Timing of Inherited IRA Withdrawals

[Ncc1701]

Hi All,

Just looking for some opinions on what you would do if you were me in order to minimize the tax impact if inherited IRA withdrawals.

I have about $300K in an inherited IRA that I have to take RMDs from and fully withdraw by the end of 2033. The allocation currently is about 80% Equities/20% Cash. I plan on retiring one year from now and my wife will retire six months later so our earned income will drop. At the same time we plan to move to a state that does not have state income taxes. So just given those two factors I think it makes sense to wait about two years before withdrawing major money.

The "problem" is the account keeps growing so the longer I wait, I'll be paying more in Federal income tax down the road rather than Capital gains tax should I move the securities into my taxable account. So its a catch 22. Move more out of the IRA now to lower the future tax liability but be susceptible to a higher tax bracket now or wait to take advantage of a lower tax bracket in the future but with a potentially higher amount of withdrawals.

Not sure what to do. Thanks for your input!

 

[njhowie]

It likely won't be growing so much all the time, it is right now because of the 80/20 allocation and that the market is strong.

Me/sis are in a similar situation going out to 2033, and we are simply planning to take 1/10 in 2024, 1/9 in 2025, and so on, withdrawing what's remaining in 2033.

Will it be optimal or minimize taxes? Don't really know or care. It will meet the withdrawal requirements no matter what RMD rules are put in place (you need to be cognizant of that above all else). This is money that we really had no expectation of receiving, so it's not worth wasting time over.

 

[pb4uski]

Hi All,

Just looking for some opinions on what you would do if you were me in order to minimize the tax impact if inherited IRA withdrawals.

I have about $300K in an inherited IRA that I have to take RMDs from and fully withdraw by the end of 2033. The allocation currently is about 80% Equities/20% Cash. I plan on retiring one year from now and my wife will retire six months later so our earned income will drop. At the same time we plan to move to a state that does not have state income taxes. So just given those two factors I think it makes sense to wait about two years before withdrawing major money.

The "problem" is the account keeps growing so the longer I wait, I'll be paying more in Federal income tax down the road rather than Capital gains tax should I move the securities into my taxable account. So its a catch 22. Move more out of the IRA now to lower the future tax liability but be susceptible to a higher tax bracket now or wait to take advantage of a lower tax bracket in the future but with a potentially higher amount of withdrawals.

Not sure what to do. Thanks for your input!

I would try to reduce equities in that inherited tIRA account. Sell equities in the inherted iIRA and buy an equal amount of equities in taxable or tax-free accounts, or even tax-deferred accounts not subject to RMDs and 10-year drain.

 

[imbatman]

Seems like you realize it but make sure you at least take the minimum RMD amount (based on IRS life expectancy tables) starting next year, if you have the 10-year liquidation requirement. As of today, the IRS has waived assessing any penalties on any missed RMDs through this tax year (2023).....but I am expecting no waiver for 2024.

 

[N02L84ER]

I would try to reduce equities in that inherited tIRA account. Sell equities in the inherited iIRA and buy an equal amount of equities in taxable or tax-free accounts, or even tax-deferred accounts not subject to RMDs and 10-year drain.

+1

 

[Ncc1701]

Thanks for the ideas all. Never thought of re-allocating. I guess hoping for lower performance is kind of counter intuitive. But from an allocation standpoint it makes sense.

 

[pb4uski]

What you want to do is to shift things around that can be done without any tax cost so your lower return assets are in the inherited IRA account that is subject to RMDs and the 10 year drain.

 

[Exchme]

Hi All,

Just looking for some opinions on what you would do if you were me in order to minimize the tax impact if inherited IRA withdrawals.

I have about $300K in an inherited IRA that I have to take RMDs from and fully withdraw by the end of 2033. The allocation currently is about 80% Equities/20% Cash. I plan on retiring one year from now and my wife will retire six months later so our earned income will drop. At the same time we plan to move to a state that does not have state income taxes. So just given those two factors I think it makes sense to wait about two years before withdrawing major money.

The "problem" is the account keeps growing so the longer I wait, I'll be paying more in Federal income tax down the road rather than Capital gains tax should I move the securities into my taxable account. So its a catch 22. Move more out of the IRA now to lower the future tax liability but be susceptible to a higher tax bracket now or wait to take advantage of a lower tax bracket in the future but with a potentially higher amount of withdrawals.

Not sure what to do. Thanks for your input!

Yes, minimizing withdrawals until your income drops and you move to a low tax location sounds right. After that, you would need a really detailed model to see how playing with inherited IRA withdrawals plays into Roth Conversion opportunities, supplying cash instead of having to sell assets to live, SS taxation, etc. In my own case, I get a tiny lifetime benefit for pulling some inherited IRA money early to minimize having to sell assets to live.

The idea of putting bonds in tax deferred and stocks in taxable/Roth is actually very tricky to analyze and it is not equivalent to holding the same allocation in all accounts because of the different tax treatments of the accounts. After taxes, it makes your portfolio act like an increase in your stock allocation (so more chance of big gains and more chance of painful losses). The size of the effect varies depending on the relative size of your accounts, your tax bracket, and how skewed the accounts are when a big market swing occurs. If you have plenty of money and don't mind a larger stock allocation, then no problem.

I did this to my portfolio (bonds in IRAs, stocks in Roth/taxable) and later did much more detailed modeling and figured out that in both bull and bear markets, after taxes, my nominal 80/20 portfolio will now act approximately like 87/13! That's a whole lot different than what I was targeting, but I don't want to take the capital gains that would be needed to go back, so just building up bonds slowly in taxable whenever cash is available.

 

[pb4uski]

^^^ OP will be in the 0% bracket for qualified dividends and LTCG since he is targeting the top of the 12% tax bracket so I don't think that what you wrote would be a concern for him.

 

[Ncc1701]

^^^ OP will be in the 0% bracket for qualified dividends and LTCG since he is targeting the top of the 12% tax bracket so I don't think that what you wrote would be a concern for him.

Thanks for all the responses. My quandary is a little more complicated. At retirement we will still have pension income of $60K and $35K of dividend income from the taxable account. So yes our income will be less but not $0.

Another complicating factor is where my fixed income holdings are. The vast majority is in a balanced fund in the taxable account and that fund has substantial unrealized gains. The other portion of fixed income is in my wife's workplace retirement plan which we will never rollover because it earns a guaranteed 7%.

 

[FREE866]

I would try to reduce equities in that inherited tIRA account. Sell equities in the inherted iIRA and buy an equal amount of equities in taxable or tax-free accounts, or even tax-deferred accounts not subject to RMDs and 10-year drain.

As opposed to selling the equities in the inherited IRA account wouldn't it make sense to just transfer in kind whatever amount he was going to sell into a taxable account?


My nieces inherited IRAs from their deceased dad and like NJ Howie I am taking out ~10% per year for 10 years. Doing that via transferring in kind positions.

 

[pb4uski]

As opposed to selling the equities in the inherited IRA account wouldn't it make sense to just transfer in kind whatever amount he was going to sell into a taxable account?...

Any transfer in-kind from an inherited traditional IRA to a taxable account would be a taxable event so I would not think the OP would want to do that. Perhaps for an amount that he needed or wanted to withdraw and pay taxes on he could but I am assuming that the inherited traditional IRA has more equities in it and he would not want to create a large taxable event for himself.

 

[FREE866]

Any transfer in-kind from an inherited traditional IRA to a taxable account would be a taxable event so I would not think the OP would want to do that. Perhaps for an amount that he needed or wanted to withdraw and pay taxes on he could but I am assuming that the inherited traditional IRA has more equities in it and he would not want to create a large taxable event for himself.

I understand your first sentence. But confused by the second.



So you're recommending he reduce equities in the INH IRA so there is less growth and hence a smaller withdrawal eventually and therefore less taxes?

 

[pb4uski]

I understand your first sentence. But confused by the second.



So you're recommending he reduce equities in the INH IRA so there is less growth and hence a smaller withdrawal eventually and therefore less taxes?

Yes, put lower growth/income investments like fixed income in the inherited traditional IRA since it is subject to RMDs for the next 10 years and has to be drained within 10 year... put the higher growth/income investments in tax-free or tax-deferred accounts that are not subject to required distributions for a while.

From a tax efficient placement perspective you want lower growth investments in tax-deferred accounts, and if you have tax deferred accounts that are subject to required withdrawals in the near term and tax-deferred accounts that are not subject to required withdrawls in the near term you would want the slower growth/lower yield assets in the former.

 

[rayvt]

Thanks for the ideas all. Never thought of re-allocating. I guess hoping for lower performance is kind of counter intuitive. But from an allocation standpoint it makes sense.

No it does not make sense. I'd rather pay 22% tax on a $10,000 gain than $0 tax on a $100 gain.

Do not let the tax tail wag the gain dog. Shifting assets around in your own IRAs is possible, but not possible in inherited IRAs.

 

[SecondCor521]

From a tax efficient placement perspective you want lower growth investments in tax-deferred accounts, and if you have tax deferred accounts that are subject to required withdrawals in the near term and tax-deferred accounts that are not subject to required withdrawls in the near term you would want the slower growth/lower yield assets in the former.

Clever thought, and I've made note of it for myself for future reference.

I do question the logic a bit, though. If they're both tax deferred accounts and the AA is the same in either scenario, I think the operative criterion is whether the marginal tax rate is lower now or later - just as it is for Roth conversions. (And perhaps if one rebalances; see below.)

Suppose I have $100K inherited tIRA and $100K tIRA and want, for sake of argument, $100K of my AA to be in a 5% returning asset and $100K of my AA to be in a 10% returning asset.

Two cases: (A) I can either put the 5% asset in the inherited account and the 10% in the tIRA or (B) the reverse - the 10% asset in the inherited account and the 5% asset in the tIRA.

Let's suppose also that I rebalance every year as I make my 10 or 11 SECURE Act withdrawals so I am always 50/50 in my AA between the two accounts.

Let's also assume that I have the same tax rate for the remainder of my life.

I think then that my after tax spending would be the same in both cases, because the initial amount, returns, and taxes would be the same in both.

If the tax rate isn't the same for the remainder of my life, then the argument is similar to the Roth conversion argument - do case A if your tax rate is higher now, do case B if your tax rate will be higher later.

If you're not going to rebalance, then your AA in the two cases will vary differently over time, and in that case I think you have to account for that in the analysis - I'm not sure how I would do that, but I think you'd have to then take the varying amount of risk you're taking between the two cases over time into account.

I respect @pb4uski, and freely admit I might be missing something. Anyone please feel free to point it out. Thanks.

 

[pb4uski]

No it does not make sense. I'd rather pay 22% tax on a $10,000 gain than $0 tax on a $100 gain.

Do not let the tax tail wag the gain dog. Shifting assets around in your own IRAs is possible, but not possible in inherited IRAs.

I'm not sure where the first part comes from or what it is that does not make sense.

On the second part, you are incorrect and I couldn't disagree more... it is very easy to shift assets even with an inherited IRA.

Let's say that you inherit a $100k IRA that is 100% stocks and you have various accounts but they include a Roth IRA that includes stocks and over $100k of bonds. The smart play would be to sell the $100k of stocks in the inherited RA and buy $100K of bonds and in the Roth, sell $100k of bonds and buy $100k of stocks.

The higher yielding stock are better in the Roth where the higher yield is tax free and the lower yielding bonds are better in the inherited IRA where they will be subject to required minimum distributions.

Actually, even if the Roth were a taxable account it would still be better as the qualified dividends and LTCG on the stocks get preferential tax rates in the taxable account but are subject to ordinary tax rates when withdrawn from an IRA.

 

[pb4uski]

Clever thought, and I've made note of it for myself for future reference.

I do question the logic a bit, though. If they're both tax deferred accounts and the AA is the same in either scenario, I think the operative criterion is whether the marginal tax rate is lower now or later - just as it is for Roth conversions. (And perhaps if one rebalances; see below.)

Suppose I have $100K inherited tIRA and $100K tIRA and want, for sake of argument, $100K of my AA to be in a 5% returning asset and $100K of my AA to be in a 10% returning asset.

Two cases: (A) I can either put the 5% asset in the inherited account and the 10% in the tIRA or (B) the reverse - the 10% asset in the inherited account and the 5% asset in the tIRA.

Let's suppose also that I rebalance every year as I make my 10 or 11 SECURE Act withdrawals so I am always 50/50 in my AA between the two accounts.

Let's also assume that I have the same tax rate for the remainder of my life.

I think then that my after tax spending would be the same in both cases, because the initial amount, returns, and taxes would be the same in both.

If the tax rate isn't the same for the remainder of my life, then the argument is similar to the Roth conversion argument - do case A if your tax rate is higher now, do case B if your tax rate will be higher later.

If you're not going to rebalance, then your AA in the two cases will vary differently over time, and in that case I think you have to account for that in the analysis - I'm not sure how I would do that, but I think you'd have to then take the varying amount of risk you're taking between the two cases over time into account.

I respect @pb4uski, and freely admit I might be missing something. Anyone please feel free to point it out. Thanks.

A bit of a contrived example, but assuming that in a taxable account that the growth from the 5% asset and the 10% asset would be ordinary income then I would agree. If the 10% growth asset generated preferenced income like qualified dividends and LTCG then there is a difference.

But I still think that if you have an account where you will be forced to take taxable withdrawals in the near term, then it is still best to place the lowest yielding ordinary income assets in the inherited tIRA.

 

[SecondCor521]

A bit of a contrived example, but assuming that in a taxable account that the growth from the 5% asset and the 10% asset would be ordinary income then I would agree. If the 10% growth asset generated preferenced income like qualified dividends and LTCG then there is a difference.

In the post of yours I quoted it seemed clear to me that you were meaning two tax deferred accounts, so that's what I thought your idea was and what I was responding to.

If you want to introduce a taxable account into the discussion, then I would agree with your second sentence.

But I still think that if you have an account where you will be forced to take taxable withdrawals in the near term, then it is still best to place the lowest yielding ordinary income assets in the inherited tIRA.

I get the idea, I'm trying to flesh it out for my own situation.

I'm 98/2 overall, and the 2% of bonds lives in my traditional IRA currently. I'm very likely to inherit a traditional IRA someday.

I can either (a) keep the 2% of bonds in my traditional IRA, which is my current plan, or (b) adopt what I understand to be your idea and move that 2% of bonds into my inherited traditional IRA.

The inherited traditional IRA will almost certainly be large enough to contain the 2% bond allocation.

I understand the point that following your plan (b), the inherited traditional IRA will grow more slowly, and thus my SECURE withdrawals will be smaller, so my tax bill during that 10 year SECURE window will be smaller.

On the other side of the ledger, though, my traditional IRA, which was 2% bonds and the rest stock, is now 100% stock, and thus growing somewhat faster. Which means my RMDs later will be somewhat larger, and my tax bill later will be somewhat larger.

So will my smaller sooner SECURE tax bills be offset by my larger later RMD tax bills? I think you're saying the earlier tax savings would be more than the later tax cost. I'm trying to understand why.

If it has to do with the tax treatment of preferenced income in taxable vs. tax-deferred, OK, I get that. But then I don't understand how that would apply in the case of two tax-deferred accounts, which is what I thought we had been talking about in this thread.

If the advantage is due to something else, that's what I'm trying to understand.

Oh, and I'm not trying to be ornery, I'm just trying to understand your clever thought and see whether it holds an advantage for my situation.

 

[dknighd]

I would try to reduce equities in that inherited tIRA account. Sell equities in the inherted iIRA and buy an equal amount of equities in taxable or tax-free accounts, or even tax-deferred accounts not subject to RMDs and 10-year drain.

This makes sense to me. Partially because you have to drain the inherited account in 10 years, and hopefully your other accounts will last more than 10 years. It makes sense to hold more stable investments in the account you have to drain first. I had not thought about that before now, so thanks for suggesting it!



I'm in the process of inheriting some money. Not a life changing amount, but a significant amount. My current thinking is to start living off the inherited money. This will delay withdrawals from my other tax deferred accounts, and perhaps provide an opportunity to Roth convert some of them.


In the OP's shoes I would probably not withdraw from the inherited account while I was still working. I might look at the inherited account as an opportunity to perhaps retire sooner than they had planned.


So many variables . . .

 

[pb4uski]

Yeah, I just inherited a traditional IRA but mom was 93 and had been doing RMDs for over 20 years, so the remaining balance divided by the number of beneficiaries was not huge, but would be subject to RMDs and 10 year drain and is only about 20% of our headroom for 12% or less withdrawals or Roth conversions.

So to keep things simple and have one less account I plan to just do in-kind transfers from the inherited IRA to my taxable brokerage account in early January. That will just reduce the amount that we can Roth convert in 2024 by ~20% but make things much simpler for DW and DD if I get hit by a beer truck.