Inherited IRA Distributions

[TightLines]

I will be receiving an IRA inheritance in a few days of about 93K. I'm wondering if I should take the lump sum, pay the taxes and then invest it in the market. I am in the 22% tax bracket and it would push me to the 24% bracket.

Or, I could take about half, pay the taxes and stay in the 22% tax bracket.

I don't need the money and hope to FIRE soon. My thought is if I can invest in the stock market and incur capital gains in the long term (15-20 years), I would sell the stocks and pay zero on long term capital gains (if I stay under my LTCG and income limit).

If I leave it in the IRA and invest it, I'll be paying taxes on the gains and the inherited amount.

This is assuming of course that tax laws don't significantly change

Any thoughts?

 

[statsman]

When you FIRE soon, will your income drop? If so, you may want to hold off cashing the inherited IRA until you are in a lower tax bracket. I'm assuming this is a non-spouse IRA you are inheriting. If so, you have 10 years to cash it out.

I have a similarly sized inherited IRA from 2012, and like you, the money isn't part of our retirement planning. Call it free money. Up until a couple of years ago, at least one of my DW and I were working, so I took the RMD only. Two years ago we sold our house and had a significant amount of taxable capable gains, so again I took the RMD only.

Last year, with both of us retired and without any income bump, we had a bit of space in the 12% tax bracket, so we increased the distribution for 2019. I am trying to drain the remainder of the inherited IRA in the next 4-5 years before I take SS for myself and my DW has to take RMDs from her IRA.

 

[ncbill]

I'd leave it in the IRA and punt for 10 years...bet you'll be in a lower tax bracket once retired.

 

[davismills]

I'd leave it in the IRA and punt for 10 years...bet you'll be in a lower tax bracket once retired.

X 1. I'd punt until the 9 year and 11 month point.

 

[Animorph]

Get the money out at the lowest tax rate possible. Most likely that is after you FIRE. You can fill up a lower tax bracket, or even just a standard deduction, and come out way ahead of 24%. And that still leaves room for 0% LTCG's.

 

[ERD50]

I'd leave it in the IRA and punt for 10 years...bet you'll be in a lower tax bracket once retired.

If this is a non-spousal inherited IRA, the new owner (OP) must take an RMD every year, based on their age. They can take out that minimum, but they can't just "leave it there".

Details - depends on age at death of the previous owner, and if they died this calendar year, the new rules apply:

https://www.fidelity.com/viewpoints/retirement/non-spouse-IRA

-ERD50

 

[scrabbler1]

My friend has an inherited IRA (about $95k, like the OP's) from when his mom passed away in 2012. He is 56 and still works full-time and doesn't need the money for his everyday living expenses.


His RMD is based on the account balance and a life expectancy value in the denominator which decreases by one every year until he reaches 84 years of age. So, it began at 34.2 back in 2013 and is down to 27.2 seven years later.


I have set up his inherited IRA so that it generates just enough income to pay out his RMD with a small amount left over. The RMD will rise gradually over time so that the accumulated excess cash won't be enough to pay the annual RMD. But that crossover point is still at least a few years away.


When he takes his RMD, I arrange to have some of it pay estimated taxes (Form 1099-R withholding) so he avoids any chance of being in the penalty zone later on. The estimated taxes are for income generated by the rest of the sizable inheritance when his mom passed away.

 

[TightLines]

Thanks for the replies. This is a non-spousal inherited IRA and the deceased was taking RMDs.

I would love to just let it sit but as I understand it, I have to begin taking RMDs this year (they passed away last year) and must continue to do so for the next ten years.

If I FIRE in the next year (I will have little to no income once I retire), would it be best to take the minimum RMD (to get in a lower tax bracket) and take the rest after FIRE, or bite the bullet now and take all or half and pay the 22% tax?

 

[Bruno]

If this is a non-spousal inherited IRA, the new owner (OP) must take an RMD every year, based on their age. They can take out that minimum, but they can't just "leave it there".

Details - depends on age at death of the previous owner, and if they died this calendar year, the new rules apply:

https://www.fidelity.com/viewpoints/retirement/non-spouse-IRA

-ERD50

I have been taking yearly RMD from my dads inherited IRA for the last several years. I take it out of EJ, pay the taxes and reinvest it back in FIDO or VG funds. This has worked good for me.

 

[Sunset]

Thanks for the replies. This is a non-spousal inherited IRA and the deceased was taking RMDs.

I would love to just let it sit but as I understand it, I have to begin taking RMDs this year (they passed away last year) and must continue to do so for the next ten years.

If I FIRE in the next year (I will have little to no income once I retire), would it be best to take the minimum RMD (to get in a lower tax bracket) and take the rest after FIRE, or bite the bullet now and take all or half and pay the 22% tax?

It's best to take out as much as possible, while staying in a low tax bracket.
So if you are working now, take out the minimum required.
When you stop working and have no income (really no interest and no dividends ??) take out enough to stay in 10 or 12% bracket, spreading it out over a few years if needed.

 

[MissMolly]

Thanks for the replies. This is a non-spousal inherited IRA and the deceased was taking RMDs.

I would love to just let it sit but as I understand it, I have to begin taking RMDs this year (they passed away last year) and must continue to do so for the next ten years.

If I FIRE in the next year (I will have little to no income once I retire), would it be best to take the minimum RMD (to get in a lower tax bracket) and take the rest after FIRE, or bite the bullet now and take all or half and pay the 22% tax?

You do not have to deplete the inherited IRA in 10 years. Since your deceased family member passed in 2019, the new SECURE Act rules do not apply. They only apply to those persons who pass away beginning 01/01/2020 or later. But, you still have to begin taking RMDs this year.

**edited for spelling error**

 

[statsman]

You do not have to deplete the inherited IRA in 10 years. Since your deceased family member passed in 2019, the new SECURE Act rules do not apply. They only apply to those persons who pass away beginning 01/01/2020 or later. But, you still have to begin taking RMSs this year.

Yeah, now I'm confused. The last comment from the OP was the person passing away last year, yet the opening line in this thread is "I will be receiving an IRA inheritance in a few days of about 93K." Beyond that confusion for me, I sure hope the estate accounted for the deceased's RMD for 2019.

 

[Bruno]

Yeah, now I'm confused. The last comment from the OP was the person passing away last year, yet the opening line in this thread is "I will be receiving an IRA inheritance in a few days of about 93K." Beyond that confusion for me, I sure hope the estate accounted for the deceased's RMD for 2019.

WARNING just a guess. My dads funds were in a trust and it took awhile for me to actually get the funds. I believe the date goes back to date of death.

 

[GalaxyBoy]

If OP had better things to do immediately after the passing, like grieving, arranging a funeral, etc., they may not have met with the IRA company for a while to fill out the paperwork.

 

[SecondCor521]

It is the date of death of the original IRA owner which determines whether or not old rules or new rules apply. If it is before 12/31/2019, then old rules. If it is after that date, then new rules (aka SECURE act).

Since they passed away last year, it is old rules. Since it is a non-spouse inherited IRA, and as long as a few other conditions were met (*), then the OP can do RMDs over their lifetime.

OP, note that you will have to do RMDs for the remainder of your life (or until you completely drain the inherited IRA) based on the account balance and your age and the appropriate IRS table.

Also, OP, note that (a) how the account is invested is a separate question from (b) how much you must take out.

(a) You can invest it in the market inside the IRA if you wish. The account may come to you as containing any number of things, but when it is in your control you can buy and sell inside the IRA as much as you want with no tax consequences.

(b) You must take out at least the RMD, but you may take out more. If you are over 70.5 and charitably inclined, you can make QCDs as part of your RMD. (*)

(*) left as exercises for the reader.

 

[ncbill]

If this is a non-spousal inherited IRA, the new owner (OP) must take an RMD every year, based on their age. They can take out that minimum, but they can't just "leave it there".

Details - depends on age at death of the previous owner, and if they died this calendar year, the new rules apply:

https://www.fidelity.com/viewpoints/retirement/non-spouse-IRA

-ERD50

First post did not indicate the owner died in 2019, so I assumed they were under the new rules.

 

[TightLines]

Thanks again for all the replies. Just to reiterate, the deceased did pass away in March of 2019 so I can stretch out my distributions. It took until now to get thru the estate, the will and probate so we are finally going to receive the distributions. It took 3 lawyers and 2 accountants...what a mess.

I am 55 so no RMDs of my own yet . Based on what I've read here, I think I'll invest the inherited IRA and take my minimum RMDs until I FIRE and am in a lower tax bracket. Once retired, I'll take out more but only enough to stay in my tax bracket and qualify for ACA.

Thanks again for all the insight.

 

[Bruno]

Based on what I've read here, I think I'll invest the inherited IRA and take my minimum RMDs until I FIRE and am in a lower tax bracket. .

I fund my ROTH each year with mine.