Join Early Retirement Today
Thread Tools Search this Thread Display Modes
Friend inherited non-qualified (after tax) IRA
Old 05-27-2015, 01:35 PM   #1
Thinks s/he gets paid by the post
Join Date: Mar 2004
Posts: 2,917
Friend inherited non-qualified (after tax) IRA

A 50-year-old married friend (father of 2 kids -- ages 17 and 10) just had both of his parents die within two months of each other. Most of their estate is in after-tax IRAs.

He has done some research and thinks these are his only 2 options:

1) Take the money as a lump sum and pay taxes on what their money earned (so if it was a $30K after-tax Non Qualified IRA, and it earned $3K, he pays taxes on the $3K, not the $30K)

2) Take the IRA in installments based on his age. So if he lives 20 more years, he just takes it in installments, so after he retires in 10 years he'll pay less in taxes those final 10 years since he won't have his exorbitant mega-corp salary.

I know there must have been others here faced with similar situations. I'm wondering if there might be some other options or strategies he could use?

FWIW, he is well-employed at a mega-corp. His wife has been a teacher 'forever' in a good school system, so she will get a decent pension. His kids are both doing great in school and will be going to college.

As his younger child will finish college when my friend is 62, he was planning to probably keep working until that kid graduates. Although, as his parents were rather frugal, depending on the size of their estate, this might precipitate an earlier-than-planned retirement.


omni550 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-27-2015, 02:06 PM   #2
Thinks s/he gets paid by the post
MooreBonds's Avatar
Join Date: Aug 2004
Location: St. Louis
Posts: 2,178
Assuming the after-tax basis is well documented, the IRS says that the cost-basis of the IRA remains with an inherited IRA (i.e. the after-tax nature stays after-tax, and he won't owe income taxes on the cost-basis) :
IRA with basis. If you inherit a traditional IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA. Unless you are the decedent's spouse and choose to treat the IRA as your own, you cannot combine this basis with any basis you have in your own traditional IRA(s) or any basis in traditional IRA(s) you inherited from other decedents. If you take distributions from both an inherited IRA and your IRA, and each has basis, you must complete separate Forms 8606 to determine the taxable and nontaxable portions of those distributions.
Publication 590-B (2014), Distributions from Individual Retirement Arrangements (IRAs)

There's nothing in the IRS literature I see where the RMDs from either an Inherited IRA or your own IRA are affected by having after-tax contributions. So, I would wager a guess that your friend must still take RMDs like any other inherited IRA - it's just that a vast majority of the withdrawal will be non-taxable.

So your friend can either take out 100% of the balance within 5 years, or take out RMDs from his parents' IRA starting in the first full year after their death.

Just remember that Inherited IRA RMDs take your first year divisor and then subtracting 1 ever year thereafter. many people (including me!) assume your RMD for an inherited IRA is like an RMD for a regular IRA - but it's not. Because your "divisor" for your RMD from an Inherited IRA reduces by 1 each year, after a while, you start getting huge % RMDs from an inherited IRA, to the point where you have to take out all of your remaining balance in maybe 30 years (depending on your starting age).

Dryer sheets Schmyer sheets
MooreBonds is offline   Reply With Quote
Old 05-27-2015, 02:32 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 23,451
Unless he has maxed out his retirement contributions depending on his financial situation he could make a deductible contribution to a tIRA or increase his 401k contributions for an amount equal to the gain so the net income would be nil.

So in your example 1, if he increased his 401k contributions by $3k or made a $3k deductible contribution to an IRA, then either of those would offset the $3k of income from cashing in the inherited IRA.

Depending on the amounts involved and the gain involved, he might want to do it over multiple years.
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is online now   Reply With Quote
Old 05-27-2015, 05:55 PM   #4
Thinks s/he gets paid by the post
Join Date: Aug 2007
Posts: 1,166
I inherited a small IRA from my mom. I ended up taking RMDs within the first year and will keep doing that indefinitely or at least until I stop working. She had her IRA at Vanguard, which made it easy to transfer to me (it was actually split three ways with my two siblings).

I don't know how other companies handle inherited IRAs, but at the beginning of the year Vanguard calculates my RMD which I immediately take out of the account.

If your friend plans on continuing to work, then he might save money in taxes by taking the minimums and then cash it out fully when he retires, assuming he needs the cash.

Keep in mind that I'm assuming the parents weren't already withdrawing from the IRA. I recall that the rules were slightly different in that case, but I don't remember the details.
Eat, Drink and Be Merry.
tulak is offline   Reply With Quote
Old 05-27-2015, 11:27 PM   #5
Thinks s/he gets paid by the post
Join Date: Mar 2010
Posts: 1,799
When we inherited a "qualified" IRA we had three options.
1) Lump sum
2) A Five year payout so the tax consequences were spread over 5 years.
3) Annuitize it based on our life expectancy and start taking RMD's.

Your friends inherited IRA is "non-qualified" (after tax) and I think his decision will depend on the tax hit, his own personal tax situation and what he projects his tax situation to be down the road.

Im not sure why he thinks he has only the two options. There is a third. The five year pay out that is supported by IRS regs and as far as I know is offered by most if not all annuity companies to comply with those regs. This should have been disclosed to him by the annuity company.
sheehs1 is offline   Reply With Quote
Old 05-28-2015, 06:06 AM   #6
Thinks s/he gets paid by the post
gauss's Avatar
Join Date: Aug 2011
Posts: 2,581
Originally Posted by sheehs1 View Post

Im not sure why he thinks he has only the two options. There is a third. The five year pay out that is supported by IRS regs and as far as I know is offered by most if not all annuity companies to comply with those regs. This should have been disclosed to him by the annuity company.
From the IRS prospective, is the 5 year method only relevant if the deceased IRA owner had not attained age 70.5 when RMDs would apply? Stated a bit differently, if the parent had attained age 70.5, the beneficiary would need to take their recalculated RMDs each year to avoid 50% penalty -- no 5 year grace period applies.

It is possible that the current IRA plan may have a separate 5-year distribution requirement for beneficiaries, but you would be able to transfer the IRA to your own "inherited IRA" titled account. You would need to do a direct transfer (no 60 day indirect rollovers allowed for inherited IRAs).

The "inherited IRA" account would be considered separately from his normal IRAs from here on out.


p.s. I have not had to deal with inherited IRAs yet, first hand, so please point out it out if anyone sees a flaw in my analysis.
gauss is offline   Reply With Quote
Old 05-28-2015, 11:02 AM   #7
Thinks s/he gets paid by the post
Join Date: Mar 2010
Posts: 1,799
gauss….My mother had starting taking RMD's and she was 76 when she passed. We had the 5 year option. I don't think having already started RMD's has an affect on the rights to the various distribution methods to a beneficiary.
My mom passed away over 10 years ago but I can't imagine these choices have changed. Although they could have.

sheehs1 is offline   Reply With Quote

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off

Similar Threads
Thread Thread Starter Forum Replies Last Post
Am I qualified for an IRA? Disappointed FIRE and Money 4 03-02-2015 02:52 PM
Non-spouse inherited IRA stephenson FIRE and Money 12 09-03-2013 01:34 PM
Lump sum/pension/non-qualified annuity ? please help enret Hi, I am... 14 05-08-2013 09:18 PM
Jointly Owned Non-spousal inherited IRA WilliamG FIRE and Money 24 03-24-2013 04:49 PM
Need help in doing IRS form to report qualified Roth IRA distribution swampwiz FIRE and Money 5 12-08-2010 02:42 PM

» Quick Links

All times are GMT -6. The time now is 07:21 AM.
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2019, vBulletin Solutions, Inc.