Inherited Non Spouse IRA: RMD Questions

[damonhowatt]

Hello to all of the ER posters here. I enjoy this website and have learned a lot over the years. I haven't posted in a while here so I'll give a brief updated summary of my situation.

I retired from the corporate world in May 2018 at age 58 and am now 61; my ability to retire early was partially due to my having read various topic threads here on ER.org. Thank you!!

I'm single and living with long time GF who is also retired and on the same page as me financially. She has significant real estate holdings and these generate more than enough cash to cover all of our expenses.

The bull market has helped more than any other single factor; my investing acumen is nothing remarkable. As the saying goes, in the last ten years, a monkey could have thrown darts at stocks and done just as well......

My current financial status is:

Traditional IRA's Total: $1,187,000
Roth IRA Total:$303,000
HSA:$15,000
After Tax Brokerage Acct: $836,000
SFR Personal Home Equity (conservative estimate): $550,000
Miscellaneous Cash: $10,000


My uncle passed away in August of this year and left some IRA's (4 funds total) and government retirement funds (3 total) to me. TIAA - CREF manages all of these and I've been completing the Beneficiary Acceptance Forms for the accounts.

IRA's Total: $45,000 (No RMD's are required from these funds but they must be emptied/"exhausted" within ten years).
Government Ret. Total: $103,000 (These three funds aren't required to be exhausted within ten years but RMD's must be taken annually).

I am waiting until age 70 to take my SS payments as i don't need them at this point. I had planned on taking funds from the IRA's I currently have and converting these to Roth IRA's up until age 72 when RMD's kick in.

Now, for the question in the thread title: what is the most tax efficient way to empty the inherited funds and also convert what amounts I can in my own IRA's? The inherited funds cannot be converted to a Roth IRA.

I appreciate any and all information and insights from the readers/website members here!

Steve.

 

[RunningBum]

Have you mapped out a plan for doing conversions to age 72, trying to even out the taxable income before 72 and after? I would just fold the inherited IRA into that plan.

That leaves the question of when to withdraw from the inherited IRA. One thought is to wait as late as possible and favor conversions early, so that more of your money has a longer time growing in the tax free Roth.

A second thought is to withdraw from the IRA when you need cash to pay conversion taxes, especially if this keeps you from incurring capital gains from having to sell taxable assets to pay the taxes, or paying the taxes out of the conversion. The idea is that since the inherited IRA has to be withdrawn and there's no avoiding the tax on it, use that money to help reduce taxes on your other assets.

 

[RunningBum]

One more thought, assuming you can withhold 99 or 100% of the inherited IRA withdrawals for taxes, you could not pay estimated taxes earlier in the year and use the withdrawal with full withholding at the end of the year to leverage that tax money for the year. Not a big gainer, but assuming investments go up through the year, it's a little plus.

 

[SecondCor521]

Personally I plan to draw down a potential inherited IRA evenly throughout the 10 or 11 tax years. Assuming 10% growth and 11 years (you can make withdrawals in 2021 through 2031), that means about 15.4% of the original balance, which in your case is about $6,930 per year.

I'd just take the RMD from the inherited retirement account each year. If you need to use Table 1, it looks like your divisor for this year would be 24.4, which would mean an RMD of about $4,221. You probably don't need to take an RMD this year since it's your uncle's year of death, so it'll probably be an RMD of 23.5 next year and an RMD of about $4,383. Actually, next year I think you'll be able to use the new RMD tables, so the RMD should be a bit less than those numbers.

Anyway, I would put those down as relatively fixed tax / income / cash flow items, then build the rest of my plan around that. ~$11K of income annually probably just covers part of your expenses, letting you leave whatever you were going to spend to pay for that $11K worth of expenses where it was, or invested, or deferred.

It may affect any Roth conversion plans you had, but shouldn't be much really. If you do any conversions over the next decade or so, you'll have to be $11K less aggressive, or pay taxes on $11K more. You'll probably want to look at converting at least to 12% and maybe some into 22% bracket; it's just that those brackets are already pre-filled by your inherited IRA and your inherited retirement account RMD.

Since your 11 year SECURE Act window for your inherited IRA and the year you should start RMDs happen to align, the analysis should be pretty straightforward. I'd recommend building a spreadsheet.

 

[Dash man]

If I were you, I’d start doing Roth conversions and pay the taxes with your inherited funds. The more tax free growth you get from the Roth, the better.

 

[SecondCor521]

If I were you, I’d start doing Roth conversions and pay the taxes with your inherited funds. The more tax free growth you get from the Roth, the better.

Up to a point. Overdoing Roth conversions can lead to being in higher tax brackets now and lower tax brackets later, and thus paying both more taxes and taxes sooner.

It's generally somewhat hard to do, but it's possible.

 

[Dash man]

Up to a point. Overdoing Roth conversions can lead to being in higher tax brackets now and lower tax brackets later, and thus paying both more taxes and taxes sooner.



It's generally somewhat hard to do, but it's possible.

In my case, we are going to the top of the 24% bracket (maybe even into the 32%) because otherwise RMDs will likely push us up to the top bracket when we start them. Break even will be around 78-79 if things go according to plan. If one of us died early, the conversions will greatly help out the survivor. By converting, our taxes starting around 72-73 will be much lower and lower IRMAA for the rest of our lives. I expect tax rates to go up in the future, so paying now while low looks better to me. Paying taxes now will also help keep us within the Estate tax exemptions after they revert back in 2026.
I’m convinced in our case conversions are the way to go.

 

[Exchme]

First, ensure your assets are allocated in a tax efficient manner, where you put your bonds into accounts that have withdrawal requirements. So fill you inherited IRA with bonds first, then your other tax deferred, leaving Roth and taxable for stocks. I don’t know the rules for your government accounts, but if the RMD table is the same as your traditional IRA, then for planning purposes, they are just more IRA money.

Then I would model account growth, RMDs and tax brackets if you did no Roth Conversions to get a feel for the highest and lowest tax bracket you would be in if you did nothing. Then a rough Roth conversion plan would be to level those marginal tax brackets out with Roth conversions.

Since you are currently pre-IRMAA, that should push the marginal decision towards bigger conversions this year and next. As RunningBum described, it’s probably best to get the Roth conversions done first and then use the inherited IRA later, say age 69. Once you collect SS, further Roth conversions may not do you much good as the SS taxation phase-in and capital gains tax phase-in can create very high marginal tax rates.

Assuming no ACA subsidies are needed, my gut feel is Roth conversions to the top of the 24% bracket this year and next, then perhaps just the top of the 22% bracket until age 69 when you withdraw the inherited IRA, then claim SS at 70. But you have to do some models to make a real plan and then count on needing to refresh the plan each year as market conditions and tax laws change.

 

[all4j]

Now, for the question in the thread title: what is the most tax efficient way to empty the inherited funds and also convert what amounts I can in my own IRA's? The inherited funds cannot be converted to a Roth IRA.


Steve.

Don't really have all info necessary to get very specific. A couple of things I'd factor in if it were me: (1) tax law as it stands today will change in 2026 (I think that is correct date); & of course none of us know how else it might change & when. might increase your bracket (2) be sure you understand IRMAA; a lot of folks don't anticipate that your initial irmaa will be based on income a couple of years before medicare. A side matter might be placement of allocation, favoring having bond (&/or bond type) investments in the tax deferred accounts to extent practical.

 

[damonhowatt]

I was out today hiking so am now reading the replies. Thanks to all of you who sent messages.

Running Bum: I haven't mapped out a plan yet for conversions but have a rough idea. This inheritance is an unexpected surprise and has thrown my rough idea out the window. I think that my idea now is to use the inherited IRA and/or government funds to pay for my IRA to Roth conversions. I'm viewing the inherited funds as a windfall that can allow me to convert larger amounts than I previously had anticipated.

Secondcor521: Your dollar amounts look similar to what I've come up with using RMD calculators.

Dash Man: I'm likely on the same page as what you've written. I think it's going to be inevitable that tax rates will rise.

Exchme: I don't have any bonds in any accounts. That may be a mistake but my conservative part of my portfolio is either cash or money market funds. I would like to keep my ACA subsidy/credit but I've got approximately $7500 of dividends coming in yearly from the taxable account and I've got to empty these inherited funds within ten years (more or less). I think I'm going to be converting substantial amounts to Roth these next ten years.

All4j: Why would having bond type investments in tax deferred accounts be preferable to other types?

 

[all4j]

Exchme: I don't have any bonds in any accounts.

All4j: Why would having bond type investments in tax deferred accounts be preferable to other types?

Well, as I said in previous post, we didn't have enough info...some of which you provided in this post. My wording wasn't very clear apparently & should have explicitly said "IF" you have bonds....since you don't, no point in me belaboring