Strategies for inherited IRA -- 2 generations

[BarbWire]

STRATEGIES for inherited IRA.... but the system won't let me edit the thread title! Grrrr!

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Hi all --

My 91yo father passed away last month, leaving everything to his surviving spouse of 62 years, my mother who is 86. They worked hard, lived below their means, managed well, and enjoyed life. A child of the Depression, he was a professor who grabbed every consulting opportunity -- and saved the extra income. They lived in a smaller house and drove older cars. For more than 35 years (after the kids were gone), they went to Europe for a month or more every year, as well as other travels. His only "mistake:" he worked until he was 80 so that he could "take care of his family," and by the time he retired, she was less able to travel due to Alzheimer's. The moral of the story .... well, you know: FIRE.

Anyway, part of her estate is a 403(b), worth about $1M. It's at TIAA-CREF. Assuming that the TIAA annuity portion (about 90%) can be liquidated, the issue becomes what to do. (Disclosure: I loathe TIAA-CREF, and want to see everything at Vanguard). After she passes, I'm the sole beneficiary.

Because of the stage of her Alzheimer's, her life expectancy now is 2-5 years. And then I inherit -- and now I'm 57 and FIRE'd. So we have a two generation strategy to figure here. I have DPoA and manage all finances.

His RMDs were about $9K/month. Because of other income streams she only needs about $2K of this per month for current expenses in her residential care facility. Their marginal tax rate in 2013 was 28%. Medical deductions were high for 2013 and 2014, but will be lower in 2015 because they are only for her -- which means a higher taxable income.

Now the questions:

It appears she can keep the 403(b) as is at TIAA-CREF in an annuity, getting his contracted distribution. Ugh. Or she can liquidate it, and roll over to Vanguard as an inherited IRA, and invest in, say, Wellington/Wellsley, and take RMDs. Or I believe she could covert all or part to a ROTH, pay very high taxes now (28 - 39% on the conversion amount) but then not have to take an RMD going forward, simply pulling out what she needs when she needs it. And then I could inherit the ROTH as, well, a ROTH with no RMD requirements. Right?

I think I'd rather inherit a ROTH, because that gives me a lot more flexibiity in planning my income (don't have to take RMDs. ) But I could be confused here. My taxable2014 income will be low in the 15% bracket (thank you tax efficient portfolios!). In the future I'd like to be able to draw income from the inheritance in the years that I travel a lot, and not others. I have no heirs to provide for -- just a lot of money to leave to Alzheimer's research.

I need to pull the trigger on this in mid-March, as soon as the probate court signs off on the will and appoints me uncontested executor. So I'm trying to get as many ducks in a row now as possible. I have no idea how to do the tax calculations for her and looking into the future for me.

All ideas appreciated!

TIA

 

[steelyman]

This (or one of the other resources on the web) may help. I believe you will have to take distributions.

http://www.schwab.com/public/schwab...rstanding_iras/inherited_ira/withdrawal_rules

 

[donheff]

You describe her conversion as being taxed at 29-39% but your distributions would presumably be lower since you are in the 15% bracket now and could (again presumably) replace some of your current withdrawals with the inherited IRA withdrawals. It may be that the untaxed growth of the Roth (note that inherited Roths are subject to RMDs so growth isn't endless) would make up for the larger initial hit. I would talk to an accountant to get this one right.

Also, it would be interesting to see your research results summarized. I have read the threads about maximizing lower brackets through conversion but haven't seen any discussion about when/if it makes sense to convert at high or maximum brackets.

 

[kaneohe]

Yes, you have to take RMDs from an inherited Roth (but no taxes). Converting a 1M TIRA in a short time sounds expensive . If one of your goals is to contribute to Alzheimer research, perhaps leaving it in TIRA would get more to them since they wouldn't have to pay taxes whereas if you converted to Roth, you'd lose that tax chunk in the beginning.

 

[BarbWire]

Thanks, all. And thanks for the link. I've tried reading the threads at Bogleheads but they give me a headache, as does the IRS booklet in IRAs.

This is just the very beginning of research, but I need to have some idea of what's going on before I meet with the TIAA-CREF folks and my parents' accountant mid-March.

Setting aside the question of traditional vs ROTH conversion for now, I think the first step will be to get the funds out of the TIAA-CREF 403(b) and into an inherited tIRA/rIRA at Vanguard.

Their non-tax-advantaged investments at Vanguard are in Wellington (1/3) and Wellsley (2/3). I suppose I could flip that for the inherited tIRA/rIRA and put 2/3 in Wellington and 1/3 in Wellsley.

Time to read, research and summarize. Thanks!

 

[ERD50]

It appears she can keep the 403(b) as is at TIAA-CREF in an annuity, getting his contracted distribution. Ugh. Or she can liquidate it, and roll over to Vanguard as an inherited IRA,

Be very careful here, the wording is confusing, and this was a problem that we ran into with MIL/FIL. It still isn't fully straightened out, several accounts were incorrectly created and closed to try to get it right.

From what I've learned, a spouse does not normally receive the IRA as an "Inherited IRA" (as you, and your IRA provider may think). It is done as a "Spousal Rollover". The rules are slightly different for each, make sure they do a "Spousal Rollover", unless you have specific reasons for something different.

Here's a link:

Naming Your Spouse to Inherit Retirement Accounts | Nolo.com

looks like if it is set up as an "Inherited IRA", it remains in the name of the deceased, and may only be beneficial if the spouse is < 59 1/2.

-ERD50

 

[Htown Harry]

Prepare yourself for some frustration in making the rollover to Vanguard. It's been a few years since DF passed, but I had to write the TIAA-CREF CEO on an RMD issue. Then I had additional challenges when I rolled over the CREF IRAs to Vanguard. TIAA was very skilled at creating obstacles to slow down and mystify the process.

It's been too long for me to remember the details, but one lesson learned was to do what you can to engage Vanguard in "pulling" the funds, rather than trying to deal with TIAA to "push" the funds. You want someone assisting who has their interests aligned with yours.

 

[GrayHare]

If you will be in a lower tax bracket than your mom is, a Roth (not an acronym) conversion is not tax efficient by itself. A way it might become tax efficient is if your mom's estate will be subject to estate tax. If she does the conversion to Roth, payment of the tax on that conversion reduces the value of her estate, and thus the eventual estate taxes as well.

 

[BarbWire]

Thanks for the further thoughts.

ERD50: the Schawb link above (which gives a very good explanation of the options) and the Nolo link echo what you're saying: since she is older than 59.5, make sure it is a "Spousal Rollover" or "Spousal Transfer" to a new IRA in her name. It looks like it will be a two-stage process: create a new IRA in her name at T-C, and then rollover to Vanguard if possible.

HtownHarry: yeah, trying to get funds rolled out of TIAA-CREF is at best unpleasant. I moved my 403(b) to Vanguard about five years ago despite their protests that I couldn't do it. In fact, I could move the CREF portion, but the TIAA portion has to be moved over 10 years, so now each year there is a new rollover of a portion of my annuity from TIAA to Vanguard. Five years to go....

Since my father's 403(b) is almost entirely in TIAA the big question will be whether it becomes completely liquid at rollover -- which would be fabulous -- or whether they will pull the slow transfer over 10 years nonsense. I'm afraid that might be the case since it will be a spousal rollover rather than an inherited IRA. There's nothing Vanguard can do to help in that situation, but I'll have them try!

There is a T-C office in town, so at least this will be a sit-down meeting rather than talking to whatever kid answers the 800#.

As for conversion to a Roth, nope: just doesn't make sense for her. So that's one simplification.

 

[Htown Harry]

There's nothing Vanguard can do to help in that situation, but I'll have them try!

I remember a breakthrough of some kind happened when I got the Vanguard rep in a 3-way call with me and T-C.

 

[Lisa99]

I've been researching the same thing for when FIL leaves his IRA to DH.

I found this article from AARP helpful. the bit I cut out of the article is a bit long but it's what I put into Evernote so I wouldn't have to read the entire article again at a later time.

IMPORTANT - inherited IRA must be retitled correctly or full amt will be taxed in first year of inheritance

A child or non-spouse inherits Understanding Inherited IRAs Can Save You Money on Taxes - Retirement - AARP

Now, take the case of inheritors who are not spouses. Say you're a child receiving an IRA from a parent. You cannot roll the money into an IRA in your own name. If you decide to cash out, two bad things happen: (1) You'll owe income taxes, if it's a traditional IRA. (2) You will lose the glorious, multiyear (even multi-decade) tax shelter that an inherited IRA can provide.
So you, too, should retitle the account as an "inherited IRA." For example, say John Jones leaves his IRA to his daughter, Joan. Joan should retitle it "John Jones IRA (deceased Aug. 1, 2012) for the benefit of Joan Jones, beneficiary." If the money will be divided among heirs, each recipient should retitle his or her share. Every year, you're required to make a minimum withdrawal, based on your age, but can take more if you want. Remember, withdrawals are taxed; the rest accumulates tax-deferred.

Now let's say that Joan dies, naming her son, Jack, as beneficiary. Jack can retitle the account as an inherited IRA and complete the withdrawals on the same schedule that Joan began. The family tax deferrals could last for decades more!

What if you inherit a 401(k)? That, too, can be retitled as an inherited IRA.
Correct titling is critical, says James Lange, author of Retire Secure! Pay Taxes Later. If you get it wrong, you'll be taxed immediately, on the whole amount. The lawyer who handles the will can help heirs retitle. Or send a letter to the mutual fund group that holds the IRA, specifically asking that it create a separate "inherited IRA" for each beneficiary.

Bottom line: Anyone holding an IRA or 401(k) should leave a note explaining the importance of retitling. You want your heirs to get as much tax deferral as they can from the money you leave them.

 

[BarbWire]

Hi all --

Five months later I finally have things to report which may be helpful to others.

Recall that my father had a 403(b) at TIAA-CREF, and his spouse (my mother) was the beneficiary. His 403(b) was almost entirely in TIAA (not a bad strategy at ages 91 and 86) earning a guaranteed 4%.

As Executor of the estate, and as her DPoA, I worked with the TIAA-CREF beneficiaries office; my assigned rep was very helpful and in no way a sales person (unlike the "asset manager" who contacted me wanting to discuss the big picture of the entire estate....uh, no).

As the surviving spouse older than 70.5, the 403(b) was rolled over to her as a traditional IRA in her name: "Traditional IRA for Jane B. Doe". There is nothing in the styling about being an inherited IRA; that styling (and tax implications) is reserved for non-spouses. The IRA is now as though she had set it up herself long ago.

Note:

• Before rolling over, she had to take my father's entire RMD for 2015 in a lump sum payout, with Federal income tax withheld. I've had this sitting in cash at Vanguard and the local MMF as the dust settles and I figure out how to rebalance her portfolio.
• Because this was a rollover to a spouse, the entire sum -- including the TIAA investment -- was immediately available for rollover. She was not trapped in a "slowly convert over 10 years" rule.
• If she continued to hold TIAA in a rollover IRA at TIAA-CREF, she would not get the same 4% that his university contract provided. The return would have been very low, and the beneficiary rep strongly urged me to dump the TIAA and put the money in CREF funds (I put it into 65% total stock index, 15% total int'l stock index, and 20% bond plus as a holding pattern until I can move it.)
• Styled as a traditional IRA in her name, she will begin taking RMDs in 2016 according to her age (87), not his age (92), so the RMD will be smaller (a good thing).

So, that all was much better than anticipated, and went really well until they (or their software, which the rep blamed) completely screwed up the rollover transaction -- and it took three months of my hard work, spreadsheets, detailed records and argument to get the erroneous transactions they had made reversed and the correct transactions executed effective the correct day ...

If I had not been hypervigilant and very proactive with spreadsheets showing exactly how much their errors had cost her, they would not have corrected the errors.

But that's now untangled. She now has a 7-figure traditional IRA sitting at TIAA-CREF.

I want to roll it over to Vanguard. The Vanguard Concierge Services rep (Concierge = "business development") said that TIAA-CREF insist that they push the money using their forms, that Vanguard cannot initiate the pull. And TIAA-CREF requires an IRA account already be set up at the receiving institution.

Done. She now has a $0 IRA account at Vanguard.

So yesterday I called TIAA-CREF to ask about the process. The call was anonymous so that the rep couldn't see the sum and push back. She asked if there was already an account/account number at Vanguard. Yep. Then she surprised me by saying "OK, we can initiate the rollover on the phone, no paperwork required. We will send a check to Vanguard which they will have in about seven days."

I'll verify this on the Vanguard end, because this sounds too simple to be true, given my experiences with TIAA-CREF in a rollover five years ago.


Stay tuned.

 

[pablo]

I have 2 decent sized inherited IRAs. Just took my first RMDs this month. I used the year end value and applied my RMD divisor as per the IRS regs for one account and the other account will be doing the calc themselves as they are full-service. A posting here mentioned that I could withdraw more than the RMD amt (I suppose that's what the 'M' in RMD means - duh) - I hadn't considered that.

I presently have two separate brokerages for these accounts as it was simpler at the time to keep using the same firms as the deceased. Now I plan to eventually move to a single firm (Vanguard?) for the 2 accounts and consider larger withdrawals, considering my income and potential Roth conversions for traditional IRAs depending on my expected income/tax rate as well as maximizing my eventual ACA subsidies (I am on Cobra now).