Offset inherited IRA tax with Trade IRA?

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kdsunday
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Joined: Thu Aug 07, 2014 2:53 pm

Offset inherited IRA tax with Trade IRA?

Post by kdsunday » Fri Mar 15, 2019 7:01 pm

I have inherited a portion of a traditional IRA which has been transferred to me as an Inherited IRA. I understand my choices are to take a full distribution, withdraw the account over five years or take lifetime distributions. The amount of the account is small, less than the $5k (which is less than the individual contribution limit for IRAs).

My plan was to take the full amount out and put it into a traditional IRA. While distributions from an inherited IRA are taxable, contributions to a traditional IRA are deductible. But the account rep at Edward Jones is claiming that if I do that, I will end up paying taxes twice. Once on the distribution and again on withdrawal from the traditional IRA in retirement. I think she's wrong. I don't see how this is any different than contributing $5000 to an IRA to offset taxable income from any other source. Am I missing something? Also am I better off contributing this (again relatively small) amount to a Roth IRA?
In theory, there's no difference between theory and practice. In practice, there is. -Yogi Berra

Katietsu
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Re: Offset inherited IRA tax with Trade IRA?

Post by Katietsu » Fri Mar 15, 2019 7:14 pm

You are both right. But your plan makes total sense as long as you meet the requirements to deduct an IRA contribution. You will have to report the $5000 distribution now as taxable income but that will be offset by the $5000 IRA deduction. And you will have to report the eventual IRA withdrawal as taxable income but you might or might not actually owe tax at that time.

fabdog
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Re: Offset inherited IRA tax with Trade IRA?

Post by fabdog » Fri Mar 15, 2019 7:16 pm

Yes, you'll pay taxes on the money when you distribute it from the IRA, no matter what you do with it.

So then if you put it right back in a deductible IRA, you take that money back off your taxes.

And, if you contribute it to the IRA, you'll pay taxes on it later when you distribute it again.

So as long as you do both the distribution and the contributions (parts 1& 2 above) in the same year, it should be a wash.

Of course, if you had the money to put in the deductible IRA and chose to take RMD's over your lifetime, you'd reduce your taxes, as you'd get the IRA
deduction and have a much smaller distribution.

I think the Edward Jones person is asking what's the logic in taking out from a tax deferred account, and putting it right back into the same vehicle? Other than removing the RMD requirement? The RMD should be very small... let the money grow

Mike

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CAsage
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Re: Offset inherited IRA tax with Trade IRA?

Post by CAsage » Fri Mar 15, 2019 8:58 pm

There might be an advantage to liquidate the inherited IRA sooner (close it out, then fund a deductible IRA with that = tax wash) just to consolidate accounts. If you are eligible for a deductible IRA, I'd be inclined to close out the old account to simplify life going forward. As to when you should pay the inevitable tax, that depends on your tax bracket now, and what it might be....
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

Spirit Rider
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Re: Offset inherited IRA tax with Trade IRA?

Post by Spirit Rider » Fri Mar 15, 2019 9:25 pm

Advantages of taking distributions from an inherited account and then contributing to an owned account:
  • You eliminate the RMDs and enable the full deferral of assets in your owned retirement account.
  • The SCOTUS ruled that inherited accounts receive no asset protection. Precious few states have subsequently enacted state protection for inherited accounts.
  • The successor beneficiary of a non-spouse inherited account must continue the lifetime divisor schedule of the original beneficiary. A non-spouse beneficiary of an owned account can use the lifetime distribution divisor based on their age in the year following the decedents death.
So this a good idea if you can't otherwise maximize your pre-tax retirement accounts.

Spirit Rider
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Re: Offset inherited IRA tax with Trade IRA?

Post by Spirit Rider » Fri Mar 15, 2019 9:57 pm

CAsage wrote:
Fri Mar 15, 2019 8:58 pm
If you are eligible for a deductible IRA, I'd be inclined to close out the old account to simplify life going forward.
Keeping the Inherited IRA will not interfere with a Backdoor Roth. Moving them to an owned IRA would, but you could then roll them over to a 401k, 403b, or 457b like any other owned IRA.

Inherited IRA pre-tax and non-deductible basis balances are totally separate from owned IRA pre-tax and nondeductible basis balances. The inherited balances are not included on the Form 8606 for owned balances. If you have both pre-tax and non-deductible basis balances in an Inherited IRA, you file a separate "named" Form 8606 for any Inherited IRA distributions.

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CAsage
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Re: Offset inherited IRA tax with Trade IRA?

Post by CAsage » Sat Mar 16, 2019 1:03 am

OP did not say there was any basis. The assumption might be that you just cash the darn thing out (less than $5k, fully taxable) then put that same amount of money into your own IRA and deduct it. I do not see any issue of basis with the new IRA since it's deductible, right? I did not think the OP was talking about a backdoor Roth here, just a plain old deductible IRA.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

Topic Author
kdsunday
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Re: Offset inherited IRA tax with Trade IRA?

Post by kdsunday » Sat Mar 16, 2019 8:08 am

Thanks everyone. Yes I am not proposing a backdoor Roth and yes the new IRA would be deductible.

I view consolidating accounts as a major plus here, as most of our assets are with Vanguard. Frankly EJ has not been the easiest to work with through all of this and I would rather not be tied up with them for 30 years of RMDs that amount an annual pittance.

But I did want to make sure I had the right understanding of the tax implications and for that again, thanks everyone.
In theory, there's no difference between theory and practice. In practice, there is. -Yogi Berra

cherijoh
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Re: Offset inherited IRA tax with Trade IRA?

Post by cherijoh » Sat Mar 16, 2019 8:41 am

kdsunday wrote:
Fri Mar 15, 2019 7:01 pm
I have inherited a portion of a traditional IRA which has been transferred to me as an Inherited IRA. I understand my choices are to take a full distribution, withdraw the account over five years or take lifetime distributions. The amount of the account is small, less than the $5k (which is less than the individual contribution limit for IRAs).

My plan was to take the full amount out and put it into a traditional IRA. While distributions from an inherited IRA are taxable, contributions to a traditional IRA are deductible. But the account rep at Edward Jones is claiming that if I do that, I will end up paying taxes twice. Once on the distribution and again on withdrawal from the traditional IRA in retirement. I think she's wrong. I don't see how this is any different than contributing $5000 to an IRA to offset taxable income from any other source. Am I missing something? Also am I better off contributing this (again relatively small) amount to a Roth IRA?
Are you certain that you are eligible to make a deductible contribution to a traditional IRA? What is your age and your current marginal tax bracket? What else are you doing with respect to saving for retirement? Without answering these questions, it would be hard to say what you would be better off doing (i.e., traditional vs. Roth).

I kept a small inherited IRA(~3X the size of yours) and have been taking RMDs from it since my Mom passed away in 2006. It is at Vanguard and currently worth almost 50% more than what I inherited despite taking RMDs. However, had it been < $5K, I think I would have opted to take the money and simply pay the taxes. (I had no unused space in retirement accounts, so what you are considering was not an option).

I would definitely avoid getting tied up at EJ, but keep in mind that you can switch to a different custodian - don't let that dictate your decision.

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BL
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Re: Offset inherited IRA tax with Trade IRA?

Post by BL » Sat Mar 16, 2019 9:38 pm

If you do have a retirement plan at work, such as a 401(k), 403(b), pension plan, etc., your ability to take the IRA deduction is income-restricted. Specifically, here's a guide of the AGI limits for your tax filing status.

2018 Tax Filing Status
Full Contribution Limit
Married filing jointly
$101,000
I think you should separate your decision to cash it in with what to do with it. First I would decide to get it away from EJ either way. They would love to make money for themselves rather than for you. Has it been re-titled into your name with previous owner included? Then either move to Vanguard or cash it in. Almost anything you put it in in Vanguard would have ERs of 0.04 to 0.20. Low ERs and no fees or commissions or AUMs really help over a period of 20+ years!

Next, do you prefer a Roth IRA or a deductible traditional IRA (see above to see if you qualify)? With a Roth IRA, you will never pay taxes on it again. In the trad. IRA, you will eventually pay taxes and have your own RMD at age 70.

Do you have a 401k? You could instead increase that and live on the $5000. Do you have any money in a Roth or traditional IRA? We know nothing about your circumstances: young/old, high/low income, savings, debt, etc.

I like to recommend this pdf for new investors or really anyone as it is a great review:
https://www.etf.com/docs/IfYouCan.pdf

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