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How to invest Inherited IRA

Posted: Fri May 22, 2020 2:49 pm
by Jboglecmu
Hello,

I just inherited an IRA from an uncle who recently passed away. I have about $50,000 in it, and I'm wondering what the best way to invest this would be. My husband and I have an AGI of about $190,000, so we are right on the cusp of the 22-24 percent tax brackets. Since we have to have it emptied in 10 years, I'm not sure how to invest. My main questions are: Should it be invested conservatively since it is only 10 years? Just take the distributions and put it in a Roth? How do we minimize taxes? Is there anything else to know about an Inherited IRA? My initial thought is just adjust our pretax accounts to invest the same as the distribution from the Inherited IRA so it basically offsets the taxable income. Does that make sense? Thanks for any help.

Re: How to invest Inherited IRA

Posted: Fri May 22, 2020 2:58 pm
by David Jay
I am presuming that your Uncle passed in 2020, so you are subject to the new rules - as you said: 10 years to withdraw.

The best way to minimize taxes if you are not "maxing out" your tax advantaged space is to increase your contributions by the same amount as the 10% withdrawal. Then you will have no increase in taxes. You still need to pay taxes on the withdrawal but your taxes on work income will go down the same amount.

If you have a moderate income, I would not let the tail (taxes) wag the dog (your future). If you are in the 12% marginal tax bracket, I would consider paying the tax and putting the money into a Roth if you (or your spouse) qualify for Roth contributions. Tax rates are scheduled to rise so the 12% tax bracket will become the 15% tax bracket in a few years. Also, Roth can do many things for you in early retirement that tax-deferred savings can't do. Right now I am withdrawing some of my living expenses from Roth to keep my income under the limit for an ACA health care credit. (I am retired but not yet age 65)

Re: How to invest Inherited IRA

Posted: Fri May 22, 2020 3:00 pm
by livesoft
It should just be invested according to the Asset Allocation plan of the rest of your portfolio There is nothing special about inherited money like this.

Re: How to invest Inherited IRA

Posted: Fri May 22, 2020 3:12 pm
by lakpr
Since the inherited IRA has to be emptied within 10 years, and withdrawal from it is going to be taxed at CURRENT marginal tax income, the first thing one should do is to squash the growth completely in it. Make the Inherited IRA the repository for the maximum bond funds that your allocation dictates.

So if you already have something like $400k in your portfolio, and your target allocation is 70:30, say ... that would mean $120k was allocated to bonds prior to the inheritance. With an inheritance of $50k, your overall portfolio is $450k, 30% of this is $135k should be allocated to bonds. So have the inheritance $50k completely bonds, the remainder $85k bonds held elsewhere in your portfolio along with the rest being in equities.

Then start withdrawing from the Inherited IRA 1/10th of the inheritance first year, 1/9th of remaining balance in the second year, 1/8th of the remaining balance the third year ... etc.

Re: How to invest Inherited IRA

Posted: Fri May 22, 2020 3:28 pm
by printer86
Well, it's got to go somewhere. We parked DW's similar sized inherited IRA in the Vanguard LifeStrategy Conservative Growth Fund.

Re: How to invest Inherited IRA

Posted: Fri May 22, 2020 4:10 pm
by sycamore
Couple of thoughts... 1) there is some info in the wiki at https://www.bogleheads.org/wiki/Inheriting_an_IRA. One thing to check if your uncle had an basis in the IRA (i.e., made non-deductible contributions). If there was any basis, it carries over to you and it would impact how much of a distribution is taxable.

2) How close are you and your husband to 70 1/2? Is it within 10 years? You could make a qualified charitable distribution (QCD) from the inherited IRA. Doing so would help minimize taxes.

Re: How to invest Inherited IRA

Posted: Fri May 22, 2020 5:23 pm
by CyclingDuo
Jboglecmu wrote:
Fri May 22, 2020 2:49 pm
I just inherited an IRA from an uncle who recently passed away. I have about $50,000 in it, and I'm wondering what the best way to invest this would be. My husband and I have an AGI of about $190,000, so we are right on the cusp of the 22-24 percent tax brackets. Since we have to have it emptied in 10 years, I'm not sure how to invest. My main questions are: Should it be invested conservatively since it is only 10 years?


You won't have to take any RMD's this year due to the CARES Act. So it can grow until December 31st of 2021. I would want to get as much return as possible out of it over the next ten years, so would go with your asset allocation you are using for your overall portfolio.
Jboglecmu wrote:
Fri May 22, 2020 2:49 pm
Just take the distributions and put it in a Roth? How do we minimize taxes?


That's one way to fund a Roth IRA. As mentioned upthread, you could max out all of your pre-tax deductions in retirement plans at work (use the over age 50 catch up if you are over 50) and take the RMD from this inherited IRA as "replacement" income. Sort of a shell game on how to move it from where it is into your own retirement accounts, but a well used strategy.
Jboglecmu wrote:
Fri May 22, 2020 2:49 pm
Is there anything else to know about an Inherited IRA? My initial thought is just adjust our pretax accounts to invest the same as the distribution from the Inherited IRA so it basically offsets the taxable income. Does that make sense? Thanks for any help.
Correct. Worth doing in our opinion. Depends on how large it is and if you can move it all using that method over the next ten years, but worth giving it a go.

CyclingDuo

Re: How to invest Inherited IRA

Posted: Fri May 22, 2020 5:35 pm
by Jboglecmu
Thanks everyone! We are both in our late 30s. We currently dont max all space in pretax accounts. We have little to no need to use this money short term.

Re: How to invest Inherited IRA

Posted: Fri May 22, 2020 5:50 pm
by lakpr
Jboglecmu wrote:
Fri May 22, 2020 5:35 pm
Thanks everyone! We are both in our late 30s. We currently dont max all space in pretax accounts. We have little to no need to use this money short term.
If this is indeed the case, then you have an excellent opportunity to "stretch" this inherited IRA. Indirectly.

Max out all your pre-tax accounts. Obviously this would decrease your taxes, as well as your paycheck take-home pay.
Withdraw your living expenses from the Inherited IRA, that would increase your taxes.

For the net result of: no change in your lifestyle or monthly expenses, no change in taxes, but money has moved from an account beset by a rule to exhaust it within a 10-year limit, into another account where you can leave it until you reach age 59.5. Instead of 10 year limit, now you have at least 20 year, perhaps longer limit.

Right-pocket / left-pocket strategy. Why does it matter where the money that you use for your monthly expenses comes from?

Re: How to invest Inherited IRA

Posted: Fri May 22, 2020 6:23 pm
by billfromct
Don't know if anyone mentioned it, but make sure you have Federal & state income taxes withheld so you get a surprise come tax filing time.

bill

Re: How to invest Inherited IRA

Posted: Fri May 22, 2020 8:39 pm
by sycamore
billfromct wrote:
Fri May 22, 2020 6:23 pm
Don't know if anyone mentioned it, but make sure you have Federal & state income taxes withheld so you get a surprise come tax filing time.

bill
Or so you don't get a surprise :)

Re: How to invest Inherited IRA

Posted: Fri May 22, 2020 9:48 pm
by Jboglecmu
Good call!

Re: How to invest Inherited IRA

Posted: Fri May 22, 2020 10:00 pm
by grabiner
billfromct wrote:
Fri May 22, 2020 6:23 pm
Don't know if anyone mentioned it, but make sure you have Federal & state income taxes withheld so you [don't] get a surprise come tax filing time.
You need to do this even if you are using the money to contribute to your 401(k). If you withdraw $10,000 from the IRA and contribute $10,000 more to your 401(k), your tax due will not change, but your employer will withhold based on a salary $10,000 less. Thus you need to file a Form W-4 indicating $10,000 of additional income in order to get the total amount withheld as needed.

Do the same for your state withholding, if appropriate; you may need to check the state form for how to adjust withholding for non-salary income.

Re: How to invest Inherited IRA

Posted: Wed May 27, 2020 11:58 am
by Jboglecmu
When paying taxes on a distribution, is it best to make a direct tax payment to the IRS? Is this better than trying to get my employer to withhold more? If I just wait until I submit a tax return for everything to be settled, I would probably owe a penalty, right?

Re: How to invest Inherited IRA

Posted: Wed May 27, 2020 12:24 pm
by lakpr
Jboglecmu wrote:
Wed May 27, 2020 11:58 am
When paying taxes on a distribution, is it best to make a direct tax payment to the IRS? Is this better than trying to get my employer to withhold more? If I just wait until I submit a tax return for everything to be settled, I would probably owe a penalty, right?
It's safer to have your employer withhold more from your taxes. Yes you can also pay estimated taxes by the quarterly due date. But the IRS deems payments made through payroll, irrespective of when they were actually made, as having been made uniformly throughout the year. You can leverage this to your advantage.

Re: How to invest Inherited IRA

Posted: Wed May 27, 2020 12:35 pm
by cherijoh
Jboglecmu wrote:
Fri May 22, 2020 2:49 pm
Hello,

I just inherited an IRA from an uncle who recently passed away. I have about $50,000 in it, and I'm wondering what the best way to invest this would be. My husband and I have an AGI of about $190,000, so we are right on the cusp of the 22-24 percent tax brackets. Since we have to have it emptied in 10 years, I'm not sure how to invest. My main questions are: Should it be invested conservatively since it is only 10 years? Just take the distributions and put it in a Roth? How do we minimize taxes? Is there anything else to know about an Inherited IRA? My initial thought is just adjust our pretax accounts to invest the same as the distribution from the Inherited IRA so it basically offsets the taxable income. Does that make sense? Thanks for any help.
Just to make it clear, you cannot do a Roth conversion on a distribution from an Inherited IRA. Now if you are eligible to make a regular Roth contribution (and are not already doing so because you are prioritizing your workplace plan), then certainly you could use the cash to fund your annual Roth contribution.

Re: How to invest Inherited IRA

Posted: Wed May 27, 2020 12:41 pm
by sycamore
lakpr wrote:
Wed May 27, 2020 12:24 pm
Jboglecmu wrote:
Wed May 27, 2020 11:58 am
When paying taxes on a distribution, is it best to make a direct tax payment to the IRS? Is this better than trying to get my employer to withhold more? If I just wait until I submit a tax return for everything to be settled, I would probably owe a penalty, right?
It's safer to have your employer withhold more from your taxes. Yes you can also pay estimated taxes by the quarterly due date. But the IRS deems payments made through payroll, irrespective of when they were actually made, as having been made uniformly throughout the year. You can leverage this to your advantage.
Agree with above. That's what I did to deal with late-in-the-year stock or RSU sales sometimes. By October I had a better idea of any shortfall in taxes and could adjust my withholding. Side note: I've had good luck with my employers and payroll processors being quick to apply my withholding changes - I know a couple times a friend's employer HR didn't deal with withholding change until after a couple payroll periods. I.e., don't wait 'til the last minute.