Inherited IRA/10 year rule/withdrawal strategy

[Dd852]

Apols if this has been covered, but wondering what people’s strategy would be for taking withdrawals from an inherited IRA under the 10 year rule.

Assuming no immediate need for the money (i.e. my living costs are already well covered by my own investments and I have no toys or splurges in mind), would you
A/spread out the tax hit and withdraw each year first 1/10, then 1/9, then 1/8 etc until year 10

Or

B/let it sit, build up (or waste away thanks to the market) and then have a mega tax hit in the last year

Or

C/do a mix and have, say, three withdrawal points with tax hits during the course of the decade.

This is truly “found money” for me - I didn’t earn it myself, obviously; I didn’t plan for it; it’s now mine. A nice problem to have, but looking for some wise thoughts on how to play the tax game.

 

[CardsFan]

I guess it depends on the value of the tIRA, and how withdrawals will affect your tax bracket. In general, I would deplete it more or less evenly over the 10 years. But there could be some benefit to bunching to stay in low tax brackets some years.

In any event, I can't imagine waiting until year 10 and take it all then, unless the account value is fairly small to begin with.

 

[OldShooter]

... looking for some wise thoughts on how to play the tax game.

Don't let the tax tail wag the investment dog. Depending on what market expectation you use, especially if you are optimistic, the distribution decision may be different, as will your AA decision. The name of the game is to maximize dollars in your pocket at the ten year point, not to minimize tax payments.

 

[RetireeRobert]

^ Like Cards Fan said, it all depends. You will have to evaluate your own tax situation and how different withdrawal amounts would impact your taxes at different times.

The rules do allow the possibility to tailor your timing of withdrawals, so you can somewhat tailor your taxable income in certain years.

You may want to delay any withdrawals for say the first five years to allow tax free compounded growth, then deplete the tIRA over the following five years. Something of trying to have your cake and eat it too. But you would have to crunch your own numbers to see if the total tax hit in those last five years compared to taking it out over all the ten years would make sense to go for growth in the first five years.

Or some combination thereof. So, you need to polish up your crystal ball to look into the future!!

 

[Texas Proud]

This is not for sure, but I did read it on another thread...


The 10 year rule still requires a RMD... so if true you cannot just let it ride and take it all out at the end.. but if you are young enough the RMD will be small so you still have options...

 

[N02L84ER]

DH inherited an IRA last year. He is 60 y.o. and he is planning to spread out the tax hit and withdraw each year first 1/10, then 1/9, then 1/8 etc until year 10.

 

[Montecfo]

we took it all in one year-last year-since we are in Roth conversion mode anyway and an inherited IRA just adds headaches.

We did not attempt to Roth convert it of course. But it was the least desired IRA vehicle tax-wise.

Also, it was not huge.

 

[RetireeRobert]

This is not for sure, but I did read it on another thread...


The 10 year rule still requires a RMD... so if true you cannot just let it ride and take it all out at the end.. but if you are young enough the RMD will be small so you still have options...

IRS has and is clarifying that RMDs "not" required for inherited IRAs where date of death of original hilder was Jan 1, 2020 or later. Rather, can make withdrawals in any one or more combinations of years. For inherited IRAs where original holder died 12/31/2019 or earlier, the inheritors can take withdrawals over their own lifetimes, subject to RMDs.

 

[SecondCor521]

This is not for sure, but I did read it on another thread...

The 10 year rule still requires a RMD... so if true you cannot just let it ride and take it all out at the end.. but if you are young enough the RMD will be small so you still have options...

This isn't true. Read further in that other thread where this was clarified.

OP, my plan is basically your plan A for inherited traditional IRAs, with two modifiers: Depending on when in the calendar year the death occurs and how fast the IRA can be retitled, then I'd do 1/11, 1/10, 1/9, ... 1/2, 1/1. You can get it in 11 tax years instead of 10 is the point.

The other thing is I'd accommodate any significant changes in my tax situation. For example, if I had only two more years on ACA, or if my kids were in college for two more years, or something like that.

Finally, for inherited Roth IRAs, I'd wait and take it all in one lump sum in the last year, since there should be no tax hit and I'd prefer as much tax free growth as possible.

 

[pb4uski]

Apols if this has been covered, but wondering what people’s strategy would be for taking withdrawals from an inherited IRA under the 10 year rule.

Assuming no immediate need for the money (i.e. my living costs are already well covered by my own investments and I have no toys or splurges in mind), would you
A/spread out the tax hit and withdraw each year first 1/10, then 1/9, then 1/8 etc until year 10

Or

B/let it sit, build up (or waste away thanks to the market) and then have a mega tax hit in the last year

Or

C/do a mix and have, say, three withdrawal points with tax hits during the course of the decade.

This is truly “found money” for me - I didn’t earn it myself, obviously; I didn’t plan for it; it’s now mine. A nice problem to have, but looking for some wise thoughts on how to play the tax game.

D. Take withdrawals to the top of your current tax bracket unless you expect to be in a lower tax bracket sometime in the next 10 years. So for example if you are currently in the 22% tax bracket, you could do to the top of the 22% tax bracket (assuming that you expect your future tax bracket to be 22% or higher).

BTW, there is no benefit to letting it sit in tax deferred if you expect your future tax bracket to be the same or higher.... that is a popular misconception... it is merely a tax rate arbitrage game.

 

[bingybear]

I've got similar issue , but the IRA is just a start to the issues. Ideally you need to optimize the problem. Recently figured that there was a ticking tax time bomb in the mess (see Ed Slot ticking tax time bomb.)

Remember that you can invest the IRA for the 10 years. Likely you will want tp do RMDs at a minimum

 

[Mariez]

Inherited IRA/10 Year Rule/Withdrawal Strategy

According to our trust attorney, the best strategy is to let it ride until year 10.

 

[SecondCor521]

According to our trust attorney, the best strategy is to let it ride until year 10.

I think the answer does depend on whether it is an inherited traditional IRA or a inherited Roth IRA. If it's a Roth, I agree with you and your attorney.

If it isn't a Roth, how did s/he or you define "best"? You may want to consult with your tax advisor on that.

 

[RunningBum]

Since the OP mentioned taxes, I assume this is an inherited traditional IRA, and all withdrawals are taxable.

I'm most in agreement with the post above that says to withdraw to the top of the current tax bracket, with some possible exceptions.

One that is already mentioned in that post, if your tax rate is expected be lower in the future, manage it so you withdraw more in those years. Perhaps you're still working now and planning to retire within 10 years. With less income in retirement it would probably be good to defer withdrawals until then.

If you are looking to manage income for the ACA subsidy, IRMAA, college aid, or anything else I can't think of now, perhaps it's better to not withdraw now if those won't be factors later. I know that if I was to inherit now, and knowing that my inheritance isn't going to be very large (less than $100K for sure), I'd hold off for 6 years until I'm done with ACA.

If you are in the 12% tax bracket, only withdraw to the point where qualified dividends and LTCGs start being taxed. If you go above, the effective conversion becomes 27%. Now, if that's going to be true every year and you'll have to go into that 27% range every year, consider larger withdrawals some years where you go all the way through it and the 22 and 24% brackets, so that other years you don't go through.

If you are at 22% now, consider withdrawing to the top of 24% because the 22% bracket is scheduled to go back to 25% in 2026, and 24%->28%.

You could already be in Roth conversion mode, so there may be strategies to best juggle your own tIRA conversions with inherited IRA withdrawals.

So there are lots of factors affecting this, so if you want to get the very best result you'll have to do work in spreadsheets and make assumptions on growth of the account. But other than possibly managing to the ACA subsidy, most of these suggestions will only make a small difference. I wouldn't do all or the bulk of withdrawals in any one year, whether it's now or in 10 years unless there was some special tax case that made it work out. Or if you have some special need for the money now.

 

[Exchme]

Apols if this has been covered, but wondering what people’s strategy would be for taking withdrawals from an inherited IRA under the 10 year rule.

Assuming no immediate need for the money (i.e. my living costs are already well covered by my own investments and I have no toys or splurges in mind), would you
A/spread out the tax hit and withdraw each year first 1/10, then 1/9, then 1/8 etc until year 10

Or

B/let it sit, build up (or waste away thanks to the market) and then have a mega tax hit in the last year

Or

C/do a mix and have, say, three withdrawal points with tax hits during the course of the decade.

This is truly “found money” for me - I didn’t earn it myself, obviously; I didn’t plan for it; it’s now mine. A nice problem to have, but looking for some wise thoughts on how to play the tax game.

Can you guess where you will be tax-wise in 10 years? For instance, if you are just entering your high earning years, you might want to take the money out earlier rather than later. On the other hand, if this money puts you over the top and makes you able to retire in the next few years, then hold off. If you will be relatively stable, then take it out evenly.

The even withdrawal method would use the PMT function in Excel. For instance, if the investment makes 6%/year, you need to withdraw 13.6%/year. An 8%/year return means 14.9% withdrawal/year. So I would make a guess of future returns and re-run something like that each year (fewer years remaining each time obviously) and take the indicated withdrawal. To whatever extent you hold bonds, this is a good place for them in order to minimize account growth.

 

[beernutzbob]

I inherited a TIAA 403b in January 2020 worth $81k. Since I already had TIAA accounts they just added another one for these funds.

I elected to have 1/10th distributed each year. That would have started in 2020 but legislation pushed back the start year to 2021 so I expect the first distribution in November.

We're using the money to fund our adult kids Roth IRAs as a legacy of my mom.

 

[Sunset]

OP - I see you have UK listed, so this may not apply, but maybe there are similar issues.

Here 10 years is a long time, so some folks might forget that at age 70 they will be taking SS, and then at 72 RMD's kick in.
If your 10 yr span hits those dates it would result in a boost to taxable income.

 

[RetireeRobert]

OP - I see you have UK listed, so this may not apply, but maybe there are similar issues.

Here 10 years is a long time, so some folks might forget that at age 70 they will be taking SS, and then at 72 RMD's kick in.
If your 10 yr span hits those dates it would result in a boost to taxable income.

Good catch! OP based in UK, might very well means all the US rules based advice above not relevant to OP's problem.

OP, can you clarify---do you mean UK tax on UK income? Or do you have a dual nation situation?

 

[Dd852]

OP - I see you have UK listed, so this may not apply, but maybe there are similar issues.

Here 10 years is a long time, so some folks might forget that at age 70 they will be taking SS, and then at 72 RMD's kick in.
If your 10 yr span hits those dates it would result in a boost to taxable income.

Sorry for the confusion. I’m best of/worst of both worlds. Dual citizen living in UK. All my non-cash investments are in the US because otherwise US rules make life far too complicated. I take my UK lumps but let the US rules lead the dance - UK rates may be slightly higher but the rules are far simpler; it is always the US rules that guide my decisions.

 

[Dd852]

Thanks for the thoughtful replies. To the various other questions (beyond citizenship answered above) - the amount is high six figures so significant. I’m not working now (other than the occasional consulting gig for fun) so basically the advice you all gave and my gut suggest that since taking a sensible cut of the legacy plus my dividend yield for the year from other investments basically will take care of everything i need, I should watch my marginal rates and maneuver around that.