Drawing down Inherited IRA vs. Roth Conversions

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
bestplans
Posts: 82
Joined: Wed Mar 12, 2014 4:20 pm

Drawing down Inherited IRA vs. Roth Conversions

Post by bestplans » Tue Jul 09, 2019 8:21 am

Assuming one has ample tax bracket "space" during early (pre-65) retirement to draw down an inherited stretch (non spousal) IRA or convert TIRAs to Roth, is it generally advisable to prioritize the Roth conversions (vs. drawing down more than the RMDs in the inherited IRA) to maximize tax free growth?

cherijoh
Posts: 5813
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Drawing down Inherited IRA vs. Roth Conversions

Post by cherijoh » Tue Jul 09, 2019 8:33 am

bestplans wrote:
Tue Jul 09, 2019 8:21 am
Assuming one has ample tax bracket "space" during early (pre-65) retirement to draw down an inherited stretch (non spousal) IRA or convert TIRAs to Roth, is it generally advisable to prioritize the Roth conversions (vs. drawing down more than the RMDs in the inherited IRA) to maximize tax free growth?
I find this an odd question. You seem to be focusing solely on the taxes paid in the current year, which is a bad approach IMO. You are letting the tail (taxes) wag the dog (your investment plan).

Do you need the money to spend? If not, then why would you want to take more than your required distribution from the inherited IRA? You would be reducing your tax-deferred space and reinvesting in taxable.

If you need the funds to live on, then Roth conversions don't help you achieve that goal.

Shamb3
Posts: 52
Joined: Mon Apr 09, 2018 8:58 pm

Re: Drawing down Inherited IRA vs. Roth Conversions

Post by Shamb3 » Tue Jul 09, 2019 9:07 am

I think your RMDs are based on the age of the person you inherited it from correct?
So the percentages you are required to withdraw from that inherited IRA will get larger and larger sooner.

So I would prioritize getting money out of that IRA before my personal one.

Topic Author
bestplans
Posts: 82
Joined: Wed Mar 12, 2014 4:20 pm

Re: Drawing down Inherited IRA vs. Roth Conversions

Post by bestplans » Tue Jul 09, 2019 11:28 am

cherijoh wrote:
Tue Jul 09, 2019 8:33 am
bestplans wrote:
Tue Jul 09, 2019 8:21 am
Assuming one has ample tax bracket "space" during early (pre-65) retirement to draw down an inherited stretch (non spousal) IRA or convert TIRAs to Roth, is it generally advisable to prioritize the Roth conversions (vs. drawing down more than the RMDs in the inherited IRA) to maximize tax free growth?
I find this an odd question. You seem to be focusing solely on the taxes paid in the current year, which is a bad approach IMO. You are letting the tail (taxes) wag the dog (your investment plan).

Do you need the money to spend? If not, then why would you want to take more than your required distribution from the inherited IRA? You would be reducing your tax-deferred space and reinvesting in taxable.

If you need the funds to live on, then Roth conversions don't help you achieve that goal.
Hi, yes I should clarify. I do not need the funds (from either source) to live on. So the question pertains to which long term strategy is best.

Topic Author
bestplans
Posts: 82
Joined: Wed Mar 12, 2014 4:20 pm

Re: Drawing down Inherited IRA vs. Roth Conversions

Post by bestplans » Tue Jul 09, 2019 11:33 am

Shamb3 wrote:
Tue Jul 09, 2019 9:07 am
I think your RMDs are based on the age of the person you inherited it from correct?
So the percentages you are required to withdraw from that inherited IRA will get larger and larger sooner.

So I would prioritize getting money out of that IRA before my personal one.
The RMDs from the inherited IRA are based on my age now (because it's a stretch IRA). So the question is what is best long term in terms of my distribution strategy to take advantage of low bracket space now; that is, to draw MORE than the RMDs from the inherited IRA vs. Roth conversions.

Digital Dave
Posts: 49
Joined: Sat Mar 10, 2007 7:47 pm
Location: Western New York

Re: Drawing down Inherited IRA vs. Roth Conversions

Post by Digital Dave » Tue Jul 09, 2019 12:15 pm

After thinking about this for a short time, I think I would advise to do a Roth conversion on your own IRA and let the stretch IRA go until you have to take distributions there. The only thing that would cause me to think otherwise is if you were getting a subsidy from ACA. At 70.5 years old, you would have less RMD in your IRA. Your own Roth converted portion would grow tax free forever.
Having said that, I would say that I don't know a lot about how stretch IRA's are handled. I never inherited one.
At 69 yo, I'm doing a Roth conversion this year, up to the top of my bracket. My IRA is modest, so next year, after the RMD, I'll do another Roth conversion. I don't expect to ever need the money in my IRA or Roth, but my heirs will have fewer tax headaches.
Investing in Mutual Funds, ETF's, P2P Lending, Forever Stamps and Bittulips.

User avatar
Flobes
Posts: 1113
Joined: Tue Feb 16, 2010 12:40 am

Re: Drawing down Inherited IRA vs. Roth Conversions

Post by Flobes » Tue Jul 09, 2019 2:53 pm

bestplans wrote:
Tue Jul 09, 2019 8:21 am
Assuming one has ample tax bracket "space" during early (pre-65) retirement to draw down an inherited stretch (non spousal) IRA or convert TIRAs to Roth, is it generally advisable to prioritize the Roth conversions (vs. drawing down more than the RMDs in the inherited IRA) to maximize tax free growth?
RMD requirements from your inherited IRA are a present obligation now. They will likely require a greater percentage of distribution than your own RMDs from your own accounts. By how much is partially determined by how long you've been the beneficiary of the RMD.

RMDs are calculated by dividing year-enid balance by life expectancy.

Example: I am 68. RMD for my BeneIRA, which starts when you inherit and changes by 1 each year, is now based on life expectancy of 17 years (based on number of years I've held it). If I inherited it now, my life expectancy would be 18.6. But when I start RMDs >70.5, life expectancy is 27.4. BeneIRA will continue to change by 1 each year, while my own future RMDs will increase by only .9.

Remember, you have the option of taking QCDs (Qualified Charitable Distributions) after you turn 70.5 from either your Inherited IRA or your own IRA in lieu of some or all of your RMD.

It is better for your heirs to inherited your IRA than your Inherited IRA. And a tax-efficient taxable account can provide growth with limited tax consequence for you, and step-up benefits (rather than RMDs) for your heirs.

So if you're going to take one or the other, it my be more advantageous to syphon from the Inherited IRA rather than do Roth conversions from your IRAs if you want to reduce future total RMDs. Less RMDs will leave more money in your accounts for tax-deferred (not tax-free) growth potential.

Whether or not it makes sense for you to take more than the RMD from your Inherited IRA and/or do Roth conversions is a different question.

cherijoh
Posts: 5813
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Drawing down Inherited IRA vs. Roth Conversions

Post by cherijoh » Tue Jul 09, 2019 4:45 pm

Shamb3 wrote:
Tue Jul 09, 2019 9:07 am
I think your RMDs are based on the age of the person you inherited it from correct?
So the percentages you are required to withdraw from that inherited IRA will get larger and larger sooner.

So I would prioritize getting money out of that IRA before my personal one.
No, the OP mentioned stretch IRA so it is based on OP's life expectancy. If you inherit an already inherited IRA THEN it would be based on life expectancy of the person from whom you inherited it.

mattshwink
Posts: 350
Joined: Mon Sep 21, 2015 10:01 am

Re: Drawing down Inherited IRA vs. Roth Conversions

Post by mattshwink » Tue Jul 09, 2019 5:07 pm

bestplans wrote:
Tue Jul 09, 2019 8:21 am
Assuming one has ample tax bracket "space" during early (pre-65) retirement to draw down an inherited stretch (non spousal) IRA or convert TIRAs to Roth, is it generally advisable to prioritize the Roth conversions (vs. drawing down more than the RMDs in the inherited IRA) to maximize tax free growth?
It depends on the tax bracket you expect to be in once you hit 70.5 and your existing TIRA (and any non-roth 401ks) have to be drawn at age 70.5. If the RMDs are higher than your current tax bracket, then converting now makes sense. If not, don't convert. It makes more sense to convert if you don't have the money because it will reduce future taxes paid (for paying some taxes now).

Topic Author
bestplans
Posts: 82
Joined: Wed Mar 12, 2014 4:20 pm

Re: Drawing down Inherited IRA vs. Roth Conversions

Post by bestplans » Tue Jul 09, 2019 5:13 pm

Flobes wrote:
Tue Jul 09, 2019 2:53 pm
bestplans wrote:
Tue Jul 09, 2019 8:21 am
Assuming one has ample tax bracket "space" during early (pre-65) retirement to draw down an inherited stretch (non spousal) IRA or convert TIRAs to Roth, is it generally advisable to prioritize the Roth conversions (vs. drawing down more than the RMDs in the inherited IRA) to maximize tax free growth?
RMD requirements from your inherited IRA are a present obligation now. They will likely require a greater percentage of distribution than your own RMDs from your own accounts. By how much is partially determined by how long you've been the beneficiary of the RMD.

RMDs are calculated by dividing year-enid balance by life expectancy.

Example: I am 68. RMD for my BeneIRA, which starts when you inherit and changes by 1 each year, is now based on life expectancy of 17 years (based on number of years I've held it). If I inherited it now, my life expectancy would be 18.6. But when I start RMDs >70.5, life expectancy is 27.4. BeneIRA will continue to change by 1 each year, while my own future RMDs will increase by only .9.

Remember, you have the option of taking QCDs (Qualified Charitable Distributions) after you turn 70.5 from either your Inherited IRA or your own IRA in lieu of some or all of your RMD.

It is better for your heirs to inherited your IRA than your Inherited IRA. And a tax-efficient taxable account can provide growth with limited tax consequence for you, and step-up benefits (rather than RMDs) for your heirs.

So if you're going to take one or the other, it my be more advantageous to syphon from the Inherited IRA rather than do Roth conversions from your IRAs if you want to reduce future total RMDs. Less RMDs will leave more money in your accounts for tax-deferred (not tax-free) growth potential.

Whether or not it makes sense for you to take more than the RMD from your Inherited IRA and/or do Roth conversions is a different question.
OP here. Thanks this a good reminder that in terms of obligation and flexibility down the road I should strongly consider (of the two options) drawing more from the inherited IRA first.

User avatar
Artsdoctor
Posts: 3929
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Drawing down Inherited IRA vs. Roth Conversions

Post by Artsdoctor » Tue Jul 09, 2019 5:18 pm

bestplans wrote:
Tue Jul 09, 2019 8:21 am
Assuming one has ample tax bracket "space" during early (pre-65) retirement to draw down an inherited stretch (non spousal) IRA or convert TIRAs to Roth, is it generally advisable to prioritize the Roth conversions (vs. drawing down more than the RMDs in the inherited IRA) to maximize tax free growth?
If possible, you can do both.

You're going to be obligated to take the RMD from the inherited IRA but the amount is based on your age. Provided you're relatively young, you may as well take the least amount out of the inherited IRA. You will not be able to turn those RMDs into a Roth conversion.

On the other hand, you have the ability to convert whatever you'd like from the tIRA to the Roth so if you can do that and stay in a reasonable marginal tax bracket, that may be beneficial to you.

For those reasons, I'd take the RMD from the inherited IRA and no more, and then convert however much you feel comfortable with from your tIRA to your Roth.

User avatar
Flobes
Posts: 1113
Joined: Tue Feb 16, 2010 12:40 am

Re: Drawing down Inherited IRA vs. Roth Conversions

Post by Flobes » Tue Jul 09, 2019 6:10 pm

bestplans wrote:
Tue Jul 09, 2019 5:13 pm
OP here. Thanks this a good reminder that in terms of obligation and flexibility down the road I should strongly consider (of the two options) drawing more from the inherited IRA first.
OP, I sent you a Private Message.

rossington
Posts: 71
Joined: Fri Jun 07, 2019 2:00 am
Location: Florida Suncoast

Re: Drawing down Inherited IRA vs. Roth Conversions

Post by rossington » Tue Jul 09, 2019 6:11 pm

Artsdoctor wrote:
Tue Jul 09, 2019 5:18 pm
bestplans wrote:
Tue Jul 09, 2019 8:21 am
Assuming one has ample tax bracket "space" during early (pre-65) retirement to draw down an inherited stretch (non spousal) IRA or convert TIRAs to Roth, is it generally advisable to prioritize the Roth conversions (vs. drawing down more than the RMDs in the inherited IRA) to maximize tax free growth?
If possible, you can do both.

You're going to be obligated to take the RMD from the inherited IRA but the amount is based on your age. Provided you're relatively young, you may as well take the least amount out of the inherited IRA. You will not be able to turn those RMDs into a Roth conversion.

On the other hand, you have the ability to convert whatever you'd like from the tIRA to the Roth so if you can do that and stay in a reasonable marginal tax bracket, that may be beneficial to you.

For those reasons, I'd take the RMD from the inherited IRA and no more, and then convert however much you feel comfortable with from your tIRA to your Roth.
+1... AND reinvest the RMD tax efficiently or use it for part of your Roth contribution if you still have earned income.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

donall
Posts: 849
Joined: Tue Mar 13, 2012 6:45 am

Re: Drawing down Inherited IRA vs. Roth Conversions

Post by donall » Wed Jul 10, 2019 6:09 pm

The distribution from the inherited IRA Becomes taxable. The IRA converted to Roth becomes nontaxable. So I would take minimum distribution from inherited IRA and convert traditional IRA to Roth using whatever criteria determined to be best (taxes, financial plan, etc.) to determine amount.

Post Reply