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Stretch IRA / Multi-generational wealth transfer
Old 09-15-2014, 03:43 PM   #1
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Stretch IRA / Multi-generational wealth transfer

After finally getting my FIRE spreadsheet built-out a bit further with a bit more historical data and future predictions I started to see the timeframe I was about to retire.

This spurred a conversation with the ole man and we got on the topic of RMD somehow so I decided to mark those dates for me and the ole man just for fun. It was then I realized (barring no change to the law) I would hit my RMD at 70 1/2 which would be the same year my ole man would turn 99 or in other words likely dead or near passing.
This spurred a bit of a tax discussion which ultimately led nowhere becauase neither me nor the ole man can predict the future tax code but left us pondering the question, how do I avoid a massive estate tax that I will likely be hit with from my ole mans inheritenane right around the same time I have to take RMD from my 401k/IRAs. I was initially planning for these to be lowest possible income years but I can foresee this might not be the case now with me taking RMD and looking at the inheritence coming in during that time.

Looks like inheritence wouuld be around $1mil. which I won't need and neither will any of my sisters...so it looks like giving it to his grandkids (and perhaps charity) would be ideal for my ole man.

My dad has not retired yet and I fear his lack of strategy will promote unneeded tax consequences.

Is a Stretch (inherited) IRA the best way to pass on wealth to your heirs...or is there something else worth pursueing that I am missing?
My ole man does not plan on touching anything in his 401k (no Roth) so I am looking for the smart thing to do so his grandkids will see the most money and I am open to simple and complex advice.
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FIRE in 2031 @ 50yrs old (+/- 2yrs) w/ a hypothetical $2.5mil portfolio, 3 appreciated homes worth $1.0mil and rental income to fund my gap years until RMD. Assets will go to an inherited IRA where I plan on watching the investments grow until I die or the trust gets executed.
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Old 09-15-2014, 04:31 PM   #2
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Estate tax is paid by the estate and not you. $1 mill is below the federal exemption. The state involved may have a tax.

I always liked inheriting a Roth IRA. The RMD's are tax free and paid over the beneficiaries life time.
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Old 09-15-2014, 04:34 PM   #3
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If you & your siblings won't need it, why will his grandkids?
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Old 09-15-2014, 04:34 PM   #4
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Currently an estate tax return is required by the Federal government only for estates over $5.34M. So it looks like you dad's estate might not be taxed so massively after all. In addition, the estate pays the estate tax, not the heir, so it should not interfere with the income tax you pay on your RMDs. Of course, once you receive the inheritance money and invest it, you might see your income and therefore the income tax liability on the RMDs increase. But it seems to be a bit early to worry about that.
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Old 09-15-2014, 04:58 PM   #5
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According to this (April 2014):
Another substantial change introduced by the tax law is the phased in doubling of the Minnesota estate tax exemption amount from $1 million to $2 million. Under the new law, the exemption amount is $1.2 million in 2014, and it will increase by $200,000 each year until it reaches $2 million in 2018.

Your dad's estate will not be subject Minnesota estate tax either (assuming he lives in MN too) and "about a million" is less than 1.2 million this year.
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Old 09-15-2014, 05:09 PM   #6
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With an inherited IRA that already has RMDs started (original owner is over 70.5) the beneficiary will also take RMDs. They *can* cash out the whole thing - but that would incur a large tax bill... or they can keep it tax deferred, taking the RMDs on a schedule that is specific to the beneficiary's age, the original owners age, etc... If the beneficiary IRA is not used up by the time the beneficiary passes - it gets passed on to the new beneficiaries (grandkids?)....

That assume your dad leaves it to you and your sister.

Your dad could also name your kids and nieces/nephews as beneficiaries - skipping you and your sister. But if the grandkids are minors there would also need to be custodians named.
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Old 09-15-2014, 06:39 PM   #7
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Your ole man is going to have to take RMDs on his 401K at 70 1/2. If he goes at 99 there will probably not be much of it left. If he does nothing with it after age 70.5 you are going to inherit a mess with the IRS.

Anything in a taxable account has its basis reset when you inherit it. So if he bought shares of XYZ for $1 a share and it is $100/share now, your basis would be $100/share if you inherit it.
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Old 09-15-2014, 06:48 PM   #8
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Quote:
Originally Posted by RunningBum View Post
Your ole man is going to have to take RMDs on his 401K at 70 1/2. If he goes at 99 there will probably not be much of it left. If he does nothing with it after age 70.5 you are going to inherit a mess with the IRS.

Anything in a taxable account has its basis reset when you inherit it. So if he bought shares of XYZ for $1 a share and it is $100/share now, your basis would be $100/share if you inherit it.
Looking at the IRS table and assuming a 4% growth per annum of the base amount around 1/3 of the original amount will be left at 100. The factor to use at 100 is to divide the amount left by 6.3 (15%) and that is the RMD at 100.
Of course if you get higher returns you will have more left.
RMD's start out by dividing the balance by 27.4 (3.6%) at 70, and the table stops (for account owners/creators) at 114 with a division factor of 2.1 or an rmd of 47% of the account balance.
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Old 09-16-2014, 01:22 AM   #9
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The 'ole man could start doing ROTH conversions, then when they are passed on the recipients won't have any tax to pay on receipt of them. They will have to do RMD's on those ROTHs but the withdrawals won't be taxable.
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Old 09-16-2014, 07:34 AM   #10
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Originally Posted by FIREd View Post
Currently an estate tax return is required by the Federal government only for estates over $5.34M. So it looks like you dad's estate might not be taxed so massively after all. In addition, the estate pays the estate tax, not the heir, so it should not interfere with the income tax you pay on your RMDs. Of course, once you receive the inheritance money and invest it, you might see your income and therefore the income tax liability on the RMDs increase. But it seems to be a bit early to worry about that.

it's my anxiety kicking in lol. Probably a bit early t worry. Thanks of the replies!
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FIRE in 2031 @ 50yrs old (+/- 2yrs) w/ a hypothetical $2.5mil portfolio, 3 appreciated homes worth $1.0mil and rental income to fund my gap years until RMD. Assets will go to an inherited IRA where I plan on watching the investments grow until I die or the trust gets executed.
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