Cash out inherited IRA or just take RMD's?

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Captain kangaroo
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Cash out inherited IRA or just take RMD's?

Post by Captain kangaroo » Wed Mar 14, 2018 3:21 pm

What is the boglehead consensus for this? I am 29, 200,000 dollar inherited IRA. I can take RMD's or I was told cash the entire IRA out without penalty but would have to pay taxes on it. I assume if I cashed it out, the 200,000 would get hit with a pretty heavy tax bill come April.

jebmke
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Re: Cash out inherited IRA or just take RMD's?

Post by jebmke » Wed Mar 14, 2018 3:22 pm

I'd take the RMD
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Darth Xanadu
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Re: Cash out inherited IRA or just take RMD's?

Post by Darth Xanadu » Wed Mar 14, 2018 3:25 pm

jebmke wrote:
Wed Mar 14, 2018 3:22 pm
I'd take the RMD
+1, assuming you don't have any significant need for the whole amount right now.
"A courageous teacher, failure is."

MotoTrojan
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Re: Cash out inherited IRA or just take RMD's?

Post by MotoTrojan » Wed Mar 14, 2018 3:28 pm

Taking the RMD and invest it in taxable.

HIinvestor
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Re: Cash out inherited IRA or just take RMD's?

Post by HIinvestor » Wed Mar 14, 2018 3:31 pm

Taking the RMDs makes it like an annuity for you. That’s a GOOD thing. Invest it wisely and you can get a nice stream of RMDs. Sorry for the long as of your loved one.

You can always cash it out later at age 59.5 if needed.

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dodecahedron
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Re: Cash out inherited IRA or just take RMD's?

Post by dodecahedron » Wed Mar 14, 2018 3:34 pm

Those are not your only two choices, of course.

You can do opportunistic partial cash out distributions in years when your effective marginal tax rate is low for whatever reason (e.g., if you take a sabbatical or return to school for a graduate degree) and/or when you just need cash for something very important to you, such as a down payment on a home or a child's education.

If you are not already maxing out your 401k at work, you could take additional distributions from your inherited IRA to cover your living expenses, allowing you to increase your payroll deductions to max out the 401k contributions.

If you want to avoid penalties, you must take AT LEAST the RMD each year (or else cash out entirely within five years), but you have plenty of flexibility beyond that minimum.
Last edited by dodecahedron on Wed Mar 14, 2018 3:37 pm, edited 1 time in total.

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dodecahedron
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Re: Cash out inherited IRA or just take RMD's?

Post by dodecahedron » Wed Mar 14, 2018 3:36 pm

HIinvestor wrote:
Wed Mar 14, 2018 3:31 pm
Taking the RMDs makes it like an annuity for you. That’s a GOOD thing. Invest it wisely and you can get a nice stream of RMDs. Sorry for the long as of your loved one.

You can always cash it out later at age 59.5 if needed.
Nothing particularly special about 59 1/2 for an inherited IRA. The OP can take as much as s/he wants each year as long the RMD is taken.

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Mlm
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Re: Cash out inherited IRA or just take RMD's?

Post by Mlm » Wed Mar 14, 2018 3:38 pm

I would take the stretched out RMD's. This gives you the ability to shelter funds from taxation while they grow for decades.
If you are ever unemployed or in a financial bind you could withdraw more and pay the tax at that time.

You have been given a wonderful gift, why give a large portion to the government?

JW-Retired
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Re: Cash out inherited IRA or just take RMD's?

Post by JW-Retired » Wed Mar 14, 2018 4:14 pm

Captain kangaroo wrote:
Wed Mar 14, 2018 3:21 pm
What is the boglehead consensus for this? I am 29, 200,000 dollar inherited IRA. I can take RMD's or I was told cash the entire IRA out without penalty but would have to pay taxes on it. I assume if I cashed it out, the 200,000 would get hit with a pretty heavy tax bill come April.
Why would you want to be hit with a huge tax bill that burns up a 3rd or more of this nest egg poof? If you already make $60k per year (I looked at previous posts), cashing out all at once would push you up into the 35% Federal bracket.... plus whatever your state tax will take. That's if you are single, might be only to the 24% Federal bracket if married.

If you are determined to take all the money out, at least do it over several years so you won't push into a high tax bracket.
JW
Retired at Last

Hug401k
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Re: Cash out inherited IRA or just take RMD's?

Post by Hug401k » Wed Mar 14, 2018 4:24 pm

I have an inherited IRA. I split it with my brother. I have been taking the RMDs annually and today, 7 years later, it is worth more than the day I inherited it. (I invested in a mix of Index funds). My brother took the RMD for a year or 2, and then he decided to buy a house and liquidated the account. No right or wrong, but I would encourage you to keep it in the IRA until you need it. There are no taxes on the investment gains until you take it out.

I moved the account to Fidelity. I found their beneficiary team to be excellent. They will do all the RMD calculations for you, and allow you to set what day you would like to be paid annually, so each year I get a nice birthday gift from my mother. :happy My home page reminds me what the amount will be and if I prefer I can take it anytime, but it's important that they will not let me forget, otherwise the penalty is stiff (50%). The money was previously at Merril who told me I needed an accountant to tell them the amount and did not appear to distribute it automatically if I forgot. Luckily, I know enough to know I could do better so I called Fidelity.

Captain kangaroo
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Re: Cash out inherited IRA or just take RMD's?

Post by Captain kangaroo » Wed Mar 14, 2018 4:45 pm

Hug401k wrote:
Wed Mar 14, 2018 4:24 pm
I have an inherited IRA. I split it with my brother. I have been taking the RMDs annually and today, 7 years later, it is worth more than the day I inherited it. (I invested in a mix of Index funds). My brother took the RMD for a year or 2, and then he decided to buy a house and liquidated the account. No right or wrong, but I would encourage you to keep it in the IRA until you need it. There are no taxes on the investment gains until you take it out.

I moved the account to Fidelity. I found their beneficiary team to be excellent. They will do all the RMD calculations for you, and allow you to set what day you would like to be paid annually, so each year I get a nice birthday gift from my mother. :happy My home page reminds me what the amount will be and if I prefer I can take it anytime, but it's important that they will not let me forget, otherwise the penalty is stiff (50%). The money was previously at Merril who told me I needed an accountant to tell them the amount and did not appear to distribute it automatically if I forgot. Luckily, I know enough to know I could do better so I called Fidelity.
Mine is at Merrill too. Any problems in switching it over to Fidelity? I was considering Fidelity and Merrill Edge.

RadAudit
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Re: Cash out inherited IRA or just take RMD's?

Post by RadAudit » Wed Mar 14, 2018 4:49 pm

I've been taking RMDs from an inherited IRA for nine years now. Nothing major; but, I see no reason to forego the tax deferred compounding that this approach permits me. And, I see no reason to let the feds and the state tax me for a larger withdrawal; I can come up with the money I need from other sources at a lower cost.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The calvary isn't coming, kids. You are on your own.

DemoEngr
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Re: Cash out inherited IRA or just take RMD's?

Post by DemoEngr » Wed Mar 14, 2018 4:53 pm

Another option is an IRA Roth annual max.

Spirit Rider
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Re: Cash out inherited IRA or just take RMD's?

Post by Spirit Rider » Wed Mar 14, 2018 5:34 pm

Think about it this way. What are we trying to do with our tax-advantaged accounts during the accumulation phase? We are trying to increase them. Why would you possibly want to decrease them? There is one case where I would take more than the RMD amount. That is when you are not currently able to maximize your tax-advantaged accounts. This does not decrease your tax-advantaged assets, it just moves them.

For example, you are $5,000 short of being able to maximize your 401k contributions and $2,500 short of being able to maximize your HSA contributions. You take $7,500 in extra distributions from the Inherited IRA and make the respective contributions. The $7,500 in tax deductible contributions will cancel out the $7,500 in taxable distributions. This results in tax neutral exchanges from inherited accounts to owned accounts.

This has these advantages:
  • You reduce and possibly eliminate RMD's at your marginal tax rate without paying any taxes on them.
  • The SCOTUS ruled in 2014 that inherited retirement accounts receive no asset protection. You are moving assets from an account with no asset protection to accounts with assert protection.
  • Your Legacy. An inherited inherited retirement account must continue RMDs with divisors based on your age. If/When you have a spouse, that spouse can assume ownership of those accounts without RMDs. If/When you have children, they can use divisors based on there own age to greatly reduce potential RMDs.

ionball
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Re: Cash out inherited IRA or just take RMD's?

Post by ionball » Wed Mar 14, 2018 6:07 pm

Take RMDs and enjoy the tax deferral for as long as you are able. Should you need to withdraw more, try to spread the withdrawals over multiple years in a tax managed manner.

malbecman
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Re: Cash out inherited IRA or just take RMD's?

Post by malbecman » Wed Mar 14, 2018 6:12 pm

My wife just inherited part of an IRA from her mom (the bulk went to dad who is still living). She took the RMDs as its like a nice $650 check every year in December and can use it to enjoy the holidays with family and also make some donations to orgs they both liked such as the SPCA. She knows her mom would approve. :D

Alan S.
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Re: Cash out inherited IRA or just take RMD's?

Post by Alan S. » Wed Mar 14, 2018 6:36 pm

Captain kangaroo wrote:
Wed Mar 14, 2018 3:21 pm
What is the boglehead consensus for this? I am 29, 200,000 dollar inherited IRA. I can take RMD's or I was told cash the entire IRA out without penalty but would have to pay taxes on it. I assume if I cashed it out, the 200,000 would get hit with a pretty heavy tax bill come April.
I sincerely hope you are not taking financial advice of any kind from whoever suggested that you cash out this inherited IRA. Your life expectancy RMD is around 3700 if you inherited last year. That's about 1.8% of the balance so if the account grows 4.8% this year, your balance will rise about 3% and should continue to rise for many years. You can always take out more if an emergency arises with tax due but no penalty.

Just remember that you CANNOT do a 60 day rollover of this inherited IRA, but you can change the IRA custodian by doing a direct transfer to a new custodian of your choice. Taking a large distribution from an inherited IRA is probably the most devastating mistake people make because the distribution is irrevocable.

scrabbler1
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Re: Cash out inherited IRA or just take RMD's?

Post by scrabbler1 » Wed Mar 14, 2018 6:38 pm

My friend received an inherited IRA worth $100k as part of a large inheritance back in late 2012. He works full-time, so he doesn't need the ~$3k RMD for his regular expenses. I help him manage his portfolio, so I tweaked the IRA's few investments so they generate enough dividends each year to cover the RMD (so far). He uses some or all of the RMD to pay some of the taxes on the investment income his portfolio generates; anything left over he takes as cash. Even after 5 years, the IRA's balance is unchanged. But the way the RMD calculation works, it is rising a little each year so its dividends won't quite be enough to cover the RMD, he will have to sell some of the underlying assets (shares of a mutual fund, first) to make up the difference.

I agree with Alan S. on his advice and points.

Hug401k
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Re: Cash out inherited IRA or just take RMD's?

Post by Hug401k » Thu Mar 15, 2018 4:14 pm

Captain kangaroo wrote:
Wed Mar 14, 2018 4:45 pm
Hug401k wrote:
Wed Mar 14, 2018 4:24 pm
I have an inherited IRA. I split it with my brother. I have been taking the RMDs annually and today, 7 years later, it is worth more than the day I inherited it. (I invested in a mix of Index funds). My brother took the RMD for a year or 2, and then he decided to buy a house and liquidated the account. No right or wrong, but I would encourage you to keep it in the IRA until you need it. There are no taxes on the investment gains until you take it out.

I moved the account to Fidelity. I found their beneficiary team to be excellent. They will do all the RMD calculations for you, and allow you to set what day you would like to be paid annually, so each year I get a nice birthday gift from my mother. :happy My home page reminds me what the amount will be and if I prefer I can take it anytime, but it's important that they will not let me forget, otherwise the penalty is stiff (50%). The money was previously at Merril who told me I needed an accountant to tell them the amount and did not appear to distribute it automatically if I forgot. Luckily, I know enough to know I could do better so I called Fidelity.
Mine is at Merrill too. Any problems in switching it over to Fidelity? I was considering Fidelity and Merrill Edge.
No problem at all. I can't remember the process exactly but it went smoothly. I had to pay a small closing fee to Merrill and fill out paperwork. I did reinvest in different investments (more boglehead worthy) once it got to Fidelity. I already had a taxable Fidelity account, but the inherited IRA was new. Now once a year, they transfer my RMD to my taxable account. I recommend calling their beneficiary line-or as they call it, Inheritor Services specialist.
800-544-0003. I remember them being very helpful. They have some good info on the web site too if you google Fidelity inherited IRA.

RetiredCSProf
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Re: Cash out inherited IRA or just take RMD's?

Post by RetiredCSProf » Thu Mar 15, 2018 9:41 pm

There is no "age limit" for non-spouses withdrawing from inherited RMDs; however, the annual RMD is calculated based on the beneficiary's life expectancy (80ish). The annual RMD for the original IRA owner is calculated based on the possibility of living to 115.

Theoretically, I can withdraw RMDs annually from my tIRA until I celebrate my 115th birthday, at which time I will need to withdraw the balance (regardless of my rate of return). OTOH, if my son inherits my tIRA, then he must take annual RMDs until he has emptied out the account, or reached his 83rd birthday, whichever comes first. That is, he needs to withdraw the balance by his 83rd birthday.

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