Inherited IRA for a child

[TightLines]

OK...a break from all the coronovirus threads My son and daughter are going to receive an inherited IRA in a week or so of about 45k each. They are 18 and 20 years old and make very little income because they are still both in college.

They will be required to take RMDs but is it best now to take everything now and reinvest it because they are in a low tax bracket? I'm thinking, maybe have them reinvest it in a Roth?

 

[MBAustin]

As the rules have changed for inherited IRAs this year with the SECURE Act, make sure you (and your kids) have up-to-date information.

Yes, I would reinvest anything they have to take out. They could put it in a Roth assuming they have enough earned income. Alternatively, they could use the $$ in lieu of some of their student loans if that applies.

 

[SecondCor521]

I agree with @MBAustin.

I'd also suggest separating in your mind RMDs, which are one thing, and whether or not (and in what) the funds are invested, which is a second thing. You certainly can have investments inside the inherited IRA, and if the IRA isn't in what you want it to be, you can reallocate within the IRA to whatever target you set.

Depending on when the original owner died and some other things, your kids might be able to take RMDs over their lifetime, or they may have to empty it in 10 years. Read up on the SECURE act if you haven't yet.

 

[CardsFan]

I am with @MBAustin as well. I would suggest they pull out at least what it takes to stay in the 10% bracket (or 0% if their income is really low)

What ever earned income they have should be put in to Roth IRA's ( this is the best tax free deal they can ever get, if they are very low income)

 

[lemming]

As the rules have changed for inherited IRAs this year with the SECURE Act, make sure you (and your kids) have up-to-date information.

Yes, I would reinvest anything they have to take out. They could put it in a Roth assuming they have enough earned income. Alternatively, they could use the $$ in lieu of some of their student loans if that applies.

I don't think you can reinvest it in a Roth and meet the RMD rules, (off to go look up stuff)
.

 

[The Cosmic Avenger]

I don't think you can reinvest it in a Roth and meet the RMD rules, (off to go look up stuff)
.

If you withdraw the RMD, that can't prevent you from contributing to a Roth either up to the limit or your earned income. But I don't think the RMD counts as earned income for the purposes of the Roth, even though it's taxable income.

 

[Dave J]

They should pull out at least what gets them up to the start of the 10% bracket, $12,400 std deduction for single, depending on earned income. Then they should figure when they will start earning after college and have a goal to use 0% as many years as they can and then supplement as much as it takes to get the rest out staying in the 10% bracket before they start earning. They will never pay less tax than now.

 

[lemming]

If you withdraw the RMD, that can't prevent you from contributing to a Roth either up to the limit or your earned income. But I don't think the RMD counts as earned income for the purposes of the Roth, even though it's taxable income.

Yeah. https://www.irs.gov/pub/irs-pdf/p590a.pdf page 20 all I found-still not sure. You can't use a Roth conversion as a RMD so you would have to pull out money from the IRA for the RMD. I think you were already restricted before 2019 in conversions from an inherited IRA, But if they have any income they can do a Roth contribution.

 

[SecondCor521]

I don't think you can reinvest it in a Roth and meet the RMD rules, (off to go look up stuff)
.

You can.

If you withdraw the RMD, that can't prevent you from contributing to a Roth either up to the limit or your earned income. But I don't think the RMD counts as earned income for the purposes of the Roth, even though it's taxable income.

It doesn't. Basically W-2 income and self-employment income work for Roth contributions.

Yeah. https://www.irs.gov/pub/irs-pdf/p590a.pdf page 20 all I found-still not sure. You can't use a Roth conversion as a RMD so you would have to pull out money from the IRA for the RMD. I think you were already restricted before 2019 in conversions from an inherited IRA, But if they have any income they can do a Roth contribution.

I don't believe you've ever been able to do a conversion from an inherited IRA (assuming non-spouse, as in the OP's case). You certainly can't do it now.

 

[TightLines]

Thanks for the replies. They are both still dependents on our tax return...this means they don't get the standard deduction, correct?

They do not fall under the SECURE act so they have until the RMDs deplete the account, but as suggested, I think it will be best to take as much out as possible to stay in the 10% tax bracket and reinvest it in a ROTH.

 

[SecondCor521]

Thanks for the replies. They are both still dependents on our tax return...this means they don't get the standard deduction, correct?

Well, they will get the standard deduction, but it isn't the normal one. See the instructions for that line on the tax form to see how to calculate it. (As a rough rule of thumb, it'll often be their earned income plus $350, but check the instructions for the actual calculation.)

 

[EastWest Gal]

Thanks for the replies. They are both still dependents on our tax return...this means they don't get the standard deduction, correct?

They do not fall under the SECURE act so they have until the RMDs deplete the account, but as suggested, I think it will be best to take as much out as possible to stay in the 10% tax bracket and reinvest it in a ROTH.

Remember they can only invest the amount equal to their earned income and only up to $6000 for 2020. They can always open a regular after tax investment account.

 

[pb4uski]

At a minimum, once they no longer are no subject to the kiddie tax they should withdraw whatever they can each year at zero tax to the extent that their income is less that the standard deduction that they qualify for. And given that in a few short years they will likely be working and earning enough to be paying taxes, it might be prudent to go to the top of the 10% bracket or even the 12% bracket.

The idea is to drain the inherited tIRA at as low a tax cost as possible.

As others have mentioned, if they have earned income and are in a low tax bracket then Roth contributions are ideal. But taxable investments in equities are almost as good as qualified dividend and long-term capital gains are taxed at 0% as long as they are in the 12% tax bracket or lower.

The top of the 12% tax bracket for 2020 is $40,125 for a single, which converts to $52,525 of income after considering the $12,400 standard deduction. The top of the 10% tax bracket is $9,875 for a single, which converts to $22,275 of income after considering the $12,400 standard deduction.

 

[yclipse]

To tell you the truth, there is very little point in trying to plan for RMDs on a stretch basis, when the owner died before January 1, 2020, when the amount is only $45,000. I think you (and they) are on the right track.