Inherited IRA slowly funneled into Roth IRA

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fz583
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Joined: Thu Jan 14, 2016 2:50 pm

Inherited IRA slowly funneled into Roth IRA

Post by fz583 » Thu Jul 12, 2018 5:45 am

Hi, quick question that popped into my mind, I inherited an IRA in Dec. 2015, I have taken my RMD's since in March and take possession of them in my personal bank account then send them towards my Roth IRA at Vanguard, I choose the stretch option for the inherited IRA , I'm 42, my wife is 43 we both have Roth IRA's at Vanguard with roughly $27,500 in each account, total $55,000, both held in Vanguard target 2045, we both have 401's with a combined total of $260,000 mine held in Vanguard target 2040 and hers in a fidelity target 2040, and the inherited IRA has a balance of abut $60,000 held in Vanguard target 2040, all in we have about $375,000 currently in money saved for retirement way down the road, would it be wise and is it an option going forward to take $11,000 out of the inherited IRA every January and have it sent to my personal bank and then turn around and fund both Roth's? We had an effective Federal tax rate of 8.65% for 2017, adjusted gross income was 96,500, taxable was 68,500, we have a 6 yr old, I don't see our income going up much over the years, maybe a couple grand every year, this year she will max her 401, I will put in about 15,500 into mine, combined we have a savings rate going into our 401's including company match's of 29.25% so far I have funded the roths with money I inherited through a house sale, we have no debt other than a 30 yr mortgage at 4% with a balance of 150,000, eventually within 10 years or so there will be money from another house sale coming into the picture of $150-200,000, Thanks for your reply's.

aristotelian
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Re: Inherited IRA slowly funneled into Roth IRA

Post by aristotelian » Thu Jul 12, 2018 6:28 am

Yes, funding IRA is a good idea. The "source" of the funds is irrelevant, as long as withdrawing from your Inherited IRA doesn't put you in a higher tax bracket. You might follow the posting guidelines to get more specific advice.

Silk McCue
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Joined: Thu Feb 25, 2016 7:11 pm

Re: Inherited IRA slowly funneled into Roth IRA

Post by Silk McCue » Thu Jul 12, 2018 7:11 am

Edit: thanks to BarbK’s post I realized that I misremembered the rules on Inherited IRA’s for non spouses. My apologies for the error.

The fact is
If you inherit an IRA from someone other than your spouse, you cannot convert it to a Roth IRA. Assets in a 401(k) can be converted, but few do so.
Getting these funds out of the Inherited IRA and into Roth's is a good tax diversification plan. I would do this up to the top of the 12% bracket via either the current approach (if $11k accomplishes that goal) or instead doing the current approach for your wife's ROTH and doing a Roth conversion to fund yours.

By example - let's say paying taxes on $15,000 on the funds used for Roth contribution/conversion takes you to the top of the 12% bracket. You would pull $5500 from the Inherited IRA and contribute that to your wife's Roth IRA and then convert the remaining $9500 into your Roth. The sooner you transfer, by either means, to the Roth's the less money you spend towards taxes as the Inherited IRA funds are likely to grow during this process resulting in more funds becoming taxable. It is also within the realm of possibility that you could eventually move into the 22% bracket due to other circumstances before completely draining the Inherited IRA.

Cheers
Last edited by Silk McCue on Thu Jul 12, 2018 9:59 am, edited 1 time in total.

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CyclingDuo
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Re: Inherited IRA slowly funneled into Roth IRA

Post by CyclingDuo » Thu Jul 12, 2018 8:14 am

fz583 wrote:
Thu Jul 12, 2018 5:45 am
Hi, quick question that popped into my mind, I inherited an IRA in Dec. 2015, I have taken my RMD's since in March and take possession of them in my personal bank account then send them towards my Roth IRA at Vanguard, I choose the stretch option for the inherited IRA , I'm 42, my wife is 43 we both have Roth IRA's at Vanguard with roughly $27,500 in each account, total $55,000, both held in Vanguard target 2045, we both have 401's with a combined total of $260,000 mine held in Vanguard target 2040 and hers in a fidelity target 2040, and the inherited IRA has a balance of abut $60,000 held in Vanguard target 2040, all in we have about $375,000 currently in money saved for retirement way down the road, would it be wise and is it an option going forward to take $11,000 out of the inherited IRA every January and have it sent to my personal bank and then turn around and fund both Roth's? We had an effective Federal tax rate of 8.65% for 2017, adjusted gross income was 96,500, taxable was 68,500
Yes, your strategy is a sound one to move the RMD's from the IRA BDA to your Roth IRA's. Contributing as much as you are to your 401k's pre-tax, helps mitigate the additional ordinary income from the inherited IRA to boot.
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fz583
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Joined: Thu Jan 14, 2016 2:50 pm

Re: Inherited IRA slowly funneled into Roth IRA

Post by fz583 » Thu Jul 12, 2018 9:23 am

Thanks for the reply’s, I should add that I’m a Mass resident and have a state income tax of 5.1%, so that seems all the more reason to get the money into our roth’s over time.

BarbK
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Re: Inherited IRA slowly funneled into Roth IRA

Post by BarbK » Thu Jul 12, 2018 9:38 am

I think the way you are funnelling the Inherited IRA is correct; so max $11K per year between you and your wife.

I don't think you are allowed to convert an Inherited IRA to a Roth IRA.

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Peter Foley
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Re: Inherited IRA slowly funneled into Roth IRA

Post by Peter Foley » Thu Jul 12, 2018 10:00 am

I agree that the full funding of two Roth IRAs from the inherited IRA is a good plan if you are able to stay in the 12% bracket.

A potential bonus might be that one usually invests a Roth more aggressively than a traditional IRA. I would have the IRA invested in bonds as part of my bond allocation and the Roths in stock mutual funds.

Silk McCue
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Re: Inherited IRA slowly funneled into Roth IRA

Post by Silk McCue » Thu Jul 12, 2018 10:03 am

BarbK wrote:
Thu Jul 12, 2018 9:38 am
I don't think you are allowed to convert an Inherited IRA to a Roth IRA.
You are correct BarbK. I edited my post to reflect my error. Very non type A of me to do so.

I found this clarifying statement.
If you inherit an IRA from someone other than your spouse, you cannot convert it to a Roth IRA. Assets in a 401(k) can be converted, but few do so.
Cheers

soccerrules
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Re: Inherited IRA slowly funneled into Roth IRA

Post by soccerrules » Thu Jul 12, 2018 10:27 am

would there be benefit to restructuring your AA/portfolio to have a better tax strategy ? It doesn't seem like you would want a lot of growth in the Inherited IRA to only pay more taxes now. Slow the growth then when you take RMD's place the money into Roth's with US Stocks --then you want the tax free growth.

Roth - US Stocks , International (more growth, larger balance - no taxes)
Inherited IRA - Bonds -- slower growth (paying less taxes)
401/tIRA's - Target Fund or Bonds here as well

Then as you take RMD's from the Inherited IRA you can increase the Bond portion of 401K/IRA's to keep AA.
Don't let your outflow exceed your income or your upkeep will be your downfall.

fz583
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Joined: Thu Jan 14, 2016 2:50 pm

Re: Inherited IRA slowly funneled into Roth IRA

Post by fz583 » Thu Jul 12, 2018 12:00 pm

There probably is but I like the simplicity of out target accounts right now across our different accounts, I think I’m better off paying a smidge more ER to not have to rebalance and constantly watch what funds in what accounts are doing what, as I learn more I may end up with the beloved 3 fund. I just think I’m better off slowly getting the money out of the inherited ira and into our roths for 20-40 years tax free growth and also there wont be any RMD’s with the roth money, and also for inheritance reasons for my wife or daughter, inherited ira’s the second time around are not allowed to do the stretch option I believe. Thanks

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