Inherited IRA but I’m in top tax bracket?!?

[toys4tots16]

Hi all- I’m in need of some advice on what to do with an inherited IRA. One of my parents recently passed, and I’m getting ~$85k in an inherited IRA (traditional not Roth). With the secure act, I need to take the money out within 10 full calendar years, and the full amount will be taxable to me.

However, I’m in my early 30s and just starting to get to my peak earning potential. Total household income is ~$500k already which puts me at the 35% federal bracket and 7% state.

I have no need for the funds right now so what do I do? Take the full tax hit now and put the money in a brokerage account? Wait 10 years and pay tax on whatever the account has grown to (which could easily double)? Take a small amount out each year? I’m at a loss on this one, and advice is needed!

Couple of extra stats...
Home paid off
$1.5m in investments (combo of taxable, Roth, and 401k)
Maxing all retirement accounts annually
Adding another ~$200k to taxable each year

[anon_investor]

Take a small amount out each year?

I would pick this one.

[johnnyc321]

Disclaim it so it goes to another family member?

[TravelforFun]

Hi all- I’m in need of some advice on what to do with an inherited IRA. One of my parents recently passed, and I’m getting ~$85k in an inherited IRA (traditional not Roth). With the secure act, I need to take the money out within 10 full calendar years, and the full amount will be taxable to me.

However, I’m in my early 30s and just starting to get to my peak earning potential. Total household income is ~$500k already which puts me at the 35% federal bracket and 7% state.

I have no need for the funds right now so what do I do? Take the full tax hit now and put the money in a brokerage account? Wait 10 years and pay tax on whatever the account has grown to (which could easily double)? Take a small amount out each year? I’m at a loss on this one, and advice is needed!

Couple of extra stats...
Home paid off
$1.5m in investments (combo of taxable, Roth, and 401k)
Maxing all retirement accounts annually
Adding another ~$200k to taxable each year

Top federal tax rate now is 37% which is scheduled to return to 39.6% in 2026 unless Congress intervenes. First thing I would do is to set up a separate Inherited IRA account and put the $85k in it while trying to determine what to do next. Next is to ask yourself will your income likely to go up or down. If it's up, I'd withdraw the entire $85k now, pay the taxes and be done with it.

TravelforFun

[bikesandbeers]

Disclaim it, assuming your high income is stable, and someone else would benefit more.

Or QCD to charoty of your choice

. If you expect to have an down year, you could wait untill then to cash out.

[sailaway]

Disclaim it, assuming your high income is stable, and someone else would benefit more.

Or QCD to charoty of your choice

. If you expect to have an down year, you could wait untill then to cash out.

Don't you have to be old to QCD?

[novemberrain]

gift to a lower tax bracket sibling ?

[toys4tots16]

Disclaim it so it goes to another family member?

Siblings are in a similar financial situation and we’re not close with any extended family.

[toys4tots16]

Disclaim it, assuming your high income is stable, and someone else would benefit more.

Or QCD to charoty of your choice

. If you expect to have an down year, you could wait untill then to cash out.

Don't you have to be old to QCD?

I like this idea, but you’re right about QCD. I just looked it up and have to be 70.5. That said, I could put the whole thing in a donor advised fund

[the way]

Did the parent have a spouse? Maybe this would have been the way to go.

[Watty]

There is an old story

Many years ago in a far away country a wise old teacher was in trouble with his King. The King sentenced the teacher to death, but listened to the teacher's appeal.

The teacher pleaded for the King to give him five years in which to teach the King's horse to talk. The King liked to own unusual things and a talking horse would certainly be unusual and after considerable thought said "yes".

A friend of the teacher said to the teacher "Why did you make such a rash promise? You know no one has ever taught a horse to talk." The teacher said in reply: "Sometime before the end of five years:

1. The King might change his mind and pardon me.

2. The King might forget that he sentenced me to death.

3. The King might die.

4. I might die.

5. I might teach the horse to talk.

In any event, I gain five years."

One strategy would be to just delay taking the money out for as long as possible since there is a non-zero chance that your situation, or the tax laws, could change sometime before you are required to take the money out of the inherited IRA

[RickyAZ]

Let it grow, plan a sabbatical sometime in the next 10 years. Take a trip of a lifetime. Write a book.

[badbreath]

First world problem.

I would do one of two things. just take the minimum out and have fun with it.
give it all to charity for a tax right off

[aristotelian]

You could just pay the tax on it. You can obviously afford it.

[LilyFleur]

Disclaim it, assuming your high income is stable, and someone else would benefit more.

Or QCD to charoty of your choice

. If you expect to have an down year, you could wait untill then to cash out.

Don't you have to be old to QCD?

I like this idea, but you’re right about QCD. I just looked it up and have to be 70.5. That said, I could put the whole thing in a donor advised fund

I think a donor advised fund would be a wonderful idea.

[shess]

Hi all- I’m in need of some advice on what to do with an inherited IRA. One of my parents recently passed, and I’m getting ~$85k in an inherited IRA (traditional not Roth). With the secure act, I need to take the money out within 10 full calendar years, and the full amount will be taxable to me.

However, I’m in my early 30s and just starting to get to my peak earning potential. Total household income is ~$500k already which puts me at the 35% federal bracket and 7% state.

I have no need for the funds right now so what do I do? Take the full tax hit now and put the money in a brokerage account? Wait 10 years and pay tax on whatever the account has grown to (which could easily double)? Take a small amount out each year? I’m at a loss on this one, and advice is needed!

There's no law which says that inheritances should be convenient to beneficiaries! Disclaiming it gives away 3/5 of the money to avoid giving the government 2/5 of the money. I mean, I'd consider disclaiming if there was someone clearly deserving, but I don't think I'd do it for tax reasons unless it was going to screw up my own tax situation (IMHO, an extra $8k/year of income is a rounding error in your case).

With $500k of income and $85k of IRA, you don't seem likely to fall into the next bracket if you liquidate in one tax year, but if it doubled, that could happen. So you could take the minimum per year to keep that from happening, and hope that something happens which takes a huge bite out of your income at some point in the next ten years. Honestly not sure if that's something to wish for, though . Another option would be to just let it sit until the 9th year, and then revisit the decision (the 9th year to reduce risk of having an up income year at the same time as you're forced to liquidate it).

Meanwhile, I'd roll it into an inherited IRA account, and use it to hold that part of your asset allocation which is expected to grow least. Probably fixed income, but could even be a money-market fund if you hold some amount of cash. IMHO you shouldn't invest in low-return assets simply to avoid taxes, but if you can rearrange your assets to put the lowest-expected-income items in your AA in the inherited account, that's reasonable.

[Moneybags1]

An extended family member of mine just inherited $36k and is in the 22% bracket wanted to take the hit and pay down 3% car loan or mortgage with the IRA, My advice was to withdrawal $6K per year and fund a Traditional IRA each year until the account is empty essentially making the tax 0%. I don't know what IRA rules are for someone making $500k is but funding IRA's might be the ticket if it's advantageous to do so.

[Stinky]

I would withdraw the IRA and donate the proceeds to a donor advised fund. The IRA withdrawal will be income to you; the donor advised fund contribution will be a deduction for you. The two should substantially offset each other.

You can then make contributions out of the DAF, all at one time if you'd like, or slowly over time.

[TomatoTomahto]

Are you a lump sum or DCA type?

If lump sum, I’d take it now. Tax rates will probably never be this low again. Put it in taxable according to your AA.

If DCA type, take 1/n each year (where n is the remaining number of years) and put it in taxable according to your AA.

Not intending to be snarky, but at your HHI, I’m having a hard time believing that this is a problem for you. Are you sure that you weren’t tempted to do a humble brag?

[SebastianIII]

deleted

[Dottie57]

Take a small amount out each year?

I would pick this one.

+1

I would probably invest it too.

Another idea - charity. Open a donor advised fund and move the contents of IRA there. Distribute a certain amount each year. The Amount contributed in assets is tax deductible in the year that you donate to the DAF. Assets can grow in the DAF and it can grow to be a very nice amount.

[Jack FFR1846]

Cash it out immediately. Pay the $35,700 in total tax and move on. The total won't even move the needle with the boatload of money you currently are paid and with the increased amount you will be paid in the future.

[sschoe2]

Your choices are pretty much cash it out and accept the taxes or charity. My prediction is taxes especially on high earners will be going up in the near future so better now than later.

The only other option is to donate it to a charity.

[KingRiggs]

Since you have no "need" of this money (ie, you're already fully funding retirement accounts and have a prodigious savings rate), pay the tax and spend $50k on something meaningful/rewarding to you and your family. Perhaps the trip of a lifetime, with a toast to your departed parent at a special location. Or a used Porsche 911. Your choice...

[Smilodon]

You should have received a step up in basis to Market Value on date of death on the IRA, did they not file a Federal Estate Tax Return?

I do not think this is correct. Inherited retirement accounts (e.g. IRA, 401(k), etc.) are considered to be income in respect of a decedent and are not eligible for a step-up in basis.

[neurosphere]

You should have received a step up in basis to Market Value on date of death on the IRA, did they not file a Federal Estate Tax Return?

I do not think this is correct. Inherited retirement accounts (e.g. IRA, 401(k), etc.) are considered to be income in respect of a decedent and are not eligible for a step-up in basis.

Confused. I'm assuming the estate tax did not come into play for the decedent/estate.

How does basis factor into an IRA? Cash coming out of the IRA will be income to the person inheriting it, right, assuming there are no previously non-deductible amounts in the IRA.

[bloom2708]

Pay the tax. Now or over 10 years.

You inherited $50k with a $35k tax bill. You also got the money to pay the tax bill.

$50k helps anyone with $0 up to millions. Pay the tax, put it to work and spend some.

[SebastianIII]

thats true i just checked.

You should have received a step up in basis to Market Value on date of death on the IRA, did they not file a Federal Estate Tax Return?

I do not think this is correct. Inherited retirement accounts (e.g. IRA, 401(k), etc.) are considered to be income in respect of a decedent and are not eligible for a step-up in basis.

Confused. I'm assuming the estate tax did not come into play for the decedent/estate.

How does basis factor into an IRA? Cash coming out of the IRA will be income to the person inheriting it, right, assuming there are no previously non-deductible amounts in the IRA.

[grabiner]

Instead of thinking of this account as $85K, think of it as $50K tax-free and $35K which is already owned by the IRS. As long as you stay at the same marginal tax rate, you would prefer to keep the tax-free money growing as long as possible. Since you are maxing out your own tax-free accounts, the ways to do this are to keep the money inside the IRA, or give it to a charity.

If you plan to give it to charity, you might as well give it now; the charity can invest the money tax-free if it needs to, or spend it now if it has a better use for the money.

If your marginal tax rate is due to increase (about to move to a higher-tax state, or in 2025 if the tax rate is still scheduled to rise to 39.6%), that is the time to withdraw. You could even come out ahead by withdrawing the balance in 2025 and paying tax at the 2025 tax rate, then donating it to charity in 2026 and deducting the donation at the 2026 tax rate.

Disclaiming makes sense if you expect the money to go to your heirs eventually. If you have children and can disclaim the IRA and leave it to them, you will reduce the tax bill. The children, if subject to the kiddie tax, can withdraw as much each year as allowed to avoid the kiddie tax, and then withdraw the whole balance at their (lower) tax rates once they are too old for the kiddie tax.

[shess]

I would withdraw the IRA and donate the proceeds to a donor advised fund. The IRA withdrawal will be income to you; the donor advised fund contribution will be a deduction for you. The two should substantially offset each other.

You can then make contributions out of the DAF, all at one time if you'd like, or slowly over time.

A number of responses mention this, but note that you can only deduct it to the extent you're already itemizing. With your income and a 7% state tax, you'd have been itemizing before the current tax law went into effect, so the decision would have been obvious. Now, it's somewhat likely that the difference between the standard deduction of $24k and the SALT limitations of $10k (ie, ~$14k) would not be deductible. So if you were to go this route, it makes sense to just do it all at once, or donate $50k to a DAF or charity and take the rest as a distribution.

That, IMHO at $500k of income, I'm not sure how much I'd let the cart wag the horse on this.

[toys4tots16]

Thanks all for the feedback. I wouldn’t have gotten here without you.

I’m going to go with the donor advised fund and give to a few charities that my parent cared about.

[TomatoTomahto]

Thanks all for the feedback. I wouldn’t have gotten here without you.

I’m going to go with the donor advised fund and give to a few charities that my parent cared about.

[retire2022]

Op

I got Inherited IRA as well 20K, not in the same amount as you but I choose to invest it. I am 60 don't need it because I have 1.9 million portfolio, in ten years, the 20K could turn to $$$,$$$ or zero it is 1% of my entire portfolio.

I could give away the future assets for charity as well, I put in an low bid for Apple shares today.

[Dottie57]

Thanks all for the feedback. I wouldn’t have gotten here without you.

I’m going to go with the donor advised fund and give to a few charities that my parent cared about.

Yea!

[ralph124cf]

Is it possible to disclaim an inherited IRA in favor of a DAF or specific charity? That way you would have neither the income nor the deduction to worry about.

In any case this is probably a rounding error in your total financial picture.

Ralph

[sailaway]

Thanks all for the feedback. I wouldn’t have gotten here without you.

I’m going to go with the donor advised fund and give to a few charities that my parent cared about.

Yea!

I have already discussed this with my parents to get a better feel for their preferences (they chose the ones they give their time to, rather than the many that they give their money to). I also tried to discuss it with the in-laws, but evidently I grew two new heads at the same time the words came out of my mouth? We were already talking about estates and family legacy, but I got the same look when I pointed out that it would be fair to divide up their estate amongst their grandchildren, given that their children are already grown and well down their own paths.

[LilyFleur]

Thanks all for the feedback. I wouldn’t have gotten here without you.

I’m going to go with the donor advised fund and give to a few charities that my parent cared about.

Great!!!

You are honoring their memory by doing this, and you're showing your halo

I was a recipient of charity when unemployed, being treated for Stage III breast cancer, and in a horrific divorce.

Thanks on behalf of those you will be helping. It means the world to good people who have had tried their best in life but gotten some hard knocks.

[NotWhoYouThink]

If you are going to give it all this year you could do it directly and skip the DAF. Really the DAF just lets you get the deduction now and stretch out the giving, but why not give it all now? The DAF also allows some anonymity, but I'm ok with organizations knowing my name.

[GAAP]

As tax law sits today, you still have a few years of potential tax-deferred growth until the rates go back up. I would wait until you know there's a change coming (up or down) and what it is. Even if the politicians decided to do something tomorrow, you would probably still have the rest of the year to act on a decision.

Stuff happens, plans change, reality strikes -- decreasing future options for no reason is not optimal.

[prairieman]

I would take all out immediately and buy something with high risk/reward. If the stock drops you can tax loss harvest. If it goes up you have capital gains which are payable only if you sell and when you sell. If you wait to cash out the IRA all new gains will be taxed at the full rate.

[grabiner]

I would take all out immediately and buy something with high risk/reward. If the stock drops you can tax loss harvest. If it goes up you have capital gains which are payable only if you sell and when you sell. If you wait to cash out the IRA all new gains will be taxed at the full rate.

The reason this doesn't work is that you can't invest the full amount in the IRA. You have $85K now and can take out $50K. If you leave the money in the IRA and it doubles in value before you withdraw, your $170K becomes $100K after tax. If you take the money out, you can only invest $50K, and if it doubles in value, you will have less than $100K because you will owe tax.

The $85K in the traditional IRA is equivalent to $50K in a tax-free Roth IRA with the same withdrawal deadline, and it would clearly not make sense to take money out of a Roth IRA before you need it.

[prairieman]

I would take all out immediately and buy something with high risk/reward. If the stock drops you can tax loss harvest. If it goes up you have capital gains which are payable only if you sell and when you sell. If you wait to cash out the IRA all new gains will be taxed at the full rate.

The reason this doesn't work is that you can't invest the full amount in the IRA. You have $85K now and can take out $50K. If you leave the money in the IRA and it doubles in value before you withdraw, your $170K becomes $100K after tax. If you take the money out, you can only invest $50K, and if it doubles in value, you will have less than $100K because you will owe tax.

The $85K in the traditional IRA is equivalent to $50K in a tax-free Roth IRA with the same withdrawal deadline, and it would clearly not make sense to take money out of a Roth IRA before you need it.

You are correct. I guess I’ve become anti-IRA since I’ve begun taking estate taxes into account. Our state has a low threshold for estate taxes. We inherited an IRA. The estate paid 16% tax on it up front and we pay our marginal rate on top of that for RMDs. Moreover, all gains since we inherited the IRA are taxable at our marginal rate whereas they would be capital gains rates outside and there’d be no additional tax at all if passed on to our heirs.

[MathIsMyWayr]

Let it grow, plan a sabbatical sometime in the next 10 years. Take a trip of a lifetime. Write a book.

It is only about OP's two months earnings.

[neurosphere]

You are correct. I guess I’ve become anti-IRA since I’ve begun taking estate taxes into account. Our state has a low threshold for estate taxes. We inherited an IRA. The estate paid 16% tax on it up front and we pay our marginal rate on top of that for RMDs. Moreover, all gains since we inherited the IRA are taxable at our marginal rate whereas they would be capital gains rates outside and there’d be no additional tax at all if passed on to our heirs.

If estate taxes were paid on assets that included the IRA, then don't you get a deduction for any income taxes you pay on inherited IRA withdrawals? Although, this is only for Federal taxes, and I don't know whether any states have similar rules for deducting estate taxes paid on an IRA. I assume the 16% you cite was for state estate tax.

Keep in mind though, that the decedent likely got a big tax deduction for the assets placed into the IRA. That money was likely invested too. So the IRA helped the estate to be larger than otherwise. If the decedent had not used the IRA, you may have inherited a smaller total amount.

[MathIsMyWayr]

I would take all out immediately and buy something with high risk/reward. If the stock drops you can tax loss harvest. If it goes up you have capital gains which are payable only if you sell and when you sell. If you wait to cash out the IRA all new gains will be taxed at the full rate.

The reason this doesn't work is that you can't invest the full amount in the IRA. You have $85K now and can take out $50K. If you leave the money in the IRA and it doubles in value before you withdraw, your $170K becomes $100K after tax. If you take the money out, you can only invest $50K, and if it doubles in value, you will have less than $100K because you will owe tax.

The $85K in the traditional IRA is equivalent to $50K in a tax-free Roth IRA with the same withdrawal deadline, and it would clearly not make sense to take money out of a Roth IRA before you need it.

You are correct. I guess I’ve become anti-IRA since I’ve begun taking estate taxes into account. Our state has a low threshold for estate taxes. We inherited an IRA. The estate paid 16% tax on it up front and we pay our marginal rate on top of that for RMDs. Moreover, all gains since we inherited the IRA are taxable at our marginal rate whereas they would be capital gains rates outside and there’d be no additional tax at all if passed on to our heirs.

Emptying the entire $85k still does not make sense. Either way, $13,6 is gone to the estate taxes and the remaining $71,4k is still subject to tax on withdrawal. If OP keeps it in IRA as long as possible, he pays taxes of 35% once. If he empties and invests in a taxable account, he also pays taxes on dividends and capital gains.

[prairieman]

You are correct. I guess I’ve become anti-IRA since I’ve begun taking estate taxes into account. Our state has a low threshold for estate taxes. We inherited an IRA. The estate paid 16% tax on it up front and we pay our marginal rate on top of that for RMDs. Moreover, all gains since we inherited the IRA are taxable at our marginal rate whereas they would be capital gains rates outside and there’d be no additional tax at all if passed on to our heirs.

If estate taxes were paid on assets that included the IRA, then don't you get a deduction for any income taxes you pay on inherited IRA withdrawals? Although, this is only for Federal taxes, and I don't know whether any states have similar rules for deducting estate taxes paid on an IRA. I assume the 16% you cite was for state estate tax.

Keep in mind though, that the decedent likely got a big tax deduction for the assets placed into the IRA. That money was likely invested too. So the IRA helped the estate to be larger than otherwise. If the decedent had not used the IRA, you may have inherited a smaller total amount.

Very good points. Yes, it was state estate taxes. I never claimed a deduction because it did not occur to me to check. I so far have been taking RMDs because that’s just what you do, but had been noticing that we’re nearing a higher tax bracket (but there’s still room). I could withdraw faster now, slower later - so that it’s gone when my own IRA forces RMDs and pushes us over.
I’m going to run through all of this on a spreadsheet before deciding.
I should mention that I only started thinking recently about this after listening to a podcast by Phil Ferguson when he said RMDs should be taken early in the year and invested right away. That way you could TLH if stocks moved down during the year. Otherwise, you need to withdraw when the market is down.

[neurosphere]

I should mention that I only started thinking recently about this after listening to a podcast by Phil Ferguson when he said RMDs should be taken early in the year and invested right away. That way you could TLH if stocks moved down during the year. Otherwise, you need to withdraw when the market is down.

And if markets go up, you can sell the taxable investments (if cash is needed) and pay capital gains, vs withdrawing from the IRA and paying ordinary income taxes on those same gains.