First Inherited Trad IRA Distribution: Critiques and Strategy

[liz24]

Hello,

I wanted to check my strategy (for my first distribution from my inherited Traditional IRA) up against the knowledge people here. Please correct my thinking if I am wrong anywhere, or if you see a better/wiser way to make moves. I am always wanting to pick the best, most strategic solutions to maximize well-being for myself and my child. (Please note I am saying well-being, not necessarily right now maximum net worth, as I need to be there for my child while they are young).

Age: 38
Net Worth: $3 million roughly (so this is a portion of my overall picture)
Issue: I need to take 100% of this money out of the tax-sheltered traditional IRA environment in roughly 8 years (parent passed 2022, but was not taking distributions, so I do not have an annual amount I must take. Just a broad requirement to take it all out in 8 more years. PLEASE NOTE: I did not take anything out yet, thus I am seeking guidance to make sure I don't really botch this up in my first time or kick myself down the road when I realize I didn't think of something from a greater perspective).

My idea: Because I stepped back from traditional work recently (temporary- I am only adjunct instructing recently, but intend to return back to work with benefits and a better salary maybe when my kid gets to full-time public school age in roughly 1.5 years), I am considering "removing" as my first Inherited Traditional IRA distribution in 2025 100% of EXG, MCR, and MMT, and living off the high monthly distributions they provide (altogether, roughly $770/month), without selling any of those shares (allowing the current # of shares the opportunity to rise in price).

Please let me know if I am missing something in this plan or if you need more info from me in this original post to better respond.

100% of Inherited Traditional IRA Portfolio (need help with decision-making with my first distribution):

Symbol Description Current Value Total Gain/Loss Percent Percent Of Account
SPAXX** HELD IN MONEY MARKET $110,495.18 12%
FBALX FIDELITY BALANCED $18,990.07 +202.85% 2%
FBGRX FIDELITY BLUE CHIP GROWTH $72,996.00 +114.58% 8%
VFH VANGUARD WORLD FD FINANCIALS ETF $31,043.50 +94.02% 3%
VTSAX VANGUARD TOTAL STOCK MARKET INDEX ADMIRAL $43,417.08 +60.12% 5%
PRWCX T ROWE PRICE CAP APPRECIATION $56,883.20 +33.34% 6%
FSDIX FIDELITY STRATEGIC DIVIDEND & INCOME $33,835.83 +30.30% 4%
VGHAX VANGUARD HEALTH CARE ADMIRAL SHS $76,417.72 +19.66% 8%
VOO VANGUARD INDEX FUNDS S&P 500 ETF USD $104,278.81 +3.44% 11%
CD CD 1.00% $69,213.20 -1.13% 7%
EXG EATON VANCE TAX-MANAGED GLOBAL COM $43,808.18 -6.80% 5%
MCR MFS CHARTER INCOME TRUST $33,257.63 -23.58% 3%
MMT MFS MULTIMARKET INCOME TRUST $24,526.88 -24.30% 3%
VWNAX VANGUARD WINDSOR II ADMIRAL $112,489.04 -- 12%
VMRXX VANGUARD CASH RESERV FED MMKT ADMIRAL $126,472.97 -- 13%
TOTAL $958,125.29 100%

[steadyosmosis]

I, personally, would make the IRA 100% fixed income, and withdraw about $120k annually for the next eight years.

[HMSVictory]

The portfolio is overly complex and has many duplicate holdings. The good news is you can easily fix this in the inherited IRA.

I don't know what the rest of your portfolio looks like but I would pick an all in one fund - like balanced index fund and be done.

Setup automatic withdraws for $150k per year, or quarterly, or monthly - whatever you would prefer.

KISS is something I have embraced and find beauty in simplicity. If you want a more aggressive or less aggressive fund you can check out the life strategy funds and find something that meets your tolerance, ability and need to take risk.

[HomeStretch]

Consider simplifying the portfolio by exchanging the account holdings into 1-3 low-ER funds taking into account your asset allocation and tax efficient fund placement. It may make sense to hold your fixed income allocation in this account to slow the growth/distributions.

Take distributions as needed. Keep in mind that the account needs to be emptied by 12/31/32 and it may be tax advantageous to spread the distributions over 2025-2032 rather than take a large distribution in 2032 to empty the account.

[bridgetek]

Because it's an IRA, you can sell assets within the Inherited IRA without any tax event. So there's no tax reason to avoid selling these assets and buying something that might suite you needs better. The value of your withdrawals will be taxed as ordinary income, weather you transfer shares in-kind or sell in the Inherited IRA and withdraw the cash. The total Gain/Loss in the Inherited IRA won't have any direct affect on your taxes. If you transfer shares in-kind to a taxable account, the cost basis will be set to the value of the shares on the day of the transfer.

Since you have 8 years to empty the account (2025-2032), one approach is to withdraw a minimum of 1/8th the first year (2025), 1/7th in 2026, ..., ending with all (1/1) in 2032. If you want to withdraw more than that to cover expenses that's fine, especially if you're in a lower tax bracket during the years of less salary income. Delaying withdrawals lets more assets accumulate tax deferred, but you run the risk of getting pushed to a higher tax bracket in 2032. The 3 assets you mentioned (EXG, MCR, MMT) account for 11% of the inherited IRA, which is a little less than 1/8= 12.5%

Based on the info provided, the Inherited IRA is about 33% of your overall new worth. Ideally, you would determine the optimal asset allocation for your overall portfolio, and then decide assets should be in each type of account: taxable brokerage, inherited IRA, tIRA, Roth IRA, etc.

Best wishes as you negotiate the balance of parenting, work, and personal finance.

[Navillus1968]

Hello,

<snip>

My idea: Because I stepped back from traditional work recently (temporary- I am only adjunct instructing recently, but intend to return back to work with benefits and a better salary maybe when my kid gets to full-time public school age in roughly 1.5 years), I am considering "removing" as my first Inherited Traditional IRA distribution in 2025 100% of EXG, MCR, and MMT, and living off the high monthly distributions they provide (altogether, roughly $770/month), without selling any of those shares (allowing the current # of shares the opportunity to rise in price).

<snip>
EXG EATON VANCE TAX-MANAGED GLOBAL COM $43,808.18 -6.80% 5%
MCR MFS CHARTER INCOME TRUST $33,257.63 -23.58% 3%
MMT MFS MULTIMARKET INCOME TRUST $24,526.88 -24.30% 3%
<snip>
TOTAL $958,125.29 100%

You are proposing to withdraw about $102k (~10.5%) of your IRA. As bridgetek suggested up-thread, withdrawing 1/8 (12.5%) of your IRA this year will help smooth out taxes over the next eight years.

Since you are currently under-employed, I would suggest withdrawing even more than 12.5% this year, since you should have headroom in the 22%/24% bracket, assuming your salary as an adjunct professor puts you in that range. Your goal should be to withdraw from the IRA each year such that your salary & IRA withdrawals keep you in the same tax bracket over the next eight years.

A couple of years in the 22%/24% brackets followed by 6 years of 32%/35% brackets is what you should try to avoid, for example. If your future salary + IRA withdrawals looks to put you in the 35% bracket, then it might make sense to withdraw enough in 2025 & 2026 to use the 32% bracket this year. By frontloading your IRA withdrawals, you might avoid putting yourself in a higher bracket than necessary down the road.

Whatever withdrawal strategy you choose, I would definitely simplify your IRA investments. Maybe a target date fund for 2050? Or, you could put your bond/fixed income allocation in the inherited IRA. This would help mitigate the 'problem' of your IRA growing too fast during the drawdown period.

[liz24]

Hello,

<snip>

My idea: Because I stepped back from traditional work recently (temporary- I am only adjunct instructing recently, but intend to return back to work with benefits and a better salary maybe when my kid gets to full-time public school age in roughly 1.5 years), I am considering "removing" as my first Inherited Traditional IRA distribution in 2025 100% of EXG, MCR, and MMT, and living off the high monthly distributions they provide (altogether, roughly $770/month), without selling any of those shares (allowing the current # of shares the opportunity to rise in price).

<snip>
EXG EATON VANCE TAX-MANAGED GLOBAL COM $43,808.18 -6.80% 5%
MCR MFS CHARTER INCOME TRUST $33,257.63 -23.58% 3%
MMT MFS MULTIMARKET INCOME TRUST $24,526.88 -24.30% 3%
<snip>
TOTAL $958,125.29 100%

You are proposing to withdraw about $102k (~10.5%) of your IRA. As bridgetek suggested up-thread, withdrawing 1/8 (12.5%) of your IRA this year will help smooth out taxes over the next eight years.

Since you are currently under-employed, I would suggest withdrawing even more than 12.5% this year, since you should have headroom in the 22%/24% bracket, assuming your salary as an adjunct professor puts you in that range. Your goal should be to withdraw from the IRA each year such that your salary & IRA withdrawals keep you in the same tax bracket over the next eight years.

A couple of years in the 22%/24% brackets followed by 6 years of 32%/35% brackets is what you should try to avoid, for example. If your future salary + IRA withdrawals looks to put you in the 35% bracket, then it might make sense to withdraw enough in 2025 & 2026 to use the 32% bracket this year. By frontloading your IRA withdrawals, you might avoid putting yourself in a higher bracket than necessary down the road.

Whatever withdrawal strategy you choose, I would definitely simplify your IRA investments. Maybe a target date fund for 2050? Or, you could put your bond/fixed income allocation in the inherited IRA. This would help mitigate the 'problem' of your IRA growing too fast during the drawdown period.

Thank you so much for your reply.

I have an important question for you or anyone who might be willing to assist. Is there an "ideal" salary I should be making right now, given the tax brackets? I think about going for an easier full-time $50,000 job or so. But what would the tax picture be like then for me for the next 8 years now with inherited traditional IRA distributions?

[mattshwink]

I have an important question for you or anyone who might be willing to assist. Is there an "ideal" salary I should be making right now, given the tax brackets?

Not necessarily. I'm in a similar situation as you are, father-in-law passed in 2022 and we have to discharge the IRA by the end of 2032, though we are subject to RMDs. We're also a bit a older (50/47) and still working. But the current portfolio value is close to yours. Our incomes are much higher, though.

What I do right now is take to the top of the 24% bracket. That was $32k this year. Eventually, we're going to have to take more. We might bump up the 32% bracket in 2026 (with the Inherited withdrawal). But that depends on how long I'm going to keep on working. Right now that's sometime between 2027-2029, and the closer to 2027 it is means we probably stay in 24% for withdrawals.

For you, you don't quite give enough detail. What is your filing status? What is your expected household salary in 2025 and 2026? Right now, I'd think the top of the 22% bracket is where you want withdrawals to be. But more detail is needed.

As others have stated, you also should really simplify this portfolio. I have mine in a simple 3 fund (which is overall how I am invested).

[liz24]

I have an important question for you or anyone who might be willing to assist. Is there an "ideal" salary I should be making right now, given the tax brackets?

Not necessarily. I'm in a similar situation as you are, father-in-law passed in 2022 and we have to discharge the IRA by the end of 2032, though we are subject to RMDs. We're also a bit a older (50/47) and still working. But the current portfolio value is close to yours. Our incomes are much higher, though.

What I do right now is take to the top of the 24% bracket. That was $32k this year. Eventually, we're going to have to take more. We might bump up the 32% bracket in 2026 (with the Inherited withdrawal). But that depends on how long I'm going to keep on working. Right now that's sometime between 2027-2029, and the closer to 2027 it is means we probably stay in 24% for withdrawals.

For you, you don't quite give enough detail. What is your filing status? What is your expected household salary in 2025 and 2026? Right now, I'd think the top of the 22% bracket is where you want withdrawals to be. But more detail is needed.

As others have stated, you also should really simplify this portfolio. I have mine in a simple 3 fund (which is overall how I am invested).

Thank you for your feedback.

Filing Status: Single
State: NJ
Expected Household Salary in 2025 (not sure of 2026, as I may be in full-time employment by then): Maybe $6,000 through my job. In addition to that, maybe another $25,000 in dividends/interest/distributions on the taxable side of my portfolio.

Thank you again!

[trueblueky]

I have an important question for you or anyone who might be willing to assist. Is there an "ideal" salary I should be making right now, given the tax brackets?

Not necessarily. I'm in a similar situation as you are, father-in-law passed in 2022 and we have to discharge the IRA by the end of 2032, though we are subject to RMDs. We're also a bit a older (50/47) and still working. But the current portfolio value is close to yours. Our incomes are much higher, though.

What I do right now is take to the top of the 24% bracket. That was $32k this year. Eventually, we're going to have to take more. We might bump up the 32% bracket in 2026 (with the Inherited withdrawal). But that depends on how long I'm going to keep on working. Right now that's sometime between 2027-2029, and the closer to 2027 it is means we probably stay in 24% for withdrawals.

For you, you don't quite give enough detail. What is your filing status? What is your expected household salary in 2025 and 2026? Right now, I'd think the top of the 22% bracket is where you want withdrawals to be. But more detail is needed.

As others have stated, you also should really simplify this portfolio. I have mine in a simple 3 fund (which is overall how I am invested).

I find it helps to think of the tax brackets as three: 10/12 , 22/24, >30.

The effort to plan the top 22% rather than allowing occasional 24% over an 8-year period may not be worth it.

Tax rates and brackets are unlikely to remain the same that long. The current rate structure is scheduled to revert to the prior one. Brackets change each year with inflation. What will be the top of 22% in 2030?

Additionally, find your NIIT level. You may want to try to stay under that.

[Stubbie]

I, personally, would make the IRA 100% fixed income, and withdraw about $120k annually for the next eight years.

This is exactly what I did with my inherited IRA.
Makes it simple.
Note: my income does not vary from year to year.

[dknightd]

As mentioned, and as you already knew, the inherited IRA has to be empty in 8 years. For tax reasons you probably want to do this in more or less uniform amounts each year.

What I decided to do with my smaller inherited IRA is to mostly use it to pay taxes on Roth conversions in my own retirement accounts. The idea being that my retirement accounts will likely be available for more than 10 years. They will eventually be subject to RMD. So, instead of moving inherited IRA to a taxable account, I'm using some of that money to convert my retirement accounts to Roth - aka tax free, and no RMD. That might be something for you to consider. If you do not need 1/8 of the money for living expenses today, you might consider using some of it to pay taxes on Roth conversions on your own retirement accounts. Doing this is essentially moving the inherited IRA into a tax free Roth account I can use as I please. Dad is paying the taxes - thanks Dad.

Just another option for you to consider. I like Roth dollars better than taxable dollars.

[mattshwink]

Filing Status: Single
State: NJ
Expected Household Salary in 2025 (not sure of 2026, as I may be in full-time employment by then): Maybe $6,000 through my job. In addition to that, maybe another $25,000 in dividends/interest/distributions on the taxable side of my portfolio.

Thank you again!

So taxes in 2026 and beyond could stay the same or there could be some changes. There's going to be a lot of wrangling in the political sphere about that this year. We'll see what happens.

But we know 2025, and there is a decent chance things stay the same for 2026 and beyond (but no means certain) so I'd plan for that for now.

The 22% bracket tops out at $103,350 for single filers, and you get the $15,000 standard deduction.

So that's $118,350 of space. So I'd take $118,350-dividend and interest income=inherited IRA withdrawal. Keep in mind that if you go over that amount, you'd pay 24% tax on the amount over, so if you go over some it's not a big deal (in other words, if you want to round up, go ahead, no need to be conservative).

In 2026 I'd plan to do the same, but we'll just have to see what happens with any tax changes later in the year.

For Fed Taxes, on that $118,350 in income, you would pay $18,383.76 in tax, minus any other tax credits or deductions you may have. You mentioned kids, and the child tax credit is $2,000 per kid. So you'd reduce your tax liability by $2,000 for every child you claim on your tax return.

[Navillus1968]

Not necessarily. I'm in a similar situation as you are, father-in-law passed in 2022 and we have to discharge the IRA by the end of 2032, though we are subject to RMDs. We're also a bit a older (50/47) and still working. But the current portfolio value is close to yours. Our incomes are much higher, though.

What I do right now is take to the top of the 24% bracket. That was $32k this year.

Thank you for your feedback.

Filing Status: Single
State: NJ
Expected Household Salary in 2025 (not sure of 2026, as I may be in full-time employment by then): Maybe $6,000 through my job. In addition to that, maybe another $25,000 in dividends/interest/distributions on the taxable side of my portfolio.

Is there a reason you don't file as Head of Household vice Single, since you have a small child as a dependent? HOH status lowers your taxes 2 ways- bigger standard deduction (HOH $21.9k vs $14.6k for Single for 2024) & an expanded 12% bracket (~$63k for HOH vs ~$47k for Single).
https://smartasset.com/taxes/head-of-ho ... -vs-single

If you take the job offering $50k in 2026 & also take about $120k from your IRA, you will be in the 24% tax bracket that year, assuming the current TCJA brackets are extended. If the previous 2017 brackets revert, you'll be in the 28% bracket.

Either way, this year you would be wise to take advantage of the last guaranteed TCJA tax year (2025) and make a large enough IRA withdrawal to fill up the 24% bracket.
Depending on interest income & other ordinary income items, with $6k of salary, you could withdraw slightly over $200k from the IRA while remaining in the 24% bracket (this assumes you take the $21.9k HOH std deduction)
Here's an income tax calculator you can plug numbers into. It's currently set up for 2024 brackets, but you can get an idea of the interplay between salary & IRA withdrawals, as well as the effect of filing as HOH vs Single. Since 2025 brackets are larger than 2024, the calculator's results should be conservative. https://www.dinkytown.net/java/1040-tax-calculator.html#

None of this should affect your New Jersey income tax situation too much- you may boost yourself from the 5.525% rate into the 6.37% rate by taking a larger IRA withdrawal, but that's fairly trivial.

One other tax to consider is the NIIT tax on investment income. It's an additional 3.8% tax on dividends, cap gains, etc. for MAGI above $200k (HOH or Single status) triggers the NIIT. With about $25k of dividends & interest, you would owe about $950 in NIIT if your MAGI was >$225k. If you keep MAGI below $200k by making a smaller TIRA withdrawal, you can easily avoid the NIIT, your call.
ETA- Another reason to limit MAGI to <$200k is the child tax credit- it begins to phase out above that number!

PS- Since you'll be making large IRA withdrawals over the next 8 years, you can use that money to live on & max out your workplace 403b/401k/etc. to boost tax-deferred savings, assuming you are covered by an employer plan.
In 2025, you can defer basically all $6k of salary into your employer plan & then max the plan(s) out in 2026 and beyond. Since your combined tax bracket will be slightly over 30% (24 fed + 6.37 NJ), Roth 403b is probably not ideal- just use the Trad version. Note- if your employer offers both a 403b & a 457b, I believe you can max out both plans with a $50k salary, IOW $23.5k into each plan.

[TrustTheMarket]

I, personally, would make the IRA 100% fixed income, and withdraw about $120k annually for the next eight years.

I appreciate your comment here. I also have a (smaller) inherited IRA and after much debate, I decided to make it all fixed income. I learned to view this money as a bonus and ultimately it is our supercharged emergency savings. We can cover 2 years of living expenses with that money. And we work in a volatile commission based industry (which is economy dependent.) So our peace of mind has significantly increased knowing these savings are there.

Many suggested having some of this money in stocks. But because of the new 10-year rule, this really isn’t a retirement account. And after reading Bogleheads for many years, it is clear that 10 years is not a long time in the stock market. Many things can happen. In my view, the stock market is most appropriate for retirement accounts, and not as appropriate for funds that support your lifestyle and provide safety net.

Was this your thinking when you said it should all be in fixed income?

[steadyosmosis]

(secrets removed)