I recently inherited an IRA from a relative. (Actually it is still in the estate but I will be distributing it to the estate beneficiaries shortly.)
The problem is that the IRA did not have any designated beneficiaries so therefore it first goes to the estate and then to the beneficiaries of the estate. The funds must be fully withdrawn from the IRA and taxed in 5 years. Apparently distribution over the life of the beneficiaries is not allowed in this instance.
Unfortunately my share of the IRA (well into 6 figures) will be taxed at the 44% rate at the current tax rate when it is withdrawn.
So the question is does anyone know of any (legal) way to reduce the tax rate on this sort of inherited IRA?
The two things that I have come up with so far are:
(1) RE and thereby reduce my taxable income. (Kind of like this one actually
I told DW that I have to RE otherwise Uncle will get all the money
So far she isn't buying
) I'm close if not already at FI now but the tentative plan was to make a decision in 2012. Moving RE forward a year or two would allow me to remove the money from the IRA over several years and thereby realize a much lower average tax rate.
(2) Distribute part of it to the kids. They are currently 15 and 17 and IRRC they will no longer be subject to the kiddie tax after they turn 18. It could then be withdrawn at a lower tax rate and used for college expenses. (We currently have about $70k/kid in UGMA and 529 accounts for college but I was budgeting about $125k/kid.)