Best way to withdraw from Inherited IRA in retirement?

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Best way to withdraw from Inherited IRA in retirement?

Post by jmk » Wed Nov 22, 2017 8:06 pm

I am about three years from FI at age 57 so am starting to think about different withdrawal strategies. I have a pretty good handle on converting my "traditional" 403bs to Roths during my early retirement in order to eliminate future RMDs. But I'm having trouble getting my head around what to do with a small Inherited IRA. I am unable to convert this to a Roth obviously. And because it's a "stretch" IRA I am already taking RMDs with 30.5 years of life expectancy. Is it more rational to stretch out the beneficiary IRA over the 30 years left (taking advantage of its deferral and the fact it won't bend my income much?), or does it make sense to cash it all out earlier?

Since I expect my marginal tax to be lower or equal in retirement, my thinking is to the if I can wait until my tax rate drops and then withdraw it all that is the most rational?

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Re: Best way to withdraw from Inherited IRA in retirement?

Post by livesoft » Wed Nov 22, 2017 8:10 pm

Any cash-out of the inherited IRA will increase your AGI for really no benefit. That is, you can increase your AGI by the same amount with a Roth conversion for your benefit instead. In other words, instead of withdraw it all, just convert more of your own IRA to a Roth for the same tax hit.

So just keep taking the RMD. We do our RMDs from inherited IRAs in January each year. Our inherited IRAs are 100% bond funds. We want them to have the lowest growth of all our accounts.
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Re: Best way to withdraw from Inherited IRA in retirement?

Post by Watty » Wed Nov 22, 2017 8:40 pm

If you have any retirement accounts, like a 401k, that you are not maxing then one option would be to increase the contributions to that and make offsetting inherited IRA withdrawals. For example you could increase your 401k payroll withholding by $1,000 a month and also withdraw $1,000 a month from the inherited IRA. These would basically cancel each other out on your taxes.

If you are not able to do that then once you retire and start withdrawing retirement money then you could spend down the inherited IRA first. The advantage of that is that if someone inherits the money they will get a lot better inheritance rules by inheriting your IRA instead of inheriting the old previously inherited IRA which has less favorable RMD rules.

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