about 12 years' living expenses (LE) in a taxable account, about 10 years of LE in the inherited IRA and roughly 5-8 more years LE in my 401k, Roths and cash. Since I can't do conversions on the inherited account, I'm concerned that the only option I have to stop the ever-growing MRDs is to take out more, and pay more taxes to move it to taxable/fund Roths (if I have earned income - which I may not after this year).

Any ideas?

And yes, I realize that this is a great problem to have in the grand scheme of things.

 

[Alan]

Maybe begin converting your 401k to a ROTH (if that is an option now but certainly after you retire). You can pay the taxes of the conversions with distributions from the inherited IRA. That would be a way to at least get some of the inherited IRA into a ROTH.

 

[GrayHare]

Take out the RMD early in the year and invest it more tax-efficiently outside the IRA. Doing so avoids that year's gains being hit with tax at ordinary rates.

 

[jjquantz]

Take out the RMD early in the year and invest it more tax-efficiently outside the IRA. Doing so avoids that year's gains being hit with tax at ordinary rates.

Bingo! DW inherited a smallish IRA and this is what we are doing.

 

[FrankiesGirl]

I do already take the MRD early in the year and reinvest (been using it to fund the Roths). Problem is (example) if my last MRD was ~10K, and the IRA makes like 50K a year in growth/dividends, I'm not even treading water. I'm seeing growth that just laughs at the tiny amounts I am required to take out.

I guess my only real option is to take out largish chunks now in the early days (which again, we'll probably just use mostly for the yearly expenses) before I hit MRDs on my other accounts when I can still somewhat control what I'm being required to take, and just pay the taxes. I hope I still have room to do conversions on my 401k to get that moved over fast enough to avoid MRDs on that one too.

And all of my buckets/funds are as streamlined as they can be - index funds all the way round, with the less tax efficient ones in the tax deferred accounts.

We're stuffing the Roths for myself and the husband with $5,500 each every year we can, and only have the 401K conversion to manipulate after we both RE. After this year, we may not have earned income to fund the regular Roth contributions, so access to stuff tax deferred accounts is going to be limited.

 

[gcgang]

I Problem is (example) if my last MRD was ~10K, and the IRA makes like 50K a year in growth/dividends, I'm not even treading water. I'm seeing growth that just laughs at the tiny amounts I am required to take out.

.

Wait until the next bear market. Your "problem" will disappear.


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[FrankiesGirl]

Wait until the next bear market. Your "problem" will disappear.


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Yup. For the duration of the bear market. I get that. The nice thing is that in a bear, I will probably hit that account exclusively and give all my other accounts plenty of time to recover from any drops. Unless anyone else has any workable suggestions I haven't considered, this appears to be the best option - just keep using this as my main drawdown account until it's depleted (which may happen faster in a bear market).

 

[Clone]

Wait until the next bear market. Your "problem" will disappear.

I remember friends who retired in 1999 saying 'Why not go? Anybody can make 15% in the market!"