Inherited IRA...any advice/insight?

[Andre1969]

Hey everyone,

My grandmother passed away about a month ago, and we're currently in the process of settling the estate. I've run into a little hiccup with regards to proceeds from an IRA I'm getting a portion of.

Initially, my plan was simply to roll it over into another IRA and let it keep compounding, but I just got off the phone with a rep with Fidelity, and he told me I'd have to start taking RMDs on it next year. It's a small amount, only $2800 I'm thinking, so I'm wondering if it's even worth it? So, if you guys and gals were in my situation, would you...

A) just cash it out, pay the taxes, and then do whatever with it or
B) put it into a new IRA, and just start taking the RMDs?

If I cash it out, they'll take about 1/3 between federal and state/local taxes, so that would only leave me about $1800-1900 to play with. I tried plugging the numbers into an RMD calculator, and it said there will be an RMD due for this year of $259, that my grandmother's estate will owe, and then for 2016, I'll have to take out $71, and that slowly goes up until the thing is depleted for the 2053 tax year, when I turn 83. That's presuming it averages 6% per year, so the real results could be greater or less.

I'm tempted to go with B, put it in the IRA, and simply spread it out. I don't need the money, so it would still help it to grow over time, albeit more slowly because of the RMDs. But, I'm wondering if that would create much of a hassle come tax time?

Any insight would be greatly appreciated!

 

[Tandemlovers]

Andre, I'm sorry for your loss.
I inherited an IRA from my father after he passed. It's not much of a hassle to take
the RMDs; in my case since the IRA was originally with Vanguard, they handled the re titling
of it as well as calculating the yearly RMDs.
In your situation, however, I would be tempted to simply cash it out and pay the taxes, since
it is a relatively small amount of money, and an account administrator might extract yearly fees
for maintaining it.

 

[Andre1969]

Thanks, Tandemlovers. The rep at Fidelity said there wouldn't be any fees on the account, so there's that, at least. That was actually one of my biggest concerns, with it being a small amount. I guess the RMDs might make my tax man charge me a bit more, since it's probably an additional form he'll have to file.

 

[Tandemlovers]

Well, in my case, I received a 1099R and had to pay taxes on the withdrawal.
I don't recall having to file any extra forms, as the withdrawal was taxed as income.

 

[Clone]

I have an inherited IRA. It started out with Wells Fargo- then we split it into individual inherited IRAs for each of the heirs at Wells Fargo. I then transferred it to Fidelity, where I have my HSA and my 401K. It shows up as another account, along with the 401K and the HSA. The only thing that I need to remember is to pull an RMD from it each year.

You pull money from it each year, at least as much as the RMD. Fidelity has a calculator that tells you how much. You get a 1099R, I use Turbo Tax and it plugs right in. The form is really no different than a 1099 for dividends or interest.

It has to be maintained as a seperate account (IRA-BDA). Make sure that it is flagged as an inherited IRA at every step of the process. If it gets transferred wrong, it will show up as income, and be taxed.

 

[Slow But Steady]

It has to be maintained as a seperate account (IRA-BDA). Make sure that it is flagged as an inherited IRA at every step of the process. If it gets transferred wrong, it will show up as income, and be taxed.

The other thing that can happen if you don't title the IRA properly is that you'll have to make the withdrawals over a smaller number of years (3 or 5?) rather than over your own life expectancy.

An inherited IRA is a real gift, because you have the money where it can be sheltered from tax for many years.

I suggest doing something with every year's RMD that would please your grandmother, or otherwise help you remember her.

 

[Brat]

You just receive an additional 1099R. No big deal.

 

[38Chevy454]

I also have an inherited IRA (from my father, it was split between 3 kids), it is originally with Fidelity. I keep it with Fidelity and is in the system as IRA-BDA. You can change the effective date for the RMD calculation to be your age rather than your grandmother's, but you still get the RMD. Just at lower percentage, so hopefully it can grow in value at a rate higher than the RMD distribution rate.

 

[pb4uski]

.....If I cash it out, they'll take about 1/3 between federal and state/local taxes, so that would only leave me about $1800-1900 to play with. .....Any insight would be greatly appreciated!

I'm sorry for you loss Andre. Are you currently saving for retirement pre-tax or after-tax? If pre-tax and you are eligible to make deductible IRA contributions, consider just cashing it out and making a deductible IRA contribution for the same amount and see if they can not withhold tax on it. So you would have $2,800 of income and a $2,800 deduction for the deductible IRA contribution so the net effect would be a big fat zero. If they have to withhold then you may have to front up the taxes withheld to get the zero effect on your tax return.

If post-tax, then cash it out, pay the tax an put the proceeds into a Roth IRA.

Whether you should be saving pre-tax or after-tax largely depends on your current marginal tax rate compared ot your expected marginal tax rate in retirement.

 

[papadad111]

Sorry for your loss.

Given small amount and my own desire for long term financial simplicity, I'd cash it out. Pay the taxes and go have a small vacation or do some charity work to honor your grandmothers memory.

It's not exactly conventional thinking but a couple thousand bucks isn't big money and dealing with additional accounts and withdrawals and record keeping at tax time and so forth for 2k seems like it will be a future waste of my time leading to frustration and bureaucracy and not the way I would want to be reminded of dear grandmother every April 15th.

But again that's just me !!!

 

[hnzw_rui]

Given small amount and my own desire for long term financial simplicity, I'd cash it out. Pay the taxes and go have a small vacation or do some charity work to honor your grandmothers memory.

It's not exactly conventional thinking but a couple thousand bucks isn't big money and dealing with additional accounts and withdrawals and record keeping at tax time and so forth for 2k seems like it will be a future waste of my time leading to frustration and bureaucracy and not the way I would want to be reminded of dear grandmother every April 15th.

I'm sorry for your loss.

Same thought process. Relatively speaking, $2,800 is a fairly small amount to be worth the hassle of remembering to take RMDs, etc. If you'd like to keep the funds for your retirement, then do an offset with a 401k or traditional IRA contribution or pay the taxes and contribute to a Roth IRA.

 

[GrayHare]

If it could be converted to Roth (an inherited IRA cannot) I'd be tempted to keep it for tax-free growth on a high-risk, high-reward investment. As a tIRA it's too small an amount to make much $ difference no matter what choice you make, so for simplicity I would take the lump sum withdrawal.

 

[user5027]

I inherited a modest $6,000 Roth IRA from my mother. Vanguard automatically computes the RMD and puts it in our joint MMF each December and I tell everyone Grandmom is taking us out for dinner tonight.

 

[RE2Boys]

You could just consider that you now have $2800 more in an IRA to grow for the future. RMDs shouldn't be an issue if you can have Fidelity send you a check once a year automatically, and no fees attached. For taxes, as others have said, no extra forms needed, just a yearly 1099R, tell Fidelity no withholding wanted. It is one more account to make an investment decision on.

 

[eytonxav]

For that amount, I would just take it as a distribution and pay tax on it.

 

[Andre1969]

Thanks everyone, for the kind words.

As for my investing situation, I currently max out my 401k at work, and also do the max for a Roth IRA. Not really doing much in the way of after-tax investing, other than letting dividends and capital gains reinvest.

As for Grandmom, she was 91 years old when she passed, but she had a pretty good, long life right up until August 2014, when she had to go into the emergency room...and then she just never got well enough to come back home. She did recover well enough to get moved to an assisted living place...essentially just a house where there was staff on hand to cook, clean up after you, bathe you, etc, but then around Christmas time she took a turn for the worse, went back to the hospital, then got moved to a rehabilitation place on the hospital grounds, and finally passed away in her sleep on May 12. Time of death was 4:20. This might be in poor taste, but I found that oddly amusing. If Grandmom knew what that meant, I think she would have laughed.

 

[sheehs1]

For that amount, I would just take it as a distribution and pay tax on it.

I agree with all those that say this.

 

[hesperus]

Sorry for your loss...
I was the beneficiary of an inherited IRA several years ago, but it was a significant amount, with the RMD's currently around 22K a year for me (56 yrs old).
I did not want to take the tax hit by cashing it out, and besides, the portfolio is in a low cost brokerage account that is well diversified. So instead of cashing anything out, I take an 'in kind' distribution of stocks/securities in the amount of the RMD every year. Since I do not need the cash, I'd rather take the security outright, minus the cap gains. The IRA is a great place to absorb cap gains, which are deferred when the securites pass at the time of distribution. In your situation however, you could easily make a case for cashing it out, or just letting it ride and taking out what you need.

 

[MooreBonds]

I also have an inherited IRA (from my father, it was split between 3 kids), it is originally with Fidelity. I keep it with Fidelity and is in the system as IRA-BDA. You can change the effective date for the RMD calculation to be your age rather than your grandmother's, but you still get the RMD. Just at lower percentage, so hopefully it can grow in value at a rate higher than the RMD distribution rate.

Just as a reminder: Inherited IRAs have a different RMD schedule than when you turn 70 1/2!

You take your divisor in your first year of inheriting the IRA to calculate your RMD. Then, for each subsequent year, you SUBTRACT 1 from the divisor to determine your RMD, rather than using the divisor from being one year older.

If you are under, say, 45-50 when you inherit an IRA, the first few years of RMDs are virtually the same compared to if you were taking RMDs on your own IRA.

However, after about 5-10 years (especially if you are over about 55 when you start an I-IRA), subtracting 1 from the divisor each year starts to really make an impact in increasing your RMD compared to if you were taking out RMDs for your own IRA. Don't automatically assume your broker will do the calculation correctly.

Since the amount is small, I would simply cash it out and invest in something with it, to avoid the headache of always calculating each year a new, separate divisor, and running the risk of making a mistake one year.

 

[Walt34]

For that amount, I would just take it as a distribution and pay tax on it.

Me too, just to keep the finances simpler if anything happened to me. DW had to deal with a lot of small financial stuff with her father that he could have greatly simplified.

For partly that reason I took out the funds and closed two IRAs with small amounts in them over the last two years. One was $6.5k and the other just over $10k. This is all part of the plan to put off SS until FRA and when that starts never again will we be in a lower tax bracket.

 

[scrabbler1]

Just as a reminder: Inherited IRAs have a different RMD schedule than when you turn 70 1/2!

You take your divisor in your first year of inheriting the IRA to calculate your RMD. Then, for each subsequent year, you SUBTRACT 1 from the divisor to determine your RMD, rather than using the divisor from being one year older.

If you are under, say, 45-50 when you inherit an IRA, the first few years of RMDs are virtually the same compared to if you were taking RMDs on your own IRA.

However, after about 5-10 years (especially if you are over about 55 when you start an I-IRA), subtracting 1 from the divisor each year starts to really make an impact in increasing your RMD compared to if you were taking out RMDs for your own IRA. Don't automatically assume your broker will do the calculation correctly.

Since the amount is small, I would simply cash it out and invest in something with it, to avoid the headache of always calculating each year a new, separate divisor, and running the risk of making a mistake one year.

My friend, nearly 52 now, received his share of his mom's IRA as an inherited IRA after she died in 2012. I have been helping him out with his taxes for many years so this was just another element to keep track of.

His inherited IRA has been worth just under $100k and the divisor has been shrinking by one every year as you wrote. But when it drops from 35 to 34 to 33 the RMD doesn't increase much as long as the IRA's value stays the same or, as has been the case in that time, rises slightly. It is with Fidelity and they calculate the RMD for his IRA. I simply go up to the next $100 increment to keep it easy to keep track of.

I have set up his Inherited IRA so that the interest and dividends it spins off throughout the year go into a cash account which is used to pay out the RMD. This way, he doesn't have to liquidate any of his few holdings within the IRA. This cash account has a small annual surplus after the RMD is paid out so this cycle can repeated for many years until the cash account won't have enough in it to pay the slowly growing RMD.

But my friend doesn't need the RMD (which is about $2,800) for his daily expenses so we use 99% of it as withholding to pay some of his income taxes, mainly on the investment income from the rest of his inheritance. We split it up between state and federal, satisfying as much of his outstanding state income tax as possible so he can deduct it on that year's federal income taxes. What's left over goes to pay some estimated federal income taxes (Form 1099-R) and keep him closer to avoiding underwithholding tax penalties. Estimated income tax payments handle the rest.

 

[gauss]

If you will be in a lower or the same tax bracket 5 years from now, you could consider the following strategy.

Let it grow for 5 more years (not taking RMDs in the years between now and then) and then just cash it out and pay the taxes then.

Alternatively if you think there is a possibility that you may have a year where your taxable income is relatively low during the next 5 years, you could wait until that time to cash it out taking advantage of the potentially lower taxes (if your income is low enough that you to push you into a lower tax bracket).

With this strategy your are keeping your options open and do not have to take RMDs in the interim.

You just should make sure that you have a good plan in place so that in 5 years you remember to take the full distribution if you have not done so by that time yet.

-gauss

 

[unclemick]

You just receive an additional 1099R. No big deal.

Mine was a little bigger - put it in Vanguard Lifestrategy conservative sort of index version of pssst Wellesley.

heh heh heh - over 10 years and going strong and of course higher RMD each year. Hinsight says it functioned like a faux annuity along with small non-cola pension, early SS providing a fall back base while my 'big dog' retirement varied more widely with Mr Market.

 

[hesperus]

I have set up his Inherited IRA so that the interest and dividends it spins off throughout the year go into a cash account which is used to pay out the RMD. This way, he doesn't have to liquidate any of his few holdings within the IRA.

Why not take the RMD in kind from the account? If he doesn't need it in cash, keep the account fully invested and just take the RMD in securities. This is what I do. I didn't want to take a cash RMD that I would eventually just reinvest anyway - as long as I didn't need the cash.

 

[scrabbler1]

Why not take the RMD in kind from the account? If he doesn't need it in cash, keep the account fully invested and just take the RMD in securities. This is what I do. I didn't want to take a cash RMD that I would eventually just reinvest anyway - as long as I didn't need the cash.

He does use the cash to pay some of the income taxes he needs to pay on the rest of his inheritance which is in a brokerage account. Fidelity allows the client to electronically pay those taxes through 1099-R withholding, a seamless and simple way of paying them compared to estimated taxes (for the state, not the feds where it just lowers what it due and keeps him from underwithholding penalties).