Inherited IRA/Roth Conversion

[james22]

4 years until I retire in 2023.

6 years until the tax brackets revert higher in 2026.

I'll have a sizeable IRA at retirement (401k plus Pension) with only 3 years to convert to a Roth at current rates.

I've an Inherited IRA.

Question is: do I begin withdrawing the Inherited IRA down before retirement, so I've all 3 years to convert my IRA?

Or do I let the Inherited IRA grow until 2025 before withdrawing, leaving only 2 years to convert the IRA?

I'd have thought the former more attractive, but compounding makes it (near) a wash.

I needn't decide before November (when we might have an idea if the tax cuts will be made permanent or expected to balloon), but is there anything I'm missing?

Thanks.

 

[GalaxyBoy]

Was the inherited IRA from a spouse or some other family member? Are you not already taking RMDs from the iIRA? Was it inherited before the end of last year, when the SECURE Act became effective? Each of these will affect the answers/opinions you’ll get.

As far as betting on what Congress will do regarding tax laws, that’s a tough one.

 

[james22]

Thanks, GB.

Inherited from my father who just passed in January. I understand I have to take the RMD he'd have taken this year?

But I'm sorry, I forgot the 'stackable' nature of my Foreign Earned Income Exclusion.

Since I'll be paying 35% on any withdrawal until I retire, I'll put off until then.

 

[N02L84ER]

You cannot convert a non-spousal IRA to a Roth.

 

[wolf]

OP. Appears, the "stretch" inherited IRA, new law, affects you. Must take "out" inherited IRA $ in 10 years.

However, heard on a " radio talk" show, lot of reaction to the elimination of the stretch.
So, public pressure, may make a change? Who knows?

 

[pb4uski]

It depends on when the OP inherited it... existing inherited IRAs were grandfathered.

Are current stretch IRAs for those who died before 2020 still good? Yes, they are grandfathered, but only until the beneficiary dies, so payouts to the successor beneficiary (the beneficiary’s beneficiary) will be limited to 10 years.

Example:

An IRA owner died in 2019 and left his IRA to his grandchild. The grandchild’s stretch period is 60 years. That schedule is grandfathered and remains the same. When the grandchild dies, though, any funds remaining in the inherited IRA that go to the grandchild’s beneficiary (the successor beneficiary) will have to be paid out within 10 years. The successor beneficiary is not grandfathered.

 

[wolf]

It depends on when the OP inherited it... existing inherited IRAs were grandfathered.

Could be wrong, but I think OP, said, Father passed in January. I assumed
he meant last month?

 

[pb4uski]

Could be wrong, but I think OP, said, Father passed in January. I assumed
he meant last month?

Ah... missed that... wasn't in OP but was in subsequent post.... if inherited in 2020 then I agree... Secure Act applies so 10 years... but can be done by as much or as little as desired anytime in 10 years from the date of death.

 

[LOL!]

I didn't think the OP was going to convert the inherited IRA which is not allowed, but was going to convert some of their own 401(k) or IRA. But it is not clear what's going on.

For instance, some 401(k)'s allow in-service rollovers to an IRA after a certain age, so just having a 401(k) at work does not prevent some people from rolling over to IRA and then converting that IRA to a Roth IRA.

But paying 35% taxes on a Roth conversion doesn't sound like a good idea.

 

[SecondCor521]

Ah... missed that... wasn't in OP but was in subsequent post.... if inherited in 2020 then I agree... Secure Act applies so 10 years... but can be done by as much or as little as desired anytime in 10 years from the date of death.

It's actually 10 calendar years starting the year after year of death. So if the original owner died in January 2020, then OP has until 12/31/2030 to drain the IRA.

Assuming the inherited IRA is traditional, the OP will pay ordinary income taxes on any withdrawals. I think OP knows that.

OP, I would think more important than the rates (possibly) reverting is when you turn 72 and RMDs start. A generally good strategy is to convert to Roth in lower-income years, which are often the years after retirement but before 72.

True, when the rates go up, Roth conversions may be less of a good deal, but they'll still probably be a good deal.

Note there is talk afoot (only talk) about making the tax rate cuts permanent. We'll see.

Finally, I agree with the above that you can't convert an inherited non-spouse IRA to a Roth. But you can roll your 401(k) to a traditional IRA and then Roth convert from there, which may be what you're meaning to say.

 

[pb4uski]

It's actually 10 calendar years starting the year after year of death. So if the original owner died in January 2020, then OP has until 12/31/2030 to drain the IRA. ....

I was relying on this, [-]which I guess is in error[/-]... strike that... everything that I find says the 10th anniversary of the account owner's death:

Under the new law, non-spouse beneficiaries will have to withdraw all the funds in the inherited IRA within 10 years from the death of the original account owner. It applies to IRAs inherited after Dec. 31, 2019.

Instead, the entire inherited IRA (or plan) account balance must be emptied by the end of the 10th year after death.

However, for situations where the original IRA account owner passes away after December 31, 2019, fewer beneficiaries will be able to extend distributions from the inherited IRA over their lifetime. Many will instead need to withdraw all assets from the inherited IRA within 10 years following the death of the original account holder.

 

[SecondCor521]

I was relying on this, [-]which I guess is in error[/-]... strike that... everything that I find says the 10th anniversary of the account owner's death:

Hmm. I read the actual law (HR 1865, Division O, Title IV, Section 401 - text here https://www.congress.gov/bill/116th...65/text#toc-H2544713764834046B363ABFE2083DC8B) which says:

"(H) SPECIAL RULES FOR CERTAIN DEFINED CONTRIBUTION PLANS.—In the case of a defined contribution plan, if an employee dies before the distribution of the employee’s entire interest—

(i) IN GENERAL.—Except in the case of a beneficiary who is not a designated beneficiary, subparagraph (B)(ii)—

(I) shall be applied by substituting ‘10 years’ for ‘5 years’, and [...]"

So it's applying the existing 5 year rule and modifying it to 10 years.

Subparagraph (B)(ii) (https://www.law.cornell.edu/uscode/text/26/401) reads:

"A trust shall not constitute a qualified trust under this section unless the plan provides that, if an employee dies before the distribution of the employee’s interest has begun in accordance with subparagraph (A)(ii), the entire interest of the employee will be distributed within 5 years after the death of such employee."

which seems to support your understanding, except that years in that subparagraph appear to be defined as calendar years elsewhere in the law.

The IRS has the 5 year rule in Pub 590-B on page 9 (https://www.irs.gov/pub/irs-pdf/p590b.pdf):

"5-year rule. The 5-year rule requires the IRA beneficiaries to withdraw 100% of the IRA by December 31 of the year containing the fifth anniversary of the owner’s death. For example, if the owner died in 2018, the beneficiary would have to fully distribute the plan by December 31, 2023. The beneficiary is allowed, but not required, to take distributions prior to that date. The 5-year rule never applies if the owner died on or after his or her required beginning date."

I think the last sentence may no longer apply with the implementation of the SECURE act, but I'm not sure about that.

IANAL, YMMV, etc.

 

[james22]

Thanks, everyone.

I do understand I've 10 years to withdraw the Inherited IRA. Since it seems I cannot convert for the next 4 years while working (because would pay 35%), it then becomes a question once retired of withdrawing my Inherited IRA or converting my IRA for the next 6.

(That IRA does not yet exist, but while once retire and rollover my 401k and Pension.)

It may not matter which I do as long as I'm doing one or the other to the top of the 24% bracket every year at least until 2025 and probably until 72.