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Old 06-29-2015, 11:27 PM   #21
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Originally Posted by MooreBonds View Post
Just as a reminder: Inherited IRAs have a different RMD schedule than when you turn 70 1/2!

You take your divisor in your first year of inheriting the IRA to calculate your RMD. Then, for each subsequent year, you SUBTRACT 1 from the divisor to determine your RMD, rather than using the divisor from being one year older.

If you are under, say, 45-50 when you inherit an IRA, the first few years of RMDs are virtually the same compared to if you were taking RMDs on your own IRA.

However, after about 5-10 years (especially if you are over about 55 when you start an I-IRA), subtracting 1 from the divisor each year starts to really make an impact in increasing your RMD compared to if you were taking out RMDs for your own IRA. Don't automatically assume your broker will do the calculation correctly.

Since the amount is small, I would simply cash it out and invest in something with it, to avoid the headache of always calculating each year a new, separate divisor, and running the risk of making a mistake one year.
My friend, nearly 52 now, received his share of his mom's IRA as an inherited IRA after she died in 2012. I have been helping him out with his taxes for many years so this was just another element to keep track of.

His inherited IRA has been worth just under $100k and the divisor has been shrinking by one every year as you wrote. But when it drops from 35 to 34 to 33 the RMD doesn't increase much as long as the IRA's value stays the same or, as has been the case in that time, rises slightly. It is with Fidelity and they calculate the RMD for his IRA. I simply go up to the next $100 increment to keep it easy to keep track of.

I have set up his Inherited IRA so that the interest and dividends it spins off throughout the year go into a cash account which is used to pay out the RMD. This way, he doesn't have to liquidate any of his few holdings within the IRA. This cash account has a small annual surplus after the RMD is paid out so this cycle can repeated for many years until the cash account won't have enough in it to pay the slowly growing RMD.

But my friend doesn't need the RMD (which is about $2,800) for his daily expenses so we use 99% of it as withholding to pay some of his income taxes, mainly on the investment income from the rest of his inheritance. We split it up between state and federal, satisfying as much of his outstanding state income tax as possible so he can deduct it on that year's federal income taxes. What's left over goes to pay some estimated federal income taxes (Form 1099-R) and keep him closer to avoiding underwithholding tax penalties. Estimated income tax payments handle the rest.
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Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

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Old 06-30-2015, 09:08 AM   #22
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If you will be in a lower or the same tax bracket 5 years from now, you could consider the following strategy.

Let it grow for 5 more years (not taking RMDs in the years between now and then) and then just cash it out and pay the taxes then.

Alternatively if you think there is a possibility that you may have a year where your taxable income is relatively low during the next 5 years, you could wait until that time to cash it out taking advantage of the potentially lower taxes (if your income is low enough that you to push you into a lower tax bracket).

With this strategy your are keeping your options open and do not have to take RMDs in the interim.

You just should make sure that you have a good plan in place so that in 5 years you remember to take the full distribution if you have not done so by that time yet.

-gauss
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Old 06-30-2015, 10:14 AM   #23
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You just receive an additional 1099R. No big deal.
Mine was a little bigger - put it in Vanguard Lifestrategy conservative sort of index version of pssst Wellesley.

heh heh heh - over 10 years and going strong and of course higher RMD each year. Hinsight says it functioned like a faux annuity along with small non-cola pension, early SS providing a fall back base while my 'big dog' retirement varied more widely with Mr Market.
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Old 06-30-2015, 10:21 AM   #24
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Originally Posted by scrabbler1 View Post

I have set up his Inherited IRA so that the interest and dividends it spins off throughout the year go into a cash account which is used to pay out the RMD. This way, he doesn't have to liquidate any of his few holdings within the IRA.
Why not take the RMD in kind from the account? If he doesn't need it in cash, keep the account fully invested and just take the RMD in securities. This is what I do. I didn't want to take a cash RMD that I would eventually just reinvest anyway - as long as I didn't need the cash.
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Old 06-30-2015, 11:21 AM   #25
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Why not take the RMD in kind from the account? If he doesn't need it in cash, keep the account fully invested and just take the RMD in securities. This is what I do. I didn't want to take a cash RMD that I would eventually just reinvest anyway - as long as I didn't need the cash.
He does use the cash to pay some of the income taxes he needs to pay on the rest of his inheritance which is in a brokerage account. Fidelity allows the client to electronically pay those taxes through 1099-R withholding, a seamless and simple way of paying them compared to estimated taxes (for the state, not the feds where it just lowers what it due and keeps him from underwithholding penalties).
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Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

"I want my money working for me instead of me working for my money!"
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