RMD Options for Reinvesting

[street]

This may be a very odd question but thinking outside the box would like your opinion.

So, when I have to take RMD, my plan was to reinvest all back into the stock market for a legacy for kids.

My questions for tax purposes and for the best to pass on the legacy, would buying land be a good option to pass down, instead of money to them in the mutual fund accounts?

If I didn't reinvest back into the stock market, I would not have gains to pay each year on more earned taxes etc.

For the kids they wouldn't have to pay taxes on money earned in the accounts when they receive the legacy. They could keep land or sell it or receive rent from the land.

What am I missing, and do you feel that is a creditable option for me and them?

What are your thoughts, concern and other options to give the legacy.

 

[Spock]

Inheriting (rental) real estate has huge advantages as the receiver gets the (assumed appreciated) property at a stepped up tax basis. Vs. inheriting an IRA where the receiver's RMD period is 10 years (depending relationship, etc).

 

[njhowie]

Inheriting (rental) real estate has huge advantages as the receiver gets the (assumed appreciated) property at a stepped up tax basis. Vs. inheriting an IRA where the receiver's RMD period is 10 years (depending relationship, etc).

It's not about inheriting the IRA, though that could be an extension.

The question is regarding the RMD that street has taken and the best way to utilize that. I think whether it's land, or reinvestment into the stock market/fund in a taxable account, there won't be any difference - heirs will get stepped up basis.

Now, as far as what remains in the IRA, your point is exactly correct - generally, under current rules, the inherited IRA needs RMDs to be taken by the heir(s) (based on heir's life expectancy) and fully emptied at year 10 after death - IRS wants their taxes.

 

[Sunset]

OP - invest the RMD money in BRK.B - you will pay zero taxes as it doesn't pay a dividend. Your heirs will inherit it stepped up so zero taxes at time of death.

Plus unlike land, they can sell it at zero cost, and sell it in 1 day.
Plus they can sell 10% of it, or 44% of it, unlike land where they have to sell it all in 1 shot. Incredibly flexible.

You could also instead or as well invest in VTI, but this will throw off small dividends each year of 1.5% which may or may not be taxable as income to you while alive, depending upon your tax situation.

 

[Philliefan33]

Don’t let the tax tail wag the dog.

It doesn’t matter that the source of funds was your RMD, it’s just cash that you have available. If you invest that cash into the stock market, you may have to pay taxes on dividends each year. The share price may go up, but you won’t have to pay taxes on any gains unless you realize them (sell shares). When you die, your heirs will get a stepped-up basis on the shares. If they sold at that time they would have little to no capital gains tax to pay.

If you invest your cash by buying land, you will have to pay real estate taxes. If you rent the land you will also pay income tax on that income. When you die, your heirs inherit the land with the basis being the value on your date of death. That will be a little harder to determine than the basis of inherited stocks; instead of looking at the share price they may have to get an appraisal. If they sell the land soon after there will likely be little to no capital gains.

 

[Spock]

Don’t let the tax tail wag the dog.
...

I've never understood this... maybe it's because it doesn't apply to my situation. Tax rates are 2-5x the returns on my savings or even the rate of benefit increase from delaying start of social security. Thus tax arbitrage has a much greater impact on me than what I invest in.

 

[street]

Don’t let the tax tail wag the dog.

It doesn’t matter that the source of funds was your RMD, it’s just cash that you have available. If you invest that cash into the stock market, you may have to pay taxes on dividends each year. The share price may go up, but you won’t have to pay taxes on any gains unless you realize them (sell shares). When you die, your heirs will get a stepped-up basis on the shares. If they sold at that time they would have little to no capital gains tax to pay.

If you invest your cash by buying land, you will have to pay real estate taxes. If you rent the land you will also pay income tax on that income. When you die, your heirs inherit the land with the basis being the value on your date of death. That will be a little harder to determine than the basis of inherited stocks; instead of looking at the share price they may have to get an appraisal. If they sell the land soon after there will likely be little to no capital gains.

I didn't address that detail. I would take the income from the land because I don't need the income. Could the income from the land be given to a charity and not seen as income to me from the renter?

 

[pb4uski]

The real basic question is whether to invest the RMD in land or back into stocks. I would much rather inherit stocks than land so I would reinvest the RMD in stocks. Both the land and stocks will get a stepped up basis when you die but measuring it is easier for stocks... for land you would need to have an appraisal done. If the heirs decide to sell with stocks they will have no selling costs but with land they'll pay 6% commission or more and other selling costs.

Stock dividends are qualified income and taxed at favorable rates where land rent is ordinary income so there is a slight advantage for stocks.

What do the heirs invest in? Stocks? Land? that might be your answer.

 

[pb4uski]

...Could the income from the land be given to a charity and not seen as income to me from the renter?

If you already itemize you would have rental income and a charitable deduction for donations to charity.

If you don't itemize then it doesn't work because you have the income but not the deduction.

 

[street]

The real basic question is whether to invest the RMD in land or back into stocks. I would much rather inherit stocks than land so I would reinvest th RMD in stocks. Both will get a stepped up basis when you die. Stock dividends are qualified income and is taxed at favorable rates where land rent is ordinary income so there is a slight advantage for stocks.

What do the heirs invest in? Stocks? Land? that might be your answer.

They invest in stocks and are in their mid to late 30's. My son does own land already along the Yellowstone River for about 27 years now.

I guess maybe it would be a question to ask them what they would prefer. Their combined income is just under 400K is my guess now so having more of a nest egg with investing back into the market maybe not what they want. For a lot of reasons.

 

[Philliefan33]

Another idea would be to deposit the RMD money into a 529 account to be used to educate your grandchild/ children. (I seem to recall that you have at least one).

 

[TheWizard]

Land for an investment seems lumpy in that you have to sell it all when the time comes?
Maybe.
Or perhaps it could be subdivided and only half sold?

Depends on whether the heirs want the land for living on or not.

Most of the time, investing in stock funds will be just fine for the eventual heirs...

 

[street]

Another idea would be to deposit the RMD money into a 529 account to be used to educate your grandchild/ children. (I seem to recall that you have at least one).

Yes, you are correct and one step GD too. I have thought about the 529 account but not sure if I want to do that or not. I most defiantly wouldn't do it for all RMD years.

A good idea for a couple of year's worth.

 

[FREE866]

I would think definitely stocks. They are liquid and my sense a much more hassle free transfer as if they are listed as beneficiaries they will simply have to open up Inherited IRA accounts which can be done online. If they want to sell, they sell. Selling land is a much more cumbersome process.

 

[aja8888]

While land is an asset, it is also a liability since it has costs such as taxes, insurance and upkeep. Plus, there are times when land is not very liquid. There are also times when land values can go negative (value less than you paid for it).

I am leaving my daughter (my only heir) my portfolio and house (and all the junk that comes with it). She can rent the house or sell it. She could even live in it if she chooses and sell hers.

 

[RetireBy90]

Another option is to donate RMDs via a Qualified Charitable Deduction. You don’t see it on your taxes and doesn’t affect IRMAA or that is my understanding. If you are so inclined.

 

[all4j]

An obvious comment is to invest in the option that had the best return -- not really helpful I know. Much will depend on magnitude & timing. A couple of considerations...As a practical matter, you can't dollar cost average into land. So, whether or not you buy land 'early' in the rmd process or late, you may have some non-land assets to pass on. Depending on the type of real estate, land is generally non-correlated with stocks. Big difference between buying a rental house vs timber land. & of course, with any real estate location is key

Good luck!

 

[audreyh1]

Are you interested in acquiring more land, and are you still planning to pass it down with the requirement that the heir can’t sell the land?

As far as the RMD - it matters not at all where the funds to buy the land come from.

 

[street]

Thanks, and some great advice once again from all of you. I have some time to think about how I want to do pass it down but have been thinking about more often now.

aja8888, all is true in what you wrote and there will expenses but I would buy bare land no building or non-improvement lands.

audreyh1, yea I would hope, and it would be my wish that the main ranch would never be sold. As for the new land if bought I wouldn't care if they sold or kept it. I have two GD's that could get the land going forward, would be my wish but doesn't have to be.

 

[pb4uski]

While land is an asset, it is also a liability since it has costs such as taxes, insurance and upkeep. Plus, there are times when land is not very liquid. There are also times when land values can go negative (value less than you paid for it).



I am leaving my daughter (my only heir) my portfolio and house (and all the junk that comes with it). She can rent the house or sell it. She could even live in it if she chooses and sell hers.

+1 Inheriting raw land is Inheriting a liability... the property taxes still need to be paid annually... not so with stocks... they produce income if dividend paying or at worst nothing, but no check needs to be written.

 

[Sunset]

If they inherit stocks, they can always sell it and buy land where they want. After all, in many years they may move far away. Then inheriting land that is distant is no fun.
Just an expense, hard to visit, pretty useless.

 

[eytonxav]

While it might require some expertise, what about investing in fine art? Just pass off as part of your belongings after death. Probably can avoid any probate if done in a stealthy manner.

 

[Koolau]

I guess I see it as two questions:

What do YOU want to do with YOUR money street? Would owning some more land (while you're living) bring you more joy than owning, say stocks or art or antique cars, etc.

What would your kids want to inherit? Land, stocks, etc.?

I think you have to play these two off against each other. I don't think the actual money or where it came from really matters much.

What a wonderful "problem" to have!