Inherited IRA and Vanguard

Hmm, I looked. Closest Fidelity office to me is about 2 hours away. It would really take something to make me drive there rather than handle things by email/phone/mail. I wonder if these kind of exception cases will be less common. I don't hold any physical certificates other than things not handled by an investment firm, like house and car titles. But I hear you, if something weird happened, like my account got hacked and everything disappeared, I'd want to camp out in an office until it got resolved.

I currently have two inherited IRAs. The first was from my grandmother, who passed away in May of 2015. The second is from my Dad, who passed away in March of 2017.

I had three choices, as I recall...either cash out the IRA, and pay tax on it, have it distributed over 5 years, where it would also pay tax, or let it sit and go through an RMD cycle, and still pay tax, but on smaller distributions, as the rest of it has the potential to grow tax deferred.

I was 45 when I inherited the first IRA, and 47 when I inherited the second one. I think the RMD cycle is set up to be completely depleted by the time I'm 84. I want to say the first year RMD was around 2.7-2.8%, for each one. It ratchets up each year, similar to the way a regular IRA starts ratcheting up each year after 70.5. But the difference is towards the end, the inherited's RMD goes so high that it'll deplete at 84, no matter how well it does. In contrast, a regular IRA could theoretically go forever. Even when you hit the age of 115, the RMD maxes out at 52.6%

Right, they don't want IRAs to pass along for many full-lived generations.

I confirmed yesterday with Vanguard - all is good - kids are secondary beneficiary, when we both are gone Vanguard will provide to the kids as Inherited IRAs with new RMD. Sweet deal for the inheritees.

RunningBum said:

Right, they don't want IRAs to pass along for many full-lived generations.

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Yeah, that's definitely understandable. I can remember my Mom getting her nose out of joint about having to pay taxes when Grandmom's IRA got split between her, my uncle, and me. I tried to explain to her that the government deferred those taxes for Grandmom's benefit, not ours, so be grateful for what you're getting. I mean, I'm all for paying as little in taxes as possible, but at the same time I understand the government is gonna want theirs, eventually.

I also told Mom that if she wanted, she could defer it like I was going to. It's not like Mom needed the money. I ended up getting around $4800, so my Mom and uncle would've gotten $9600 apiece. Mom ended up just taking the lump sum and paying the taxes. So did my uncle, but he was out of the workforce by then, and on disability, so his tax burden was really small.

As for me, if I took the lump sum, I would've coughed up about a third of that in federal + state/local taxes. It wasn't a life changing amount, so I figured let's just let it ride on the stock market, and see how it does over time. It's invested in a Fidelity Biotech fund that took a hammering soon after I bought it, but has recovered a bit in later times. I had a 2016 payment of $117.42, a 2017 payment of $88.90 (it pretty well tanked in late 2016), and a 2018 payment of $117.10. It's worth $4356 as of yesterday's close. So, I'm not doing too bad, I guess.

Souschef said:

I have an IRA with Morgan Stanley, and have my 2 sons as beneficiaries. The each will get 50 % of the IRA. They will have to take the RMD based on their age in the table, but the number is small, compared to the RMD at age 70.


[FONT=&quot]As an example, based on the life expectancy of the beneficiary, RMD amounts are calculated as follows: In the calendar year following the year in which the owner dies, the beneficiary should consult the applicable IRS Single Life Expectancy table (available at irs.gov) and identify the factor that corresponds with the age he or she will turn that year. The beneficiary then takes the balance of the Inherited IRA as of December 31 of the prior calendar year and divides the dollar amount by the factor from the IRS table. The result is the minimum amount that beneficiary is required to withdraw from the Inherited IRA by December 31 of that year. (He or she always can withdraw more.) For subsequent years, the beneficiary should repeat the RMD calculation using the original life expectancy factor minus one each year. (There is no need to go to the table for a new factor.) Any beneficiaries of the Inherited IRA after the first beneficiary could continue to use the RMD calculation factor based on the life expectancy of the original Inherited IRA owner—again subtracting one from that factor for each year thereafter[/FONT]

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I was told if you want to be fair to each, you setup two Roth IRA's, one for the Eldest Child, and one for the youngest. That way the Inherited RMD is based off the eldest age expectancy and the youngest child's is based separately on their own.



If there is one account for both children, then the table states to use the calculation of the oldest... [-]potentially [/-]adding tax liability to the youngest earlier than necessary.



I could be wrong on this though or this could be outdated info.

@kgtest, since the beneficiaries are individuals and the I in IRA stands for individual, I believe the original account would have to be split into multiple accounts - one for each beneficiary. The only way I could imagine it remaining in a single account is if the original owner listed a trust as beneficiary, which I don't think is a good way to go, because that eliminates the ability to do a stretch IRA anyway.

I'll add here a thought that I have that I think I've discussed in a separate thread before: If you really want to stretch an IRA and you don't need all the money yourself and the beneficiaries are listed properly ("secondcor521 33.33% per stirpes"), then I believe you can disclaim your portion of an IRA. If the beneficiaries are as listed, then your portion would go to your kids, who are an entire generation younger. Since they would have therefore inherited the IRA from your parent who is the original owner, then they should be entitled to do a stretch IRA over their lifetimes. Anyone know if this works or not? I'm planning on asking my CPA about it later this year.

SecondCor521 said:

@kgtest, since the beneficiaries are individuals and the I in IRA stands for individual, I believe the original account would have to be split into multiple accounts - one for each beneficiary. The only way I could imagine it remaining in a single account is if the original owner listed a trust as beneficiary, which I don't think is a good way to go, because that eliminates the ability to do a stretch IRA anyway.

I'll add here a thought that I have that I think I've discussed in a separate thread before: If you really want to stretch an IRA and you don't need all the money yourself and the beneficiaries are listed properly ("secondcor521 33.33% per stirpes"), then I believe you can disclaim your portion of an IRA. If the beneficiaries are as listed, then your portion would go to your kids, who are an entire generation younger. Since they would have therefore inherited the IRA from your parent who is the original owner, then they should be entitled to do a stretch IRA over their lifetimes. Anyone know if this works or not? I'm planning on asking my CPA about it later this year.

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can't you have two IRA's open under your name at Vanguard at once...each with a separately listed Beneficiary?

kgtest said:

can't you have two IRA's open under your name at Vanguard at once...each with a separately listed Beneficiary?

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Well sure, but I think that's a harder way to do it if you want 50% to go to each beneficiary, because you have to keep the accounts balanced in size all the time. One might be caught unaware by the grim reaper, or be too sick to pay attention to balancing IRAs in one's final days. If the accounts are invested differently, they'll get out of whack size-wise as the investments perform differently over time.

I personally think it's easier to have one IRA at Vanguard and list beneficiaries as:

secondcor521 kid 1 per stirpes 50%
secondcor521 kid 2 per stirpes 50%

Then when I kick the bucket, my executrix calls Vanguard, they split my single IRA into two equal sized pieces right down the middle (maybe my oldest kid gets the extra penny or extra 0.001 share if there's an odd amount) and create two new inherited IRA accounts for my kids.