Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Inherited IRA, 401k help !!!
Old 10-20-2021, 12:39 PM   #1
Dryer sheet aficionado
 
Join Date: May 2013
Posts: 29
Inherited IRA, 401k help !!!

Right now, I max out my Roth 401k with $26k in contributions a year. I will raise this to $27k for 2022.

My wife and I max out our Roth IRAs at $7k each.

She has a public employee pension that she contributes to, but it’s not much as she’s part time.

Combined income is about $110k.

I have inherited $25k in a Roth IRA and $450k in a Traditional IRA from my father. I know I have 10 years to empty these accounts and it’s “income” on my 1040.

Anything I can do tax wise to minimize taxes? The only thing I can think of is I am eligible to put up to $10k after tax into the 401k. Does it even make sense to do that?

Also, I MAY move to a tax free state in 2-5 years. But who knows. I'm just thinking of pulling out 1/10 of the IRA a year.

Looking for any other ideas...
silvor is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 10-20-2021, 01:22 PM   #2
Full time employment: Posting here.
 
Join Date: Nov 2016
Location: Fargo
Posts: 658
How old are you?

The easiest way is to do Pre-tax 401k contributions for the $26k (with catch up). Do Post-Tax then if you have more to save from the extra income.

That would allow you to recognize $26k of withdrawal from the Trad IRA and not pay more tax.

No matter what, you will pay tax on the new/extra income from the $45k+ you take out.

Not sure what your reason is for doing all Roth 401k. For most Pre-tax + Regular Roth + taxable or Post-Tax 401k is the best way to optimize.

With the added income
bloom2708 is offline   Reply With Quote
Old 10-20-2021, 01:54 PM   #3
Full time employment: Posting here.
 
Join Date: Nov 2013
Posts: 821
Quote:
Originally Posted by silvor View Post
Right now, I max out my Roth 401k with $26k in contributions a year. I will raise this to $27k for 2022.

...

I have inherited $25k in a Roth IRA and $450k in a Traditional IRA from my father. I know I have 10 years to empty these accounts and it’s “income” on my 1040.

Anything I can do tax wise to minimize taxes?

...

Also, I MAY move to a tax free state in 2-5 years.

...

Looking for any other ideas...
Based on your contributions you must be 50+, you are also on E-R.org, so I'm assuming that you might retire in the next 10 years. Your absolutely lowest tax situation might be after retirement. Is this inheritance helping you retire earlier? It might benefit you to delay withdrawals until you don't have income and withdraw 1/5 per year vs. adding 1/10th to your current income.

Lay out the different scenarios.

1/10th IRA withdrawal + $110k income
1/5th IRA withdrawal + $0 income

Model what might be the lowest tax situation
NgineER is online now   Reply With Quote
Old 10-20-2021, 02:41 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 5,955
My condolences.

Some thoughts:

If your father died this year, then you have until 12/31/2031 to empty the IRAs. This means you have 11 tax years to work with, not 10.

Dividing things equally over the next 11 years is approximately the best thing to do, but you'll want to take into consideration your other income tax items (like if you're going to retire, or have a kid in college, or get some other income windfall).

If the account is invested and will grow, you might want to take that growth into account. To evenly drain an account growing at 10% in 10 years, my spreadsheet says you need to take about 16.27% of the remaining balance each year. (I don't know what the relevant number is for 11 years or for other growth rates, but you can work it out in Excel in just a few minutes.)

The Roth IRA distributions will generally have no income tax associated with it. I personally would wait until 12/31/2031 to drain it unless you need the money sooner. That maximizes the tax-free growth on the account balance.

With the additional income and cash flow, yes, you should look at your tax savings options. Continue what you're already doing. If the after-tax 401(k) is the only option you have left, then yeah, look at that. Maybe investigate HSA contributions. Or just invest in taxable in low-cost, low-dividend index mutual funds or ETFs. Having some taxable around is nice because it gives you some flexibility and options if you do retire early.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 10-20-2021, 02:46 PM   #5
Full time employment: Posting here.
 
Join Date: Aug 2017
Posts: 659
Quote:
Originally Posted by SecondCor521 View Post
If your father died this year, then you have until 12/31/2031 to empty the IRAs. This means you have 11 tax years to work with, not 10.
Not the OP but I thought you had to take the deceased RMD in the first year.
badatmath is offline   Reply With Quote
Old 10-20-2021, 02:50 PM   #6
Dryer sheet aficionado
 
Join Date: May 2013
Posts: 29
To clarify...

We are both 50.

I actually could have retired before the inheritance, assuming I can get decent healthcare. With the inheritance, that's now not an issue, but for various reasons, I'm not retiring yet. (There will be another thread on that!)

I went with the Roth 401k simply because I figured out I can afford it and honestly don't think taxes are going down. That said, with the new "10 year rule", maybe going back to the Traditional IRA is a better idea.

Is the idea of putting the extra 10k in the 401k a good idea?
silvor is offline   Reply With Quote
Old 10-20-2021, 03:00 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 5,955
Quote:
Originally Posted by badatmath View Post
Not the OP but I thought you had to take the deceased RMD in the first year.
Under certain circumstances, yes. Most notably if the deceased was required to take RMDs and hadn't fully taken it yet themselves, then OP and any other IRA beneficiaries would have to finish the decedent's RMD this year.

But the OP could also take a distribution *in addition to* the RMD if they wanted to / if it made sense to do so. So using that 16.27% number from my previous post, if it were a $1M traditional IRA and the decedent had not yet taken their RMD and the RMD was about 4%, then the OP could take ~$40K to satisfy the RMD, then take an additional ~$122,700 to start evening out the distribution over 10 years. If they're using an 11 year period and assuming 10% growth, it'd be about 15.4%, so a $40K RMD and a $114,000 additional distribution to even it out over 11 years.

Key point is that OP can do *both* the RMD and an additional "SECURE Act" distribution in that first year.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 10-20-2021, 03:11 PM   #8
Full time employment: Posting here.
 
Join Date: Nov 2013
Posts: 821
I guess it is a matter of paying your taxes at one point or another.

What is your plan WRT retirement? Keep working for a couple of more years?
Will you (including the inherited 401k, pensions etc) have higher income in retirement than what you have today?
How does SS play in?

There are too many unknowns to say what is best in your situation, investigating the different scenarios will be beneficial.
NgineER is online now   Reply With Quote
Old 10-20-2021, 03:14 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Location: St. Charles
Posts: 3,072
OP:

Just thinking out loud here, but if you change your current contributions from Roth to traditional 401k/IRA, you could pull out $41k each year from the inherited IRA with out changing your current taxes. Then just invest the $41k in an after tax brokerage account.

Just a thought.
__________________
If your not living on the edge, you're taking up too much space.
Never slow down, never grow old!
CardsFan is offline   Reply With Quote
Old 10-20-2021, 03:17 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 5,955
Quote:
Originally Posted by CardsFan View Post
OP:

Just thinking out loud here, but if you change your current contributions from Roth to traditional 401k/IRA, you could pull out $41k each year from the inherited IRA with out changing your current taxes. Then just invest the $41k in an after tax brokerage account.

Just a thought.
Depending on what the rest of OP's tax life looks like, they may want to start paying more in taxes, rather than the same, in order to maximize lifetime after tax income.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 10-20-2021, 03:28 PM   #11
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Location: St. Charles
Posts: 3,072
Quote:
Originally Posted by SecondCor521 View Post
Depending on what the rest of OP's tax life looks like, they may want to start paying more in taxes, rather than the same, in order to maximize lifetime after tax income.
Fair point, and OP has not provided nearly enough info to allow anyone to give solid advice. We have no idea if the OP already has a significant tIRA holding or not. That could make a difference.
__________________
If your not living on the edge, you're taking up too much space.
Never slow down, never grow old!
CardsFan is offline   Reply With Quote
Old 10-20-2021, 04:18 PM   #12
Dryer sheet aficionado
 
Join Date: May 2013
Posts: 29
Quote:
Originally Posted by CardsFan View Post
Fair point, and OP has not provided nearly enough info to allow anyone to give solid advice. We have no idea if the OP already has a significant tIRA holding or not. That could make a difference.
I have $535 in my 401K
$399k traditional 401k
$136k Roth 401k

I also have a pension valued at $112k. I will likely roll that into an IRA when I can.

$1.7 million total portfolio.
silvor is offline   Reply With Quote
Old 10-20-2021, 04:44 PM   #13
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Location: St. Charles
Posts: 3,072
Quote:
Originally Posted by silvor View Post
I have $535 in my 401K
$399k traditional 401k
$136k Roth 401k

I also have a pension valued at $112k. I will likely roll that into an IRA when I can.

$1.7 million total portfolio.
Based on this, if it were me, I would do as I described above. You can basically get the inherited tIRA converted to after tax investments mostly in the 12% bracket, over the next 10 years, then you can start converting tIRA/t401k money to Roth IRA, still mostly in the lower bracket until RMD's kick in.

Just an idea.
__________________
If your not living on the edge, you're taking up too much space.
Never slow down, never grow old!
CardsFan is offline   Reply With Quote
Old 10-20-2021, 05:02 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 30,593
Quote:
Originally Posted by silvor View Post
Right now, I max out my Roth 401k with $26k in contributions a year. I will raise this to $27k for 2022.

My wife and I max out our Roth IRAs at $7k each.

She has a public employee pension that she contributes to, but it’s not much as she’s part time.

Combined income is about $110k.

I have inherited $25k in a Roth IRA and $450k in a Traditional IRA from my father. I know I have 10 years to empty these accounts and it’s “income” on my 1040.

Anything I can do tax wise to minimize taxes? The only thing I can think of is I am eligible to put up to $10k after tax into the 401k. Does it even make sense to do that?

Also, I MAY move to a tax free state in 2-5 years. But who knows. I'm just thinking of pulling out 1/10 of the IRA a year.

Looking for any other ideas...
To be clear the only income will be from your inherited traditional IRA withdrawals, the Roth withdrawals are tax-free.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56
pb4uski is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Will SECURE act IRA rules affect inherited IRA from 2014? Yarnstormer FIRE and Money 11 04-27-2021 06:04 PM
Inherited IRAs/401k kannon FIRE and Money 11 07-23-2017 11:22 AM
Inherited 401K / IRA - Distribution? Steelart99 FIRE and Money 13 08-20-2016 10:01 AM
Confused choosing between: 401K, Roth 401K, Roth IRA or Traditional IRA? krldrummerboy FIRE and Money 22 05-26-2016 11:46 AM

» Quick Links

 
All times are GMT -6. The time now is 01:10 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2021, vBulletin Solutions, Inc.