Inherited IRA, 401k help !!!

[silvor]

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...

 

[bloom2708]

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

 

[NgineER]

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

 

[SecondCor521]

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.

 

[badatmath]

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.

 

[silvor]

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?

 

[SecondCor521]

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.

 

[NgineER]

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.

 

[CardsFan]

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.

 

[SecondCor521]

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.

 

[CardsFan]

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.

 

[silvor]

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.

 

[CardsFan]

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.

 

[pb4uski]

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.