inherited IRA(non-spousal) options

[Samuel Adams]

My wife has inherited two IRA's from her mother and father, who both died in 2015. My wife is 65 and I am 67. We are both receiving SS.

Our intent was to transfer the trustee of the IRA to a local bank, and then take distributions either her life time or in 5 years from it. We had hoped to avoid going into the 25% TAX BRACKET and losing another 10%, but we might have to take a hit on the taxes for it the first year.

This morning a sales person at our bank tried to sell us a variable annuity for it, but we declined her wonderful sales pitch.

Since its currently at Vanguard, will it be possible to transfer trusteeship to someone local? Or would that entail taking a full distribution from Vanguard. We had hoped to find a real person to talk to when we needed a distribution.

If that is not possible or would be too messy, then we will continue with Vanguard, and ask for a specific distribution every year for 5 years starting with one before December 31.

We plan to consult with a tax professional to determine exactly how much of distribution we need to take to avoid paying the extra 10%.

 

[rodi]

Inherited IRAs can be transferred, custodian to custodian, similar to traditional IRAs... You just have to make sure they title it correctly (as a beneficiary account.)

You can transfer it to your local bank or brokerage if they support IRA accounts. You can leave it at Vanguard, or transfer it to whatever brokerage firm you prefer.

Why not leave it at Vanguard? They can assist with the RMD's you need to take each year.

I inherited 2 IRAs from my father... I transferred from Vanguard to Schwab in a consolidation effort (I had other investments at Schwab)... I didn't convert it to money market - since I have many years left to use it.

 

[MooreBonds]

Our intent was to transfer the trustee of the IRA to a local bank, and then take distributions either her life time or in 5 years from it. We had hoped to avoid going into the 25% TAX BRACKET and losing another 10%, but we might have to take a hit on the taxes for it the first year.

This morning a sales person at our bank tried to sell us a variable annuity for it, but we declined her wonderful sales pitch.

Don't forget - when dealing with Inherited IRAs, you must start with the first year's divisor then subtract one each year thereafter (unless you do the "withdraw 100% within 5 years"). It's NOT based on the heir's lifetime, but just the heir's age in the first year it is inherited. That means that, after just a few years, the divisor grows relatively large.

 

[Bamaman]

Just roll it over into another account at Vanguard--one that suits your needs and investment goals.

If you need to make withdrawals, it can be wire transferred to your bank account in a day or two.

 

[Dancfo]

As others have commented, you can just transfer it to the inherited IRA. It is considered a "transfer" so there it not a separate a taxable "distribution" and subsequent roll-over. The original owners (mom and dad) would have already been taking their required distributions. Either they should have taken a distribution in 2015, or your wife should have taken a distribution in 2015. Your wife will need to take a distribution from each IRA by the end of this year, using her life expectancy to calculate the distribution. There are no penalties for taking the distributions, but of course they are taxable income (assuming traditional IRA). There is no 5 year rule applicable in this case. Using the single life expectancy table, a 65 year old has a life expectancy factor of 21. This results in a required distribution of a bit less than 5%. As previously noted, this factor will decrease by 1 each year. After 21 years, the full IRA will be distributed.

 

[GrayHare]

Our intent was to transfer the trustee of the IRA to a local bank, and then take distributions either her life time or in 5 years from it.

You can move it from Vanguard to a local bank, but already you can see how a bank will pressure you into things like annuities. I'd leave it at VG. Regardless of which you choose, titling it as an inherited IRA is critical.

We plan to consult with a tax professional to determine exactly how much of distribution we need to take to avoid paying the extra 10%.

If you do not withdraw enough the penalty is not 10%, instead it's an ouchful 50%.

 

[Samuel Adams]

Why not leave it at Vanguard? They can assist with the RMD's you need to take each year.

.

We wish to:

1. get it to a place where its not 700 miles away, and where we know the person we are dealing with not someone new.

2. More importantly, we want to be out of the market with it. We consider the current state of world affairs to be rather volatile, and wish to have it in a safe place, even if the interest accrual is dismal, there is no change that we could lose principle unless the USA collapses.

 

[Samuel Adams]

If you do not withdraw enough the penalty is not 10%, instead it's an ouchful 50%.

I wasn't talking about the penalty for failure to withdraw on time. I was talking about the penalty to us(not external penalty from the IRS) by causing the money to kick us up into the 25% tax bracket. Then we would have to pay out an extra 10% above the 15% federal tax we are paying now.

This means that this year this year i was 66 for the whole year so I can reduce my taxable income by my whole SS pension. But my wife still has to pay the 15% on hers. Next year she will only have to pay it on about half of the time since she turns 66 in the middle of the year. But this will allow us to take a full distribution probably in the five year context without kicking it up.

But we are consulting with a CPA tax professional next week just to make sure.

 

[Samuel Adams]

Don't forget - when dealing with Inherited IRAs, you must start with the first year's divisor then subtract one each year thereafter (unless you do the "withdraw 100% within 5 years"). It's NOT based on the heir's lifetime, but just the heir's age in the first year it is inherited. That means that, after just a few years, the divisor grows relatively large.

We plan to get a schedule from a CPA tax professional. I don't fool around with the tax system after I decided by in the mid 90's that I could fill out my short form 1040 myself without a computer program. I checked a box that no longer exists that said "Final Return". I figured it was the last return that I worked on that year.

You can guess what happened. I didn't even know that my local small city had an IRS office. And when I told them why I checked the "final return" box, the phone went dead for 15 seconds while the guy probably put his hand over the mouth-piece so he could laugh.

The tax code is too complicated for me to deal with this without help, especially for a guy who checked "final return" and a short form 1040. BTW, i can build houses, run complicated analyses, and earn lots of money in investments(all of which I have done in my life), but in the words of Dirty Harry: "A man's gotta know his limitations".

 

[Sunset]

......

This means that this year this year i was 66 for the whole year so I can reduce my taxable income by my whole SS pension. But my wife still has to pay the 15% on hers. Next year she will only have to pay it on about half of the time since she turns 66 in the middle of the year. But this will allow us to take a full distribution probably in the five year context without kicking it up.

But we are consulting with a CPA tax professional next week just to make sure.

I'm curious as maybe I can learn something.
You talk about taxes like you are not a couple, so possibly there is an advantage to filing separate vs joint when you are 66 ?

I never heard of a deduction for the full value of SS from taxable income, I do know if you keep your taxable income below a certain amount, that SS is not taxable. Was this what you meant ? As I don't see that when I look it up.

 

[Samuel Adams]

Pardon me for not using the right terms. I know my language is confusing to people familiar with the tax code. I avoid taxes as much as I can, and simply do whatever my tax program tells me to do.

However.... as I understand it, prior to age 66(approximately---its actually 65-67 depending on your birthday) if you are getting social security then you have to pay federal taxes on it. After age 66 or so, if you are getting SS then you don't have to pay taxes on it. If you are filing jointly, then this mix will impact you. We noticed this year as in 2015 I turned 66, and our payment to the federal government went down a good bit.

Filing separately might be worthwhile now since her income is in the 10% tax bracket, but only if she wanted to take less than 10K out of the IRA which on the 5 year dispersal rule, she cannot without throwing her into the 15% tax bracket which is what I am in.. But in succeeding years she might be able to do so. In fact, it might even be worthwhile now. We'll ask our CPA about that.

 

[LOL!]

We wish to:

1. get it to a place where its not 700 miles away, and where we know the person we are dealing with not someone new.

2. More importantly, we want to be out of the market with it. We consider the current state of world affairs to be rather volatile, and wish to have it in a safe place, even if the interest accrual is dismal, there is no change that we could lose principle unless the USA collapses.

My wife has an inherited IRA at Vanguard and I have an inherited IRA at Fidelity. Both firms will calculate the RMD for you and remind you that you need to take it. We take our RMDs in January of every year.

If you want to be out of the market both Vanguard and Fidelity (and most other financial institutions) would let you invest in a CD or money market fund or Treasury bills or other short-term cash investments.

But if you want to transfer to somone local, there should be no problem. We have found that a few local places don't know much about inherited IRAs nor RMDs nor taxes, so we don't use them. Make sure the CPA actually knows about inherited IRAs, their RMDs, and the various withdrawal rules. For instance, one does not need to withdraw the entire amount over 5 years in most circumstances.

It is often possible to stretch out the withdrawals over the rest of one's life. But this may not apply to you all depending on your personal circumstances because you inherited these assets a while ago. Although IRS publication 590B seems to state that you can, so you are probably good for the stretch.

 

[kaneohe]

...................

However.... as I understand it, prior to age 66(approximately---its actually 65-67 depending on your birthday) if you are getting social security then you have to pay federal taxes on it. After age 66 or so, if you are getting SS then you don't have to pay taxes on it. .......................

This is not correct. Taxation is the same at all ages....taxation of SS depends on how much other income you have. The only I can think of that is age-dependent is that your std deduction increases a bit when you turn 65.

 

[Samuel Adams]

This is not correct. Taxation is the same at all ages....taxation of SS depends on how much other income you have. The only I can think of that is age-dependent is that your std deduction increases a bit when you turn 65.

this disagrees:

http://finance.zacks.com/social-security-benefits-taxable-after-age-65-5823.html

This agrees:

https://www.newretirement.com/answers/11762/taxes-and-social-security-after-age-66.aspx


----
Its so hard to get accurate information about anything in the financial world.

 

[MichaelB]

this disagrees:

http://finance.zacks.com/social-security-benefits-taxable-after-age-65-5823.html

This agrees:

https://www.newretirement.com/answers/11762/taxes-and-social-security-after-age-66.aspx


----
Its so hard to get accurate information about anything in the financial world.

I think the Zacks article age reference is about "full retirement age", not taxes.

Neither of those two sources are known for expert tax advice, with probably adds to the difficulty in getting accurate information.

 

[kaneohe]

this disagrees:

http://finance.zacks.com/social-security-benefits-taxable-after-age-65-5823.html

This agrees:

https://www.newretirement.com/answers/11762/taxes-and-social-security-after-age-66.aspx


----
Its so hard to get accurate information about anything in the financial world.

The zacks article is a curious blend of 2 completely different concepts so tho it incorporates both, the end blended result is neither fish nor fowl. The first concept is that SS benefits are reduced if you work and are too young.
https://faq.ssa.gov/link/portal/340...k-and-get-social-security-retirement-benefits

This is not SS taxation. SS taxation is what happens after you receive whatever you receive so most of the zacks article is about taxation but the grand opening statement is about something else so blame them for any confusion. Might be interesting to let them know also.

 

[Samuel Adams]

This is not correct. Taxation is the same at all ages....taxation of SS depends on how much other income you have. The only I can think of that is age-dependent is that your std deduction increases a bit when you turn 65.

I believe your point of view. The only reason I brought it up was that the salesperson the bank sent me to, in the process of trying to ram a variable annuity down our throats, said that now that I was 66(the age for full retirement on SS) my tax would go down. Oddly the tax that I have to write a check for to the Feds in April, went down by about 600 bucks.

Since I only do what the H & R block program says, and I have nothing unusual in my income, and since its now October, 6 months after I filed and I've not heard from the IRS that I need to come up with more money, I don't actually know why I owed them less than I normally do.

 

[kaneohe]

....................

Since I only do what the H & R block program says, and I have nothing unusual in my income, and since its now October, 6 months after I filed and I've not heard from the IRS that I need to come up with more money, I don't actually know why I owed them less than I normally do.

Try comparing the 2 returns line by line........e.g. AGI, taxable income, tax.
That should give you a clue where to look in more detail. There's no black magic here

 

[EastWest Gal]

I'm not sure why you need it local. I have my inherited IRA as a separate account in my Schwab portfolio. In past years I took my RMD by printing a paper and faxing it or dropping it off at the local Schwab office. This year I transferred the money online.


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[Samuel Adams]

I'm not sure why you need it local. I have my inherited IRA as a separate account in my Schwab portfolio. In past years I took my RMD by printing a paper and faxing it or dropping it off at the local Schwab office. This year I transferred the money online.


Sent from my iPhone using Early Retirement Forum

If there was a local Vanguard office then we'd stick with them.

I would never transfer any money on-line. If the IRS itself can be hacked, then anyone can.

I too much experience with screw-ups by brokerage, annuity insurance companies, and other stuff.

Wife has decided to simply transfer custodianship to local bank and put it in 1 year, 2 year and 3 year CD's. Total CD interest compared to the mutual fund dividends minus the management fees, will be pretty close to the same. And the addition of totally safe principle will be much better.

 

[meierlde]

If there was a local Vanguard office then we'd stick with them.

I would never transfer any money on-line. If the IRS itself can be hacked, then anyone can.

I too much experience with screw-ups by brokerage, annuity insurance companies, and other stuff.

Wife has decided to simply transfer custodianship to local bank and put it in 1 year, 2 year and 3 year CD's. Total CD interest compared to the mutual fund dividends minus the management fees, will be pretty close to the same. And the addition of totally safe principle will be much better.

Of course you can get purchased CD's at vanguard as well, with whatever term you like. Basically when you need to redeem early you get the market price for the cd at the time. So in that case at vanguard the only fee might be the basic fee depending on the size of the account. (I suspect you can get brokered CDs at pretty much any brokerage. These CDs are fdic insured and if you have over 250k you can choose different banks and get higher limits than the 250k of FDIC insurance by using multiple banks.

 

[Sunset]

OP - your idea about filing taxes separately will cause you to pay in total more tax on SS than filing jointly as a married couple.

Straight from the irs site:
https://www.irs.gov/uac/newsroom/social-security-benefits-and-your-taxes

"You can follow these two quick steps to see if your benefits are taxable:

• Add one-half of the Social Security benefits you received to all your other income, including tax-exempt interest. Tax-exempt interest includes interest from state and municipal bonds.
• Next, compare this total to the ‘base amount’ for your filing status. If the total is more than your base amount, then some of your benefits may be taxable.
  
  The three 2012 base amounts are:
  
  $25,000 for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year;
  
  $32,000 for married couples filing jointly; and
  
  $0 for married persons filing separately who lived together at any time during the year."

 

[Samuel Adams]

Of course you can get purchased CD's at vanguard as well, with whatever term you like. Basically when you need to redeem early you get the market price for the cd at the time. So in that case at vanguard the only fee might be the basic fee depending on the size of the account. (I suspect you can get brokered CDs at pretty much any brokerage. These CDs are fdic insured and if you have over 250k you can choose different banks and get higher limits than the 250k of FDIC insurance by using multiple banks.

Yes I know that. I shared that with the wife. Its her inheritance. I got mine 20 years ago and made my decisions with mine. She has chosen to have it moved to her bank. She doesn't care much for Vanguard. They took a more than a year to get their act together to transfer the IRA from her father and mother into the beneficiary IRA for her and her sisters.

 

[Samuel Adams]

OP - your idea about filing taxes separately will cause you to pay in total more tax on SS than filing jointly as a married couple.

Thank you. We figured that one out. It was never a plan, just an option that didn't pan out. I forgot when I first looked at it that by filing separately, the greater portion of our income which is mine would suddenly be taxed not at 15% but at 25%. the only way it would work out better was if we took all of the IRA at one time. But there is no reason to do that since its not required, except to get it all out by 5 years. Going to lifetime wouldn't help either since we are up against on of the tax brackets now. So we just have to grin and bear the fact that we'll have to pay the 25% rate on the inheritance that is the IRA part.

 

[MooreBonds]

I would never transfer any money on-line. If the IRS itself can be hacked, then anyone can.

I too much experience with screw-ups by brokerage, annuity insurance companies, and other stuff.

Hmm...are you aware that every financial institution has some exposure to computer networks being "hacked"? Do you think your credit union down the block has anywhere near the level of cyber security compared to a Vanguard or any other major financial institution? And are you aware that financial fraud and theft is just about as old as.....well, money? Do you really think that identify theft/financial theft/hacking/network intrusion only came upon the scene in 1994 when the internet started to take off?

Yes, mistakes can happen in transferring accounts from one custodian to another. Just like mistakes have been happening since...oh, just about since records have started. Do you think that every hand-written digit and manually-typed digit ever made has any greater security or level of accuracy than current recordkeeping systems? If you truly fear massive screw-ups by custodians, I wonder how fearful you are of far more likely situations happening.