Best way to withdraw from an Inherited IRA

[FREE866]

My two nieces both inherited a traditional IRA and a Roth IRA.


the tIRAs are ~ $230,000 each and the Roths are ~$95,000 each.


they are 21 and 23 years old.


From what I understand, all accounts have to be withdrawn in 10 years. What would be the best way to have $$ withdrawn?


As of today they both have very little income so I was thinking ( and I know as the years go by things can change) for now to leave the Roth $$ in there until the 10th year as they will not have any taxes due and the money can grow tax deferred.



For the tIRA , it's a little trickier as I want as much growing tax deferred, but would like to mitigate whopping tax bill each year as well as at the end of the 10th year. Was thinking , for now, to simply transfer in kind ETF positions they have--VTI mainly, into a taxable acct, of ~$25,000 a year this way they keep money invested and wont have huge tax hit due to low income level. Taxes would be paid out of a separate money market fund they have.



Anyone that is good with this stuff or have experience please comment.


thank you

 

[njhowie]

All sounds good for the most part. I've been going through similar scenarios in my head with inherited traditional IRAs me and my sister recently received. I've come to a similar conclusion - just take about 10% each year and not worry about it. Taxes will need to be paid on the total amount over the 10 years regardless of the distribution method.

I only question the thinking on the ETF transfer in kind...I don't believe there's going to be any difference from a tax perspective whether you transfer or simply cash it out. If you want to maintain the investments, fine. But, I think if you/she wants to maintain the cash in the money market fund and pay the taxes due by cashing out some of the VTI that's fine as well. The total in taxable accounts after the transfer and paying tax will be the same either way. Only a matter if she'd prefer the larger money market balance, or more in VTI?

 

[FREE866]

All sounds good for the most part. I've been going through similar scenarios in my head with inherited traditional IRAs me and my sister recently received. I've come to a similar conclusion - just take about 10% each year and not worry about it. Taxes will need to be paid on the total amount over the 10 years regardless of the distribution method.

I only question the thinking on the ETF transfer in kind...I don't believe there's going to be any difference from a tax perspective whether you transfer or simply cash it out. If you want to maintain the investments, fine. But, I think if you/she wants to maintain the cash in the money market fund and pay the taxes due by cashing out some of the VTI that's fine as well. The total in taxable accounts after the transfer and paying tax will be the same either way. Only a matter if she'd prefer the larger money market balance, or more in VTI?

Thank you Howie.
Thats a fair point about the in-kind option. They have enough in money market so I'd like to keep money invested. It wont have any difference from a tax perspective--I do the same thing in my personal tIRA every year -I stay to the top of the 12% tax bracket and move in kind positions to a Roth.

 

[Niuatoputapu]

Do note that the rules differ if the original owner of the IRA reached a certain age or not:

Following is from the Schwab website: https://content.schwab.com/ira/understand-iras/ira-calculators/inherited-rmd/



Type of IRA

Distribution Requirement

Traditional IRA* death of IRA owner before required beginning date *Also applies to SEP and SIMPLE IRAs
The beneficiary is subject to the 10-Year Rule. Under these circumstances, with the 10-Year Rule, a beneficiary may take withdrawals as slowly or as quickly as they wish provided all funds are withdrawn by the end of the tenth year following the year of the IRA owner’s death. There is no schedule for how payments must come out, but the entire IRA must be depleted by December 31 of the tenth year.


Traditional IRA* death of IRA owner on/after required beginning date *Also applies to SEP and SIMPLE IRAs
The beneficiary must withdraw a minimum amount each year beginning in the calendar year following the year of the IRA owner’s death. The annual distribution is generally based on the beneficiary’s single life expectancy, nonrecalculated. As a Non-Eligible Designated Beneficiary, in addition to taking minimum annual withdrawals, the entire Inherited IRA must be depleted no later than December 31 of the tenth year following the IRA owner’s year of death.

Note: A distribution in the year of the IRA owner’s death must be withdrawn by the beneficiary if the IRA owner did not withdraw the RMD before death.


Roth IRA The beneficiary is subject to the 10-Year Rule. Under these circumstances, with the 10-Year Rule, a beneficiary may take withdrawals as slowly or as quickly as they wish provided all funds are withdrawn by the end of the tenth year following the year of the IRA owner’s death. There is no schedule for how payments must come out, but the entire IRA must be depleted by December 31 of the tenth year.

 

[SecondCor521]

The rules around inherited IRA distributions can be complicated. I would recommend confirming through a careful reading of IRS Pub 590-B that they are indeed subject to the 10 year rule (which is the likely situation here, but not 100% certain). When reading Pub 590-B, note that there are separate chapters for traditional IRAs and Roth IRAs - you'll need to read both.

Note the 10 year deadline is 12/31/N+10 where N is the year the original owner died. So if they died on 5/6/2023, they would have until 12/31/33 to empty both kinds of accounts assuming they are subject to the 10 year rule - which is about 10 1/2 years.

Things I would account for:

1. Any potential growth in the account over the 10 year period,
2. Their 10 year period probably covers 11 tax years (2023, 2024, ... 2033), and
3. Tax brackets, the standard deduuction, and most (but not all) other tax-related thresholds are adjusted upward over time by the rate of inflation.

So my plan would be to withdraw:

=PMT([real rate of return%], 11, 230000, 0, 0)

the first year (assuming they can get the IRA transferred into their name in time), then

=PMT([real rate of return%], 10, [remaining balance], 0, 0)

the second year, and so on.

Where [real rate of return%] = [nominal rate of return%] - [inflation rate%].

I would also take into account any predictable changes in their tax situation over the next ten years. So for example, at their age they'll probably have increasing income and tax brackets over that time period, so in their case it would likely be smart to front load their traditional IRA withdrawals to reduce the tax rate paid.

I agree on leaving the Roth until 12/31/33 or whenever, again assuming they're subject to the 10 year rule.

 

[Phroig]

I agree, wait until 2033 on the Roth. For the Traditional, why not use the strategy you've adopted, and withdraw to the top of the 12% bracket? Any growth then occurs in a taxable account, and is not taxed unless they need to sell; even then, their capital gains rate is likely to be zero. Moreover, when they get older and start their careers, their marginal tax rate is likely to increase significantly.

 

[Slim11]

Yup, it depends on the age, as stated above. And the state, as you may owe an inheradance tax also. Additionally some plans may make you cash it out. You will owe state taxes on it also. I just went through this also. Taxes can be a lot.

 

[FREE866]

Thank you all for your thoughtful responses.
To clarify, there’s no inheritance tax and there were no RMDs as their dad was 64.
The Roth is a no brainer- will wait till 2033. . The tIRA yearly withdraws I’ll most likely do a combination of portfolio amount divided by years left In conjunction with the top of whatever tax bracket is commensurate with their AGI for that given year.

 

[Sunset]

Due to their young age and low income now, I'd be tempted to withdraw a few percent higher in the first X years, as it's likely they will get a good paying job or raise in a few years.

 

[TheWizard]

Those nieces might want to use the inherited IRA money to max out their own Roth IRA s and 401k plans, assuming they are employed and not otherwise financially able to do that...

 

[FREE866]

Those nieces might want to use the inherited IRA money to max out their own Roth IRA s and 401k plans, assuming they are employed and not otherwise financially able to do that...

Yeah, was thinking about maybe doing a Roth. Think I'd have to open up a brand new Roth account as the current one is an Inherited Roth. Think max is only $6500, but it's something.

 

[dknighd]

Those nieces might want to use the inherited IRA money to max out their own Roth IRA s and 401k plans, assuming they are employed and not otherwise financially able to do that...

I agree! If they can afford it, and have some income, I would keep as much as I could tax deferred! Which means, at least, they should withdraw what they earned that year, and deposit it in a Roth IRA, or regular IRA, or a 401k, or 403b.


Otherwise it gets complicated. The default would be take 1/10 IRA each year, and Roth IRA after 10 years. But if they needed the money now, take it now.


I would withdraw at least up to the top of 0% tax bracket. Probably up to the top of current 12% bracket.

 

[dknighd]

Yeah, was thinking about maybe doing a Roth. Think I'd have to open up a brand new Roth account as the current one is an Inherited Roth. Think max is only $6500, but it's something.

no no no. They have to open their own retirement accounts.

 

[FREE866]

no no no. They have to open their own retirement accounts.

??


I meant a Roth account for them...not me!
I'm not that clueless!

 

[dknighd]

??


I meant a Roth account for them...not me!
I'm not that clueless!

Good. You said "Think I'd have to open up a brand new Roth account".
They have to create the account, not you

 

[dknighd]

I think I'll retire, and keep my mouth shut

 

[Montecfo]

My two nieces both inherited a traditional IRA and a Roth IRA.


the tIRAs are ~ $230,000 each and the Roths are ~$95,000 each.


they are 21 and 23 years old.


From what I understand, all accounts have to be withdrawn in 10 years. What would be the best way to have $$ withdrawn?


As of today they both have very little income so I was thinking ( and I know as the years go by things can change) for now to leave the Roth $$ in there until the 10th year as they will not have any taxes due and the money can grow tax deferred.



For the tIRA , it's a little trickier as I want as much growing tax deferred, but would like to mitigate whopping tax bill each year as well as at the end of the 10th year. Was thinking , for now, to simply transfer in kind ETF positions they have--VTI mainly, into a taxable acct, of ~$25,000 a year this way they keep money invested and wont have huge tax hit due to low income level. Taxes would be paid out of a separate money market fund they have.



Anyone that is good with this stuff or have experience please comment.


thank you

My thoughts are same as others. While their tax rates are low might want to be sure they fund Roth accounts to the max or as earned income allows. They should have decent liquidity given the payouts from inherited IRA's.

High quality problem!

ETA: I see this point was made further down the thread by The Wizard.

 

[orbops]

I have both an Inherited IRA ($100K)& Inherited Roth IRA ($140K), but I got them before the rules changed to the 10 year limit.

Since they are both in their 20s, I agree with waiting on the Inherited Roth IRA until 2033 (or as long as possible). I used my Inherited Roth as a down payment when I bought a home - and maybe they can also use the Roth as a 20% down to avoid PMI when they're ready to buy a home.

For the traditional Inherited IRA, I would have them take out the max amount each year to keep them in the 10 or 12% tax bracket. This will also teach them how to manipulate their AGI to stay within a specific bracket.

 

[SJhawkins]

Due to their young age and low income now, I'd be tempted to withdraw a few percent higher in the first X years, as it's likely they will get a good paying job or raise in a few years.

This, right upto the 12% bracket at a minimum as long as that last, from a tax perspective.

Probably the bigger question is how are they doing otherwise, if they need a few more years to "grow" then waiting is the correct awnser, not that one can contol it.