Question about Beneficiary IRA & Investing?
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- Posts: 23
- Joined: Mon Dec 11, 2017 4:10 pm
Question about Beneficiary IRA & Investing?
Hi everyone,
Just wanted to say hello for joining the forum. I'm in a weird situation currently.
I'm a 29 male who was in terrible car accident recently (luckily still here), and for most of 2017, I haven't been able to work most of the year with therapy, etc. I'm back to work these last few months, but it's a terrible job with bad pay, long hours, and no opportunities (i.e. let say its a basic Amazon warehouse job).
My dad died recently as well, and I had a beneIRA worth around 34k I put in a beneIRA with TDAmeritrade. So far, all I've done is take the minimum RMD (which is $630) this year.
So by the end of this year, I've made around 10k from my job + rmd + side business I started:
- 5k grossed in job (w2 sent to me)
- 4.5k grossed in side business (1099-misc are sent to me) I also had a lot of expenses to run this like mileage, tools, etc. Spent well over 2k just this year.
- $630 in beneIRA RMD
I have two questions:
1.) Would it be wise to take only the minimum rmd, or should I take more (like $3k-5k)? I realize i'll be taxed at a rate depending how much I make/take this year (which is around 10-15% i believe). For the past year, it has just been sitting in the account as cash. I know, why cash, but I am a new to investing, so I rather have the money in cash before making a bad decision in the wrong investment.
2.) I was thinking next year or even this year to take around 2k-3k, and start investing it. Maybe in a index fund, or etf's, and learn the basics? Would love to earn around 5-7% on returns yearly. I would really appreciate anyone that could give me some insight into things.
Thanks in advance!
Just wanted to say hello for joining the forum. I'm in a weird situation currently.
I'm a 29 male who was in terrible car accident recently (luckily still here), and for most of 2017, I haven't been able to work most of the year with therapy, etc. I'm back to work these last few months, but it's a terrible job with bad pay, long hours, and no opportunities (i.e. let say its a basic Amazon warehouse job).
My dad died recently as well, and I had a beneIRA worth around 34k I put in a beneIRA with TDAmeritrade. So far, all I've done is take the minimum RMD (which is $630) this year.
So by the end of this year, I've made around 10k from my job + rmd + side business I started:
- 5k grossed in job (w2 sent to me)
- 4.5k grossed in side business (1099-misc are sent to me) I also had a lot of expenses to run this like mileage, tools, etc. Spent well over 2k just this year.
- $630 in beneIRA RMD
I have two questions:
1.) Would it be wise to take only the minimum rmd, or should I take more (like $3k-5k)? I realize i'll be taxed at a rate depending how much I make/take this year (which is around 10-15% i believe). For the past year, it has just been sitting in the account as cash. I know, why cash, but I am a new to investing, so I rather have the money in cash before making a bad decision in the wrong investment.
2.) I was thinking next year or even this year to take around 2k-3k, and start investing it. Maybe in a index fund, or etf's, and learn the basics? Would love to earn around 5-7% on returns yearly. I would really appreciate anyone that could give me some insight into things.
Thanks in advance!
- Epsilon Delta
- Posts: 8090
- Joined: Thu Apr 28, 2011 7:00 pm
Re: Question about Beneficiary IRA & Investing?
Welcome.
Sorry for the loss of your father and best wishes for a complete recovery from your accident.
Whether and how to invest the beneIRA money is independent of any withdrawals. You can use the cash in the beneIRA to buy stock or bond funds at TDAmeriTrade. Or you could transfer the beneIRA into a beneIRA at Vanguard and buy Vanguard funds, or you could take the money out and invest in a taxable account (probably not best) or several other things.
I would suggest you decide what the money is for. (e.g. Do you intend it for your retirement? the next few years living expenses? going back to school? starting a business?) Once you do that you can come up with an asset allocation (40% bonds/60% stock might be suitable for retirement, 50% cash/50% limited term bonds might be suitable if you intend to spend it in a couple of years). Until you decide on an asset allocation leaving it in cash is reasonable, but it does not have to be left at TDAmeriTrade.
A second thing to decide is if TDAmeriTrade is a reasonable custodian for your size account and experience. I can't comment on that, hopefully somebody else will. The main issues are fees, available investments and customer service.
A third thing to decide is whether to make withdrawals from the beneIRA. As mentioned above you can invest with or without making withdrawals. Generally it's better to leave money in an IRA for tax free growth and only take the minimum out, but in your circumstances there is another opportunity. You have earned compensation on your W-2 and probably other earned compensation as your net from the 1099s. This means you can make an IRA contribution of your own. You'll have to do the math but your probably allowed to contribute $5,500. If you don't intend to make a contribution you could take $5,500 out of the beneIRA and make a $5,500 contribution to your own IRA. If you add the income and deduct the contribution I think it has no effect on your income tax. The advantages of having money in your own IRA rather than a beneIRA is no RMD, possible Roth conversions and, perhaps, some simplicity in a few years if you empty the beneIRA. The disadvantage is once it's in your own IRA you'll pay a 10% penalty if you need it before age 59 1/2)
Warning: you should be eligible for Earned Income Tax Credit and possibly a few other benefits. I think moving the IRA shuffling I described is neutral for EITC but I am not intimately familiar EITC. If you qualify for means tested benefits (e.g. medicaid) you'll need to check the rules for those. Some may count the withdrawal as income and not consider the deduction, which could result in loss of benefits.
I hope at least some of that was helpful. If not at least I bumped your post and perhaps somebody else will come along.
Sorry for the loss of your father and best wishes for a complete recovery from your accident.
Whether and how to invest the beneIRA money is independent of any withdrawals. You can use the cash in the beneIRA to buy stock or bond funds at TDAmeriTrade. Or you could transfer the beneIRA into a beneIRA at Vanguard and buy Vanguard funds, or you could take the money out and invest in a taxable account (probably not best) or several other things.
I would suggest you decide what the money is for. (e.g. Do you intend it for your retirement? the next few years living expenses? going back to school? starting a business?) Once you do that you can come up with an asset allocation (40% bonds/60% stock might be suitable for retirement, 50% cash/50% limited term bonds might be suitable if you intend to spend it in a couple of years). Until you decide on an asset allocation leaving it in cash is reasonable, but it does not have to be left at TDAmeriTrade.
A second thing to decide is if TDAmeriTrade is a reasonable custodian for your size account and experience. I can't comment on that, hopefully somebody else will. The main issues are fees, available investments and customer service.
A third thing to decide is whether to make withdrawals from the beneIRA. As mentioned above you can invest with or without making withdrawals. Generally it's better to leave money in an IRA for tax free growth and only take the minimum out, but in your circumstances there is another opportunity. You have earned compensation on your W-2 and probably other earned compensation as your net from the 1099s. This means you can make an IRA contribution of your own. You'll have to do the math but your probably allowed to contribute $5,500. If you don't intend to make a contribution you could take $5,500 out of the beneIRA and make a $5,500 contribution to your own IRA. If you add the income and deduct the contribution I think it has no effect on your income tax. The advantages of having money in your own IRA rather than a beneIRA is no RMD, possible Roth conversions and, perhaps, some simplicity in a few years if you empty the beneIRA. The disadvantage is once it's in your own IRA you'll pay a 10% penalty if you need it before age 59 1/2)
Warning: you should be eligible for Earned Income Tax Credit and possibly a few other benefits. I think moving the IRA shuffling I described is neutral for EITC but I am not intimately familiar EITC. If you qualify for means tested benefits (e.g. medicaid) you'll need to check the rules for those. Some may count the withdrawal as income and not consider the deduction, which could result in loss of benefits.
I hope at least some of that was helpful. If not at least I bumped your post and perhaps somebody else will come along.
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- Joined: Mon Dec 11, 2017 4:10 pm
Re: Question about Beneficiary IRA & Investing?
Hi Epsilon, wow what a insightful post! I literally had to reread it 3 times just to digest everything.
Well school honestly is not really in the focus right now. I really hate the corporate America lifestyle, I really would like to start my own business, however I would not use this money for that, but my own capital labor (work ethic to get it off the ground). Ive built my credit and learned how to sell, write copy, and advertising while on this job. I've literally read every great book in the realm of business (from tmf, to cashvertising, and more).
I've thought about getting my real estate license or even into real estate and buying properties for cash flow, but entrepreneurship has been a repeating lifestyle I'd like to get involved in.
As for the money, my goal really isn't to get an ira (I figure even if it gets tax deferred, I would be penalized at least 10% plus any other fees if I withdraw early, and I'd like to enjoy it or at least have it in my bank account before 59-60). I think the best strategy is to grow it at a rate of 5-7% while taking minimum Rmds. Possibly investing in some muni bonds and boring index funds, but the initial reason I choose td over vanguard is I believe trading options could prove quite viable. I'm still new at everything, and don't know which way to go, but I've just been trying to wrap my heads around things.
Thank you for all the kind words and advice by the way!
Well school honestly is not really in the focus right now. I really hate the corporate America lifestyle, I really would like to start my own business, however I would not use this money for that, but my own capital labor (work ethic to get it off the ground). Ive built my credit and learned how to sell, write copy, and advertising while on this job. I've literally read every great book in the realm of business (from tmf, to cashvertising, and more).
I've thought about getting my real estate license or even into real estate and buying properties for cash flow, but entrepreneurship has been a repeating lifestyle I'd like to get involved in.
As for the money, my goal really isn't to get an ira (I figure even if it gets tax deferred, I would be penalized at least 10% plus any other fees if I withdraw early, and I'd like to enjoy it or at least have it in my bank account before 59-60). I think the best strategy is to grow it at a rate of 5-7% while taking minimum Rmds. Possibly investing in some muni bonds and boring index funds, but the initial reason I choose td over vanguard is I believe trading options could prove quite viable. I'm still new at everything, and don't know which way to go, but I've just been trying to wrap my heads around things.
Thank you for all the kind words and advice by the way!
- arcticpineapplecorp.
- Posts: 15013
- Joined: Tue Mar 06, 2012 8:22 pm
Re: Question about Beneficiary IRA & Investing?
sorry to hear about your situation. Couple other things worth mentioning:
1. If your income is only $10,000 for the whole year you wouldn't owe income taxes considering you get a $6350 standard deduction and a $4000 exemption provided no one is claiming you as a dependent. That wipes out the first $10,350 of your income. Only income above that is taxable at the 10% rate. You'd have to have $19,676 of income or more (before deductions) to get to the 15% tax bracket.
This is why epsilondata mentioned the EITC (earned income tax credit). It's for people who earn an amount where taxes aren't owed...and you get money back (known as a refundable credit, meaning you can get money back even if you owe no tax) as an incentive for working.
2. You may owe self-employment tax however, even if you owe no other income taxes. This is because self-employed people are contributing essentially the employee and employer's portion of social security (when you work for another you only pay the 6.25% and the employer pays the other portion). So you may have self-employment tax to pay (you'll need to file a schedule C and a schedule SE).
3. If your income starts to go up a little where you would owe taxes, if you make a contribution to an IRA you get a saver's credit (non-refundable tax credit, meaning you get money back if you owe but no extra money back if you don't). You can't be a dependent on anothers tax return and can't be a student.
https://www.irs.gov/retirement-plans/pl ... ers-credit
4. not sure where you got the idea that munis would be appropriate for your situation. Usually muni bonds are for people with high income or high net worth because these are tax free (federal) and some might be state tax free. Since you're in a low/no tax situation because of low income muni's are not really going to benefit you. I think there's a tradeoff with muni's in that the cost is higher, which is fine because people make up the difference (or more) from the tax savings on the income they generate. But if you're getting no tax benefit then why pay more than you could with other bonds or investments. Muni's are typically for people in 25% tax bracket or higher. That's not you right now (hopefully in the future!)
http://www.bankrate.com/investing/munic ... -and-cons/
5. I wouldn't take money out of the inherited IRA to invest it in a taxable account. It's in an IRA (inherited) which means you're free to invest it now, though you have to take the RMDS. So just change what the IRA is invested in. An IRA is just an investment vehicle. You can put stocks, bonds, cds, REITS, or a mix in it. So don't take money from a tax deferred account (when you can invest it and defer the taxes until RMD time) just to put the money in a taxable account and pay taxes every time your investments generate dividends/cap. gains.
I would read more here:
https://www.bogleheads.org/wiki/Boglehe ... philosophy
1. If your income is only $10,000 for the whole year you wouldn't owe income taxes considering you get a $6350 standard deduction and a $4000 exemption provided no one is claiming you as a dependent. That wipes out the first $10,350 of your income. Only income above that is taxable at the 10% rate. You'd have to have $19,676 of income or more (before deductions) to get to the 15% tax bracket.
This is why epsilondata mentioned the EITC (earned income tax credit). It's for people who earn an amount where taxes aren't owed...and you get money back (known as a refundable credit, meaning you can get money back even if you owe no tax) as an incentive for working.
2. You may owe self-employment tax however, even if you owe no other income taxes. This is because self-employed people are contributing essentially the employee and employer's portion of social security (when you work for another you only pay the 6.25% and the employer pays the other portion). So you may have self-employment tax to pay (you'll need to file a schedule C and a schedule SE).
3. If your income starts to go up a little where you would owe taxes, if you make a contribution to an IRA you get a saver's credit (non-refundable tax credit, meaning you get money back if you owe but no extra money back if you don't). You can't be a dependent on anothers tax return and can't be a student.
https://www.irs.gov/retirement-plans/pl ... ers-credit
4. not sure where you got the idea that munis would be appropriate for your situation. Usually muni bonds are for people with high income or high net worth because these are tax free (federal) and some might be state tax free. Since you're in a low/no tax situation because of low income muni's are not really going to benefit you. I think there's a tradeoff with muni's in that the cost is higher, which is fine because people make up the difference (or more) from the tax savings on the income they generate. But if you're getting no tax benefit then why pay more than you could with other bonds or investments. Muni's are typically for people in 25% tax bracket or higher. That's not you right now (hopefully in the future!)
http://www.bankrate.com/investing/munic ... -and-cons/
5. I wouldn't take money out of the inherited IRA to invest it in a taxable account. It's in an IRA (inherited) which means you're free to invest it now, though you have to take the RMDS. So just change what the IRA is invested in. An IRA is just an investment vehicle. You can put stocks, bonds, cds, REITS, or a mix in it. So don't take money from a tax deferred account (when you can invest it and defer the taxes until RMD time) just to put the money in a taxable account and pay taxes every time your investments generate dividends/cap. gains.
I would read more here:
https://www.bogleheads.org/wiki/Boglehe ... philosophy
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
Re: Question about Beneficiary IRA & Investing?
One thing you might consider is withdrawing a little extra each year, pay taxes on it, and contribute to a Roth IRA. That will eliminate the need for rmds and allow for tax free growth for the rest of your life.
http://time.com/money/3835309/retiremen ... tion-roth/
http://time.com/money/3835309/retiremen ... tion-roth/
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- Joined: Mon Dec 11, 2017 4:10 pm
Re: Question about Beneficiary IRA & Investing?
So much great info in here! Sorry for the delay, had a family emergency, but I feel I have a better understanding now.
So as of now, my income looks like this:
Gross income from job: $5,040
Side business: $4,540 (actually spend about $1800 in expenses and equipment out of this).
RMD: around $630
I understand now why it's not wise to take money out the inherited ira, and invest into an account that is taxed on interest.
My questions are:
1.) Should I/would I be able to take another distribution before the end of this year, and if so, how much could I take, based on my deductions, etc, before I would have to pay taxes on it? Would the trump bill doubling the standard deduction play into this, allowing me to take more?
2.) What do you think is the most logical decision to invest a portion of the inheritance in? My goal to have growth, while pay less in tax. I was aiming for something that could give a 5-7% return.
Thanks for everyone!
So as of now, my income looks like this:
Gross income from job: $5,040
Side business: $4,540 (actually spend about $1800 in expenses and equipment out of this).
RMD: around $630
I understand now why it's not wise to take money out the inherited ira, and invest into an account that is taxed on interest.
My questions are:
1.) Should I/would I be able to take another distribution before the end of this year, and if so, how much could I take, based on my deductions, etc, before I would have to pay taxes on it? Would the trump bill doubling the standard deduction play into this, allowing me to take more?
2.) What do you think is the most logical decision to invest a portion of the inheritance in? My goal to have growth, while pay less in tax. I was aiming for something that could give a 5-7% return.
Thanks for everyone!
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- Posts: 706
- Joined: Thu Mar 06, 2014 9:43 pm
Re: Question about Beneficiary IRA & Investing?
I bought Vanguard total world stock market Index ETF in my moms ira at TD Ameritrade. That’s a good simple choice for an investment. You will pay a small brokerage fee.
- hoppy08520
- Posts: 2193
- Joined: Sat Feb 18, 2012 10:36 am
Re: Question about Beneficiary IRA & Investing?
My condolences on the death of your father, and I hope you continue to recover from your automobile crash.
One thought is that as long as your income is low enough that you aren't paying income taxes, to withdraw as much as you can from your inherited IRA tax-free and re-invest in a Roth IRA. You can contribute up to $5,500 annually to a Roth IRA (as long as you have that much earned income). With this approach, you're essentially transferring money from the inherited IRA to your Roth IRA and paying no tax penalty for doing so. Make sure you're also accounting for any possible state income taxes. I'd only go up to around $5,500 per year so you don't over-withdraw from your inherited IRA and not get a chance to invest it in an Roth IRA. Also, this strategy only makes sense if conceptually you aren't contributing to a Roth IRA anyway because you don't have the funds. In the best of all worlds, you're maxing your Roth IRA and keeping all but your RMD in your inherited IRA.
You're better off having $1 in the Roth IRA than $1 in the inherited IRA. If your future income rises, then you'll be paying more taxes on any withdrawals from the inherited IRA (whether from RMD or in addition to RMD), but you won't in the Roth IRA.
If you are concerned that you'll be "locking away" your money in a Roth IRA, you can always withdraw your contributions tax-free, just not any earnings on them. Read up on this and make sure you keep good records. Once you are 59 years old, you can also withdraw contributions tax-free.
One thought is that as long as your income is low enough that you aren't paying income taxes, to withdraw as much as you can from your inherited IRA tax-free and re-invest in a Roth IRA. You can contribute up to $5,500 annually to a Roth IRA (as long as you have that much earned income). With this approach, you're essentially transferring money from the inherited IRA to your Roth IRA and paying no tax penalty for doing so. Make sure you're also accounting for any possible state income taxes. I'd only go up to around $5,500 per year so you don't over-withdraw from your inherited IRA and not get a chance to invest it in an Roth IRA. Also, this strategy only makes sense if conceptually you aren't contributing to a Roth IRA anyway because you don't have the funds. In the best of all worlds, you're maxing your Roth IRA and keeping all but your RMD in your inherited IRA.
You're better off having $1 in the Roth IRA than $1 in the inherited IRA. If your future income rises, then you'll be paying more taxes on any withdrawals from the inherited IRA (whether from RMD or in addition to RMD), but you won't in the Roth IRA.
If you are concerned that you'll be "locking away" your money in a Roth IRA, you can always withdraw your contributions tax-free, just not any earnings on them. Read up on this and make sure you keep good records. Once you are 59 years old, you can also withdraw contributions tax-free.
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- Joined: Mon Dec 11, 2017 4:10 pm
Re: Question about Beneficiary IRA & Investing?
Had a quick question about this because my end goal is to either get as much as I can cash in the bank, or where I can pay less in taxes/tax-free.
I only have less than 2 days left before the new year, so what would you suggest would be the best way go about things?
My income this year is around:
Job $5050
Misc 1099 side business $4500 (about $1800 in expenses)
RMD $630
Would the new tax bill apply to me doing my taxes (standard deduction), and if so, what would be the most I could withdraw before paying taxes?
Or would it be better to go to Vanguard, open a Roth IRA, and send $3000-$5,550 to it? And would I be subject to taxes withdrawing the roth ira early, or only subject when I make interest from it?
I know its alot, and thanks everyone for the advice!
I only have less than 2 days left before the new year, so what would you suggest would be the best way go about things?
My income this year is around:
Job $5050
Misc 1099 side business $4500 (about $1800 in expenses)
RMD $630
Would the new tax bill apply to me doing my taxes (standard deduction), and if so, what would be the most I could withdraw before paying taxes?
Or would it be better to go to Vanguard, open a Roth IRA, and send $3000-$5,550 to it? And would I be subject to taxes withdrawing the roth ira early, or only subject when I make interest from it?
I know its alot, and thanks everyone for the advice!
- arcticpineapplecorp.
- Posts: 15013
- Joined: Tue Mar 06, 2012 8:22 pm
Re: Question about Beneficiary IRA & Investing?
the new tax bill won't affect anything you do by the end of 2017. The new rules are for 2018 income, not 2017.WillingtoLearn88 wrote: ↑Fri Dec 29, 2017 1:07 pm Had a quick question about this because my end goal is to either get as much as I can cash in the bank, or where I can pay less in taxes/tax-free.
I only have less than 2 days left before the new year, so what would you suggest would be the best way go about things?
My income this year is around:
Job $5050
Misc 1099 side business $4500 (about $1800 in expenses)
RMD $630
Would the new tax bill apply to me doing my taxes (standard deduction), and if so, what would be the most I could withdraw before paying taxes?
Or would it be better to go to Vanguard, open a Roth IRA, and send $3000-$5,550 to it? And would I be subject to taxes withdrawing the roth ira early, or only subject when I make interest from it?
I know its alot, and thanks everyone for the advice!
You have until tax day 2018 (4/17/18) to make a roth contribution for 2017. But if you make a withdrawal from your inherited IRA in 2018 it will count as income (taxable) in 2018, not 2017. Hope that makes sense. Guess what I'm saying is I'm not sure how you'll get this accomplished by the end of 2017 since there's no business days left in 2017. So whatever you do will not affect your 2017 income taxes but will affect your 2018 income taxes (that would be due April 2019).
Now I'm not sure what you're talking about withdrawing early from the Roth IRA? What Roth IRA? The one you're planning on setting up? I was under the impression the withdrawals you want to make are from the inherited IRA which I assumed were tax deferred. Is that not correct? Was it an inherited Roth IRA?
If it's a traditional ira then there are taxes due on withdrawals. If it's an inherited Roth IRA there are no taxes due, but RMDs for you the beneficiary.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
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Re: Question about Beneficiary IRA & Investing?
Thanks for chiming in. I'm starting to understand it better now.
And yes, you were correct, its from an Inherited IRA which is tax deferred.
What I was trying to see is what's the most I could withdraw from it before 2018 before I'd owe income taxes (assuming I get a $6350 standard deduction and a $4000 exemption since no one is claiming me)?
And yes, I meant the was planning to set up a roth ira, and sending a portion of funds to it, and withdrawing it early (but I believe I'd be subject to a penalty).
Thanks for all the help
And yes, you were correct, its from an Inherited IRA which is tax deferred.
What I was trying to see is what's the most I could withdraw from it before 2018 before I'd owe income taxes (assuming I get a $6350 standard deduction and a $4000 exemption since no one is claiming me)?
And yes, I meant the was planning to set up a roth ira, and sending a portion of funds to it, and withdrawing it early (but I believe I'd be subject to a penalty).
Thanks for all the help
- arcticpineapplecorp.
- Posts: 15013
- Joined: Tue Mar 06, 2012 8:22 pm
Re: Question about Beneficiary IRA & Investing?
Couple things to clarify to make sure we're on the same page.WillingtoLearn88 wrote: ↑Fri Dec 29, 2017 8:56 pm Thanks for chiming in. I'm starting to understand it better now.
And yes, you were correct, its from an Inherited IRA which is tax deferred.
What I was trying to see is what's the most I could withdraw from it before 2018 before I'd owe income taxes (assuming I get a $6350 standard deduction and a $4000 exemption since no one is claiming me)?
And yes, I meant the was planning to set up a roth ira, and sending a portion of funds to it, and withdrawing it early (but I believe I'd be subject to a penalty).
Thanks for all the help
1.There's no limit on the amount that you can convert to a Roth. But you will owe tax on the amount you convert. I.E. you can contribute $5500 if you have that much or more in earnings, but you can also convert more from a tax deferred IRA into a Roth (which would also be subject to tax). source: https://www.google.com/search?q=how+muc ... fox-b-1-ab
2. Contributions to a Roth are allowed to be withdrawn tax and penalty free at any time. Only if you withdraw interest/earnings on those contributions would you be subject to tax and penalties if taken out prior to 59 1/2. source: https://www.google.com/search?q=penalty ... fox-b-1-ab
so as an example say you put $5500 in a Roth 1/2/18 and your investment goes up 10% by the end of 2018 and at the start of 2019 the Roth is worth $6050 ($5500 X 1.10 = $6050). In 2019, you can take out the $5500 you originally contributed (tax/penalty free) but no more or else you'll owe tax and penalties on the amount above the $5500 you contributed. Make sense?
If you take the 34K from the inherited IRA you can convert the whole thing to the Roth IRA but you will owe tax on the entire amount converted. Using the same example as above but assuming converting the entire tax deferred IRA into Roth say 1/2/18 you convert $34,000 to Roth IRA (and pay the tax owed). Then it goes up 10% in 2018 and at the end of 2018 (and beginning of 2019) it's worth $37,400 ($34,000 X 1.10 = $37,400). You can take out the $34,000 in 2019 and owe no tax (because you already paid it when you converted in 2018) but the other amount $3,400 would need to remain because those are earnings. If you withdrew the $37,400 (entire amount) in 2019 you'd owe tax and penalties only on the $3,400 in earnings on the original contribution of $34,000. Make sense?
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
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Re: Question about Beneficiary IRA & Investing?
Oh yes, that makes much better sense now.
I had a few questions just to see in a "what if scenario":
1.)Based on my income this year, what if I withdrew $4000 from the inherited IRA (withdrew to cash) before 2018? Would I owe taxes on the $4000 I withdrew based on my income?
2.) Let's assume I roll 30k over into a Roth IRA, and it appreciates 10% ($33,000) in 2018. Then I decide to withdraw 30k from it, I wouldn't be subject to taxes/penalties? So basically I am not subject to tax or penalties based on the original contribution?
Thanks much for all the help btw. You've made my day!!!
I had a few questions just to see in a "what if scenario":
1.)Based on my income this year, what if I withdrew $4000 from the inherited IRA (withdrew to cash) before 2018? Would I owe taxes on the $4000 I withdrew based on my income?
2.) Let's assume I roll 30k over into a Roth IRA, and it appreciates 10% ($33,000) in 2018. Then I decide to withdraw 30k from it, I wouldn't be subject to taxes/penalties? So basically I am not subject to tax or penalties based on the original contribution?
Thanks much for all the help btw. You've made my day!!!
- arcticpineapplecorp.
- Posts: 15013
- Joined: Tue Mar 06, 2012 8:22 pm
Re: Question about Beneficiary IRA & Investing?
1. if you withdrew $4000 then your 2017 total income would be (some of this may/may not be right. You may have expenses/deductions for the side business so I'm not sure if the $4,500 is net income or gross). Oh, I see it's probably not gross, you had expenses. Well, let's say it's net (worst case scenario, which it's probably not) but we have nothing else to go on. If we assume it's net income from side business (after all self employment business deductions):WillingtoLearn88 wrote: ↑Sat Dec 30, 2017 8:29 pm Oh yes, that makes much better sense now.
I had a few questions just to see in a "what if scenario":
1.)Based on my income this year, what if I withdrew $4000 from the inherited IRA (withdrew to cash) before 2018? Would I owe taxes on the $4000 I withdrew based on my income?
2.) Let's assume I roll 30k over into a Roth IRA, and it appreciates 10% ($33,000) in 2018. Then I decide to withdraw 30k from it, I wouldn't be subject to taxes/penalties? So basically I am not subject to tax or penalties based on the original contribution?
Thanks much for all the help btw. You've made my day!!!
$5k grossed in job (w2 sent to me)
$4.5k grossed in side business (1099-misc are sent to me) I also had a lot of expenses to run this like mileage, tools, etc. Spent well over 2k just this year.
$630 in beneIRA RMD
$4000 additional withdrawal from beneIRA
$10,130 total 2017 income
The standard deduction for 2017 is $6350 and the personal exemption is $4050 (if filing single and not a dependent on another's return).That's $10,400 in deductions. The deductions wipe out your income completely and $0 tax will be owed. I believe that was the original jist of this and what others were suggesting because of your low income this year.
Problem is, it's December 31. How are you able to withdraw today (Sunday) the $4000? If you wait until tomorrow it will count as income for 2018, not 2017 and then tax you owe is dependent on what your income is next year.
2. Let's say you are able to roll over $30,000 (instead of withdrawing $4000) before the end of 2017 (highly unlikely). Then your 2017 income is:
$5k grossed in job (w2 sent to me)
$4.5k grossed in side business (1099-misc are sent to me) I also had a lot of expenses to run this like mileage, tools, etc. Spent well over 2k just this year.
$630 in beneIRA RMD
$30,000 additional rollover from beneIRA to Roth
$40,130 total 2017 income
-$6350 standard deduction
-$4050 personal exemption
$29,730 taxable income for 2017 which results in taxable income of $2386 owed based on http://taxplancalculator.com/calc
If you roll over $30,000 from your beneIRA to Roth in 2018 that will be taxable to the extent of any other income in 2018 and change in tax rate next year.
You'll save more in taxes from doing the rollover in 2018 because some of that income will be taxed at 12% instead of 15% and the standard deduction will go up (which means another $1350 of your income is untaxed in 2018 that would be taxed in 2017). But it is/was also good to rollover the amount $4000 that brought you up to the amount of income that equals your 2017 standard deduction and personal exemption, so that you'd not be paying any tax at all on the $4000 taken out of the beneIRA this year. I just don't see how you can get that done because it's a sunday.
But if your income remains low next year (under $12,000 including RMD) then you can rollover an additional amount from the beneIRA that brings all your income up to $12,000 and owe no income tax at all. And if you rollover more than that, say so your total income is $21,525 (the highest point of 10% taxable) then you would only owe 10% tax on the amounts (after standard deduction of $12,000). That would be $952 total tax:
$21,525 total 2018 income
-$12,000 standard deduction
$9525 total income after deductions. You pay 10% tax on that = $952 total
Any income above $21,525 would be taxed at 12% in 2018. Play around with the following to see what you'd owe:
http://taxplancalculator.com/
Has this been helpful at all?
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Re: Question about Beneficiary IRA & Investing?
Sure, if you expect your income to put you in a higher tax bracket in the future and/or if you have a good use for the money now while you are in a low tax bracket, it makes logical sense to take larger withdrawals now. Especially if you convert to Roth and keep the funds invested.
The behavioral risk is that you will use the liquidity to leave very beyond your means and fritter it away. If you don't trust yourself not to do that, then it may make sense to keep the money invested where it is.
The behavioral risk is that you will use the liquidity to leave very beyond your means and fritter it away. If you don't trust yourself not to do that, then it may make sense to keep the money invested where it is.
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Re: Question about Beneficiary IRA & Investing?
@arcticpineapplecorp. you are amazing! Thanks
I'm kind of in standstill now, I'm wondering with my income being this low, should I take out that $4k today, and then I can rollover the remainder next year into a roth ira? My brokerage will let me request a check online today, and I could cash it next week, so maybe that wouldnt be an issue?
Or keep the 4k in there, roll it all to a roth ira, research and invest a portion of that 34k and learn the market, and then assess and adjust based on my risk and where I project I will get great returns?
I'm kind of in standstill now, I'm wondering with my income being this low, should I take out that $4k today, and then I can rollover the remainder next year into a roth ira? My brokerage will let me request a check online today, and I could cash it next week, so maybe that wouldnt be an issue?
Or keep the 4k in there, roll it all to a roth ira, research and invest a portion of that 34k and learn the market, and then assess and adjust based on my risk and where I project I will get great returns?
- Earl Lemongrab
- Posts: 7270
- Joined: Tue Jun 10, 2014 1:14 am
Re: Question about Beneficiary IRA & Investing?
Sometimes decisions get made for us. I doubt it would be possible to withdraw in 2017. It's a Sunday, and it's unlikely your custodian could process a transaction today.WillingtoLearn88 wrote: ↑Sun Dec 31, 2017 11:33 am I'm kind of in standstill now, I'm wondering with my income being this low, should I take out that $4k today
Re: Question about Beneficiary IRA & Investing?
I believe you are out of time for any withdrawals in 2017. Maybe you could call and verify.
I don't believe you can do Roth conversions with an inherited IRA, if that is what you have.
You can, however, take out up to 5500 from your inherited IRA, and use that money, or any money, to put into a Roth IRA for 2017 (deadline tax-day in April). You could do this each year you earn at least that much. That would give you tax-free growth, and access to contributions, not gains, at any time if you really need it, and no tax on anything after age 49.5.
Up to a 2000 contribution to any retirement program could make you eligible for a tax break, but only if you owe any tax. Only by doing a test tax return will you know for sure. In fact, calculating your taxes early will be very useful for you to figure out how much you can take out, etc. Things get complicated with possible earned income tax credit (refundable), saver's credit (non-refundable), etc. There are too many moving pieces to your tax return for someone to give you exact numbers.
You will have to pay about 15% SS/Medicare tax on net self-employment income. Then you can also deduct some part of that, maybe 1/2 of the tax, on page one of your 1040 to lower your income a bit.
Edit: as for investing, simple is great. Trading rather than buy and hold is more likely to be a mistake. The Wiki here has Getting Started with lots of info. Here is a short pdf booklet, just 16 pages, that is written by an expert just for new investors. It has lots of good things to think about:
https://www.etf.com/docs/IfYouCan.pdf
I don't believe you can do Roth conversions with an inherited IRA, if that is what you have.
You can, however, take out up to 5500 from your inherited IRA, and use that money, or any money, to put into a Roth IRA for 2017 (deadline tax-day in April). You could do this each year you earn at least that much. That would give you tax-free growth, and access to contributions, not gains, at any time if you really need it, and no tax on anything after age 49.5.
Up to a 2000 contribution to any retirement program could make you eligible for a tax break, but only if you owe any tax. Only by doing a test tax return will you know for sure. In fact, calculating your taxes early will be very useful for you to figure out how much you can take out, etc. Things get complicated with possible earned income tax credit (refundable), saver's credit (non-refundable), etc. There are too many moving pieces to your tax return for someone to give you exact numbers.
You will have to pay about 15% SS/Medicare tax on net self-employment income. Then you can also deduct some part of that, maybe 1/2 of the tax, on page one of your 1040 to lower your income a bit.
Edit: as for investing, simple is great. Trading rather than buy and hold is more likely to be a mistake. The Wiki here has Getting Started with lots of info. Here is a short pdf booklet, just 16 pages, that is written by an expert just for new investors. It has lots of good things to think about:
https://www.etf.com/docs/IfYouCan.pdf
- arcticpineapplecorp.
- Posts: 15013
- Joined: Tue Mar 06, 2012 8:22 pm
Re: Question about Beneficiary IRA & Investing?
BL is right, you can't do a rollover from a beneIRA into a Roth. My bad. I was thinking it was like converting from trad IRA to Roth IRA, but that is not the case. This is confirmed here:
https://www.schwab.com/resource-center/ ... a-now-what
BL is right. You can take up to $5500 each year out of the beneIRA even though your RMD is only $630 or so each year, and use that money to fully fund your Roth.
If you had done this before the end of this year, either very little or possibly none would have been taxable (this depended on whether your adjusted gross before standard deduction and personal exemption exceeded $10,400 total).
Now that 2017 is passed, you can still take out $5500 from the beneIRA in 2018 but contribute that $5500 to a Roth IRA for 2017 as long as you do so before April 17, 2018. You may owe tax on that $5500 for 2018 depending on how much other income you have in 2018, but the $5500 will be part of your total 2018 income.
Then you could take out another $5500 from your beneIRA in 2018 and contribute that to your Roth IRA for your 2018 contribution. You would owe tax on any amount of income exceeding $12,000 (which would include $5500, $5500 and all other income earned in 2018).
As BL said, if you're going to take money out of the beneIRA, it's best to make sure you fund your Roth IRA. Don't pass that opportunity up since you're in a low tax bracket and have a long time to compound the money.
You could also look into an individual 401k or SEP IRA if you don't have access to one (this is in addition to the Roth):
https://investor.vanguard.com/what-we-o ... Link=facet
And don't forget about the saver's credit.
https://www.schwab.com/resource-center/ ... a-now-what
BL is right. You can take up to $5500 each year out of the beneIRA even though your RMD is only $630 or so each year, and use that money to fully fund your Roth.
If you had done this before the end of this year, either very little or possibly none would have been taxable (this depended on whether your adjusted gross before standard deduction and personal exemption exceeded $10,400 total).
Now that 2017 is passed, you can still take out $5500 from the beneIRA in 2018 but contribute that $5500 to a Roth IRA for 2017 as long as you do so before April 17, 2018. You may owe tax on that $5500 for 2018 depending on how much other income you have in 2018, but the $5500 will be part of your total 2018 income.
Then you could take out another $5500 from your beneIRA in 2018 and contribute that to your Roth IRA for your 2018 contribution. You would owe tax on any amount of income exceeding $12,000 (which would include $5500, $5500 and all other income earned in 2018).
As BL said, if you're going to take money out of the beneIRA, it's best to make sure you fund your Roth IRA. Don't pass that opportunity up since you're in a low tax bracket and have a long time to compound the money.
You could also look into an individual 401k or SEP IRA if you don't have access to one (this is in addition to the Roth):
https://investor.vanguard.com/what-we-o ... Link=facet
And don't forget about the saver's credit.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |