Help with inheritance choice

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Newtothis
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Help with inheritance choice

Post by Newtothis » Wed Aug 15, 2018 2:45 pm

Hi,

My parents who are in their early 80’s have offered me the choice of inheriting 1 million from their TIAA retirement account or 1 million from their bank account CD’s upon their passing. I understand that the retirement account is not taxed yet, it will need required distributions based on my life expectancy.

Any suggestion on which choice to go with? Pre tax TIAA account or bank CD? I am in my early 40s and I won’t touch these funds for the next 20+ years.

Thank you!

RadAudit
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Re: Help with inheritance choice

Post by RadAudit » Wed Aug 15, 2018 5:23 pm

Welcome to the forum.

I'm 71. I'm hoping my kids will inherit what ever is left in my IRA and keep (most of) it there [well,actually it'll be an inherited IRA to them] and take the RMDs as required. They are can invest what's left from the RMDs after taxes each year in their own already established Roth IRAs and delay / avoid taxes on most of the money for a long time. That approach may help them get to their financial goals a little quicker.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The Calvary isn't coming, kids. You are on your own.

Newtothis
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Re: Help with inheritance choice

Post by Newtothis » Wed Aug 15, 2018 6:26 pm

Thank you for your response. I am still trying to figure out if 1 mil in IRA is a better choice than 1 mil with no tax.

Minty
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Re: Help with inheritance choice

Post by Minty » Wed Aug 15, 2018 6:33 pm

$1 million (the bank account) is worth more than ~~$600,000 (the TIAA account after taxes). So if I had a choice I'd take the bank account since it is larger. If you prefer the TIAA investments (I assume that there are some stocks and bonds) you can put the cash into that, tax free.
Core Four with nominal bonds and TIPS.

ionball
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Re: Help with inheritance choice

Post by ionball » Wed Aug 15, 2018 6:36 pm

I would choose the 1 mil with no tax and no restrictions. Struggling to think of a reason to go the other way....maybe the IRA if you lack discipline and the age restriction would deter you from spending now assuming your purpose is to save it for retirement.

RadAudit
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Re: Help with inheritance choice

Post by RadAudit » Wed Aug 15, 2018 6:47 pm

Newtothis wrote:
Wed Aug 15, 2018 6:26 pm
I am still trying to figure out if 1 mil in IRA is a better choice than 1 mil with no tax.
Minty wrote:
Wed Aug 15, 2018 6:33 pm
$1 million (the bank account) is worth more than ~~$600,000 (the TIAA account after taxes).
Minty is probably correct. I made a WAG that inheriting an IRA and only paying taxes on the RMDs - and keeping the rest tax deferred and compounding until withdrawn - would work out better in the long run, if the after tax remains of the RMDs were reinvested in a tIRA or Roth. Don't know for sure. The only way to get a ball park figure that I know of is get a spread sheet and plug and chug using your specific situation. So, YMMV. Best of luck.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The Calvary isn't coming, kids. You are on your own.

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FIREchief
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Re: Help with inheritance choice

Post by FIREchief » Wed Aug 15, 2018 7:20 pm

Newtothis wrote:
Wed Aug 15, 2018 2:45 pm
My parents who are in their early 80’s have offered me the choice of inheriting 1 million from their TIAA retirement account or 1 million from their bank account CD’s upon their passing.
If it were me, I would ask them to leave me the $1M cash from the CDs in a trust that allows me to serve as my own trustee.

Just curious, what's going to happen to the amount that you don't take?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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BolderBoy
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Re: Help with inheritance choice

Post by BolderBoy » Wed Aug 15, 2018 9:17 pm

Newtothis wrote:
Wed Aug 15, 2018 2:45 pm
Any suggestion on which choice to go with? Pre tax TIAA account or bank CD?
The bank CD. It's worth more.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

mcluhan
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Re: Help with inheritance choice

Post by mcluhan » Wed Aug 15, 2018 9:30 pm

The inherited IRA will grow tax deferred for the next 40+ years. You'll only have to take out small distributions each year. In the long run the bank CD will NOT be worth more. You're getting some terrible advice on this forum.

aristotelian
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Re: Help with inheritance choice

Post by aristotelian » Wed Aug 15, 2018 9:51 pm

What happens to the other $1M?

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FIREchief
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Re: Help with inheritance choice

Post by FIREchief » Wed Aug 15, 2018 10:21 pm

mcluhan wrote:
Wed Aug 15, 2018 9:30 pm
The inherited IRA will grow tax deferred for the next 40+ years. You'll only have to take out small distributions each year. In the long run the bank CD will NOT be worth more. You're getting some terrible advice on this forum.
If he takes the 100% after tax CD and invests it in a total market index fund, won't everything but the dividends also be tax deferred? The dividends will only be taxed at capital gains rates and if he ever sells the inflated principle, the gains will be similarly taxed. Any gains in the tIRA will ultimately be taxed at ordinary income rates. Are you sure the OP has been given terrible advice? :confused
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

MrBeaver
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Re: Help with inheritance choice

Post by MrBeaver » Wed Aug 15, 2018 10:50 pm

aristotelian wrote:
Wed Aug 15, 2018 9:51 pm
What happens to the other $1M?
If the other 1M would be donated to a charitable institution, then it is likely better for them to donate the IRA to charity and the cash to the heirs.

There is a breakeven point (number of years) where there is more benefit to keeping a gift to heirs in a tax deferred vehicle than a stepped up basis taxable account. That point will be a function of the heirs’ tax bracket.

Minty
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Re: Help with inheritance choice

Post by Minty » Wed Aug 15, 2018 11:54 pm

FIREchief wrote:
Wed Aug 15, 2018 10:21 pm
mcluhan wrote:
Wed Aug 15, 2018 9:30 pm
The inherited IRA will grow tax deferred for the next 40+ years. You'll only have to take out small distributions each year. In the long run the bank CD will NOT be worth more. You're getting some terrible advice on this forum.
If he takes the 100% after tax CD and invests it in a total market index fund, won't everything but the dividends also be tax deferred? The dividends will only be taxed at capital gains rates and if he ever sells the inflated principle, the gains will be similarly taxed. Any gains in the tIRA will ultimately be taxed at ordinary income rates. Are you sure the OP has been given terrible advice? :confused
I'm with FIREchief. Distributions from the inherited IRA will be subject to taxation as ordinary income, every penny of them. The bank CD or whatever investments it is rolled into will have a $1 million basis, so the first million can be used and spent tax free, and dividends or capital gains, with a little planning, as FIREchief notes, will be taxed at the lower rate, and can, mostly, be deferred. So, again, the question reduces to whether the OP would prefer to (1) pay income taxes on the corpus, or have the transfer be tax free, and (2) pay higher or lower tax rates on the returns.

If OP's goal is to leave the money untouched as long as possible, that also cuts in favor of the bank account. The RMD for a 42 year old with a million dollar IRA inherited from a nonspouse is about 50 grand per year, according to the Schwab calculator, taxed at ordinary income rates. The dividend yield of a million worth of SPY (S & P 500) is about 22K, taxed as a qualified dividend, and there is no requirement in a taxable account to sell shares as there is in an inherited IRA.
Core Four with nominal bonds and TIPS.

47Percent
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Re: Help with inheritance choice

Post by 47Percent » Thu Aug 16, 2018 12:10 am

Minty wrote:
Wed Aug 15, 2018 11:54 pm
FIREchief wrote:
Wed Aug 15, 2018 10:21 pm
mcluhan wrote:
Wed Aug 15, 2018 9:30 pm
The inherited IRA will grow tax deferred for the next 40+ years. You'll only have to take out small distributions each year. In the long run the bank CD will NOT be worth more. You're getting some terrible advice on this forum.
If he takes the 100% after tax CD and invests it in a total market index fund, won't everything but the dividends also be tax deferred? The dividends will only be taxed at capital gains rates and if he ever sells the inflated principle, the gains will be similarly taxed. Any gains in the tIRA will ultimately be taxed at ordinary income rates. Are you sure the OP has been given terrible advice? :confused
I'm with FIREchief. Distributions from the inherited IRA will be subject to taxation as ordinary income, every penny of them. The bank CD or whatever investments it is rolled into will have a $1 million basis, so the first million can be used and spent tax free, and dividends or capital gains, with a little planning, as FIREchief notes, will be taxed at the lower rate, and can, mostly, be deferred. So, again, the question reduces to whether the OP would prefer to (1) pay income taxes on the corpus, or have the transfer be tax free, and (2) pay higher or lower tax rates on the returns.

If OP's goal is to leave the money untouched as long as possible, that also cuts in favor of the bank account. The RMD for a 42 year old with a million dollar IRA inherited from a nonspouse is about 50 grand per year, according to the Schwab calculator, taxed at ordinary income rates. The dividend yield of a million worth of SPY (S & P 500) is about 22K, taxed as a qualified dividend, and there is no requirement in a taxable account to sell shares as there is in an inherited IRA.
+1 a million times.

On lean years, the entire qualified dividend on the $1M could be taxed at 0% rate. You would never have that luxury for money inside an IRA, as everything that comes out will be at ordinary income rate.

OP needs to be careful -- This could be a trick question from his parents to test his financial acumen. The entire $2M may end up going to charity, and he may only get the Little book of Common Sense Investing ;-)

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celia
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Re: Help with inheritance choice

Post by celia » Thu Aug 16, 2018 12:27 am

C'mon people. It is irrelevant what anything is invested in at the time of death. Once it is yours, you can invest it however you want (or not). If you took the CD, you could put it in a taxable account using the same investments that are in the IRA. If you took the tIRA, you could exchange the assets to a CD (within the IRA).

The question is simply: Would you choose the door with one million behind it or the door with one million behind it, but you have to share it with your Uncle Sam and possibly your state? Plain and simple, that is the question. (Note that the doors have windows so you can see what's on the other side.)
[For the answer see my signature below.]


I'm wondering if the parents are really asking the above. It could be as simple as they are updating their beneficiaries to specify who will get each asset that is worth one million today, but more or less in the future. Maybe one child will get what is left of the current $1M CD while another child will get what is left from the current $1M IRA. The better way to go, in this case, would be for the children to be listed as co-beneficiaries per stirpes on both assets. This is a different question than what was originally asked, since the assets could become worth more or less between now and death.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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celia
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Re: Help with inheritance choice

Post by celia » Thu Aug 16, 2018 1:14 am

mcluhan wrote:
Wed Aug 15, 2018 9:30 pm
The inherited IRA will grow tax deferred for the next 40+ years. You'll only have to take out small distributions each year. In the long run the bank CD will NOT be worth more. You're getting some terrible advice on this forum.
The beneficiary is free to change the asset of either one into something else. So assume the CD and the IRA are then invested the same way. They will continue to grow exactly the same way. The only difference between them is the "wrapper". The CD is assumed to be a taxable account so the assets that replace the CD will also be in a taxable account. The assets in the IRA will continue to be in an IRA, although RMDs will need to be withdrawn each year (but not necessarily spent)

In the CD, the original $1M already was taxed, so only the future yearly dividends and capital gains will be taxed, usually at favorable tax rates. The Inherited IRA, on the other hand, will have EVERY DOLLAR WITHDRAWN be taxed as ordinary income.

FIREchief wrote:
Wed Aug 15, 2018 10:21 pm
If he takes the 100% after tax CD and invests it in a total market index fund, won't everything but the dividends also be tax deferred? The dividends will only be taxed at capital gains rates and if he ever sells the inflated principle, the gains will be similarly taxed. Any gains in the tIRA will ultimately be taxed at ordinary income rates. Are you sure the OP has been given terrible advice? :confused
No, the original $1M in the CD won't be taxed again, only the growth on it.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

47Percent
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Re: Help with inheritance choice

Post by 47Percent » Thu Aug 16, 2018 1:43 am

celia wrote:
Thu Aug 16, 2018 1:14 am
The beneficiary is free to change the asset of either one into something else. So assume the CD and the IRA are then invested the same way. They will continue to grow exactly the same way. The only difference between them is the "wrapper". The CD is assumed to be a taxable account so the assets that replace the CD will also be in a taxable account. The assets in the IRA will continue to be in an IRA, although RMDs will need to be withdrawn each year (but not necessarily spent)
Not quite.
Even if you are willing to be taxed all over again, you cannot put that $1M in CD's into an IRA account. So, money inside an IRA needs to be given due consideration, not just as a "wrapper" as you cannot wrap it yourself if you wanted to.

But as many have pointed out the correct answer is the Cash in taxable CD's. For all practical purposes, you can create a near tax-deferred vehicle whenever you want to by just investing in broad based index fund and holding it for the long run without trading. Asset allocation would be a challenge you have to manage.

jminv
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Re: Help with inheritance choice

Post by jminv » Thu Aug 16, 2018 2:17 am

I’m surprised that someone went for the inherited IRA and felt so strongly about it. If it happened tomorrow, the required RMDs on the inherited IRA would not be tiny. It would also force the OP to get taxed at ordinary income tax rates on income he says he doesn’t need now. It would force him to do things that he otherwise might not want or do.

The account with the cds is the way to go but when you do inherit put it in index funds, target date allocation, etc. Buy and hold. New basis, taxes only on dividends received at the qualified rate assuming you’re not receiving non tax-exempt interest, don’t have to take out money when you don’t want to, aren’t taxed at high marginal income tax rate. Another nice feature is that you can invest in assets that don’t pay (or pay low) dividends if you really want to avoid taxes on them. You could buy tax exempt bonds. You can do what you want with the money when you want to.

NotWhoYouThink
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Re: Help with inheritance choice

Post by NotWhoYouThink » Thu Aug 16, 2018 7:56 am

If they live to be 100, the IRA will shrink because their RMDs will be large. The account with the CDs may grow or shrink depending on whether they need to spend it for living expenses.

Luke Duke
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Re: Help with inheritance choice

Post by Luke Duke » Thu Aug 16, 2018 9:51 am

mcluhan wrote:
Wed Aug 15, 2018 9:30 pm
The inherited IRA will grow tax deferred for the next 40+ years. You'll only have to take out small distributions each year. In the long run the bank CD will NOT be worth more. You're getting some terrible advice on this forum.
:oops:

John Laurens
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Re: Help with inheritance choice

Post by John Laurens » Thu Aug 16, 2018 10:01 am

I believe the question being posed is to to determine the rightful heir. If you get the answer correct, I believe you will receive both of the 1 million accounts. Choose wisely. Take the 1 million taxable account. Then invest the proceeds tax efficiently.

Regards,
John

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celia
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Re: Help with inheritance choice

Post by celia » Thu Aug 16, 2018 10:45 am

47Percent wrote:
Thu Aug 16, 2018 1:43 am
Even if you are willing to be taxed all over again, you cannot put that $1M in CD's into an IRA account.
But WHY would you even want to put the CD money in an IRA, even if you could? You would be paying higher taxes on the growth as it is withdrawn. And after age 70.5, your taxes could even be higher once you take RMDs on your own (contributed to) IRAs as well as SS as well as the RMDs on this new account.

Many Bogleheads here have seen that when they retire, their projected income after age 70.5 will put them into a higher tax bracket. So they start doing Roth conversions before then. That is not an option for Inherited IRAs. But the money can be withdrawn (and taxes paid) while your taxable income is lower (when one is not working or in early retirement).

That was certainly our case. As soon as we retired, we started doing Roth conversions and were ahead of schedule in having everything converted before age 70.5. Then DH inherited an IRA. AARG! We then shifted over to withdrawing as much as we could from the Inherited IRA while staying in the same tax bracket. It helped that we slowed down its growth by putting most of it in bonds.

Once we hit 70.5, we started giving at least the RMDs of our own remaining IRAs and the Inherited one to charities by using QCDs. Neither the charities or us have to pay taxes on those RMDs.

If you have an Inherited IRA, you also have to start RMDs on that account in the year after death. The withdrawal rate is more than the RMDs on your own IRA since the account must be cleared out in a shorter time whereas your own IRA can last past age 110 or thereabouts. If you are in your high earning years when you inherit, this will add to your taxable income.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

cherijoh
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Re: Help with inheritance choice

Post by cherijoh » Thu Aug 16, 2018 11:04 am

Newtothis wrote:
Wed Aug 15, 2018 2:45 pm
Hi,

My parents who are in their early 80’s have offered me the choice of inheriting 1 million from their TIAA retirement account or 1 million from their bank account CD’s upon their passing. I understand that the retirement account is not taxed yet, it will need required distributions based on my life expectancy.

Any suggestion on which choice to go with? Pre tax TIAA account or bank CD? I am in my early 40s and I won’t touch these funds for the next 20+ years.

Thank you!
Everyone seems to be approaching this as though the OP's parents will be gifting the money as soon as they update their wills.

Is there any chance one (or both) of your parents will need to go in a nursing home? IANAL but I think the only IRA RMD would be accessible to pay for a nursing home, while the entire after-tax account (or at least a large chunk of it) could be eaten up by an extended stay in a nursing home.

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celia
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Re: Help with inheritance choice

Post by celia » Thu Aug 16, 2018 11:57 am

cherijoh wrote:
Thu Aug 16, 2018 11:04 am
Everyone seems to be approaching this as though the OP's parents will be gifting the money as soon as they update their wills.
Not me. And you can't gift your IRA to anyone while you are living, not even your spouse.
Is there any chance one (or both) of your parents will need to go in a nursing home? IANAL but I think the only IRA RMD would be accessible to pay for a nursing home, while the entire after-tax account (or at least a large chunk of it) could be eaten up by an extended stay in a nursing home.
After 59.5 you can pull out as much as you want, but after 70.5 you must pull out at least the RMD amount.

If it is an Inherited IRA you can pull out as much as you want each year but need to pull out at least the RMD.

The nursing home doesn't care (or likely doesn't even know) where the money comes from. In fact you may even WANT to pay using IRA withdrawals if the payments to the nursing home are tax-deductible, especially if you have other deductions up to 12,000 (filing Single) or 24,000 (filing MFJ).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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FIREchief
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Re: Help with inheritance choice

Post by FIREchief » Thu Aug 16, 2018 12:18 pm

celia wrote:
Thu Aug 16, 2018 1:14 am
FIREchief wrote:
Wed Aug 15, 2018 10:21 pm
If he takes the 100% after tax CD and invests it in a total market index fund, won't everything but the dividends also be tax deferred? The dividends will only be taxed at capital gains rates and if he ever sells the inflated principle, the gains will be similarly taxed. Any gains in the tIRA will ultimately be taxed at ordinary income rates. Are you sure the OP has been given terrible advice? :confused
No, the original $1M in the CD won't be taxed again, only the growth on it.
Isn't that exactly what I said?? :confused
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

RadAudit
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Re: Help with inheritance choice

Post by RadAudit » Thu Aug 16, 2018 2:00 pm

jminv wrote:
Thu Aug 16, 2018 2:17 am
I’m surprised that someone went for the inherited IRA
Well, now that I look at my original answer and reconsider it based on the various other inputs, so am I. The surprise that one experiences when what you thought was a good answer turns out not to be all that good is part of the learning process I guess. Sorry to send OP off on the wrong path.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The Calvary isn't coming, kids. You are on your own.

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celia
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Re: Help with inheritance choice

Post by celia » Thu Aug 16, 2018 4:19 pm

FIREchief wrote:
Thu Aug 16, 2018 12:18 pm
celia wrote:
Thu Aug 16, 2018 1:14 am
FIREchief wrote:
Wed Aug 15, 2018 10:21 pm
If he takes the 100% after tax CD and invests it in a total market index fund, won't everything but the dividends also be tax deferred? The dividends will only be taxed at capital gains rates and if he ever sells the inflated principle, the gains will be similarly taxed. Any gains in the tIRA will ultimately be taxed at ordinary income rates. Are you sure the OP has been given terrible advice? :confused
No, the original $1M in the CD won't be taxed again, only the growth on it.
Isn't that exactly what I said?? :confused
I was commenting on the red part. We agree that later dividends will be taxed, but the first sentence (as a standalone sentence) sounded like the $1M principle would eventually be taxed again (ie, "tax-deferred"). You seemed to correct it in the bolded part, but I just want to be sure that other readers understand that the original $1M principle will not be taxed again, but its gains will be, if later sold during the beneficiary's lifetime.


I might add again, that it is also irrelevant what the $1M is invested in (as some posters seemed to be distracted by the growth of certain assets compared to other assets, ie, CD vs mutual fund).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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FIREchief
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Re: Help with inheritance choice

Post by FIREchief » Thu Aug 16, 2018 4:49 pm

celia wrote:
Thu Aug 16, 2018 4:19 pm
FIREchief wrote:
Thu Aug 16, 2018 12:18 pm
celia wrote:
Thu Aug 16, 2018 1:14 am
FIREchief wrote:
Wed Aug 15, 2018 10:21 pm
If he takes the 100% after tax CD and invests it in a total market index fund, won't everything but the dividends also be tax deferred? The dividends will only be taxed at capital gains rates and if he ever sells the inflated principle, the gains will be similarly taxed. Any gains in the tIRA will ultimately be taxed at ordinary income rates. Are you sure the OP has been given terrible advice? :confused
No, the original $1M in the CD won't be taxed again, only the growth on it.
Isn't that exactly what I said?? :confused
I was commenting on the red part. We agree that later dividends will be taxed, but the first sentence (as a standalone sentence) sounded like the $1M principle would eventually be taxed again (ie, "tax-deferred"). You seemed to correct it in the bolded part, but I just want to be sure that other readers understand that the original $1M principle will not be taxed again, but its gains will be, if later sold during the beneficiary's lifetime.


I might add again, that it is also irrelevant what the $1M is invested in (as some posters seemed to be distracted by the growth of certain assets compared to other assets, ie, CD vs mutual fund).
Fair enough. I was assuming the step up basis but, to your point, without stating that explicitly it could have confused some readers. I was referring to the tax deferral of monies held in a growth asset (such as stocks) until that asset is sold or left to an heir.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

Newtothis
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Re: Help with inheritance choice

Post by Newtothis » Thu Aug 16, 2018 5:07 pm

Thank you all for your thoughtful responses. I asked my parents to name me as beneficiary for 500k in bank CD’s and 500k in retirement account and they agreed. For those who are curious, the rest of the beneficiaries are charities and few other relatives. I requested this mix because they don’t have long term care insurance and they might need help with nursing home etc in future.

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FIREchief
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Re: Help with inheritance choice

Post by FIREchief » Thu Aug 16, 2018 5:54 pm

Newtothis wrote:
Thu Aug 16, 2018 5:07 pm
Thank you all for your thoughtful responses. I asked my parents to name me as beneficiary for 500k in bank CD’s and 500k in retirement account and they agreed. For those who are curious, the rest of the beneficiaries are charities and few other relatives. I requested this mix because they don’t have long term care insurance and they might need help with nursing home etc in future.
It would generally be much better for the tax deferred retirement funds to be left to charity, as the charity won't have to pay any taxes on them. I don't understand why you don't just want to take it all from the CD's (which of course can then be invested in whatever you want). Also, in the event that they do need nursing home care in the future, the taxes on tIRA withdrawals could be largely offset by a medical itemized deduction to pay for the care. Based upon what you've told us, it simply doesn't make sense to take it 50/50 as you've described.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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celia
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Re: Help with inheritance choice

Post by celia » Thu Aug 16, 2018 6:53 pm

Newtothis wrote:
Thu Aug 16, 2018 5:07 pm
Thank you all for your thoughtful responses. I asked my parents to name me as beneficiary for 500k in bank CD’s and 500k in retirement account and they agreed. For those who are curious, the rest of the beneficiaries are charities and few other relatives. I requested this mix because they don’t have long term care insurance and they might need help with nursing home etc in future.
I'm now confused. You are bringing up expenses they may incur while they are living (long term care and nursing home) and which can be paid from any source. I understood the question to be about distributions of their assets after they have died. These are different topics. What if they were to put you as the beneficiary of an asset, but then those assets were spent before they die, leaving other assets to go to someone besides you? They should spend down their assets for what makes the most financial/tax sense for them while they are living. Spending down a CD or an IRA may or may not make sense as time goes by.

I'm not even sure what their wishes are or what the real question should be at this point. Based only on the statement that "the beneficiaries are charities and few other relatives", the following may or may not make sense for them (and you):

Separate out some assets meant for "other relatives" and put them in another similar account with them as beneficiaries, leaving only you and charities to receive the rest. They may want to withdraw from this account over time so it doesn't end up being the last asset left, should they have big expenses later on.

Then put you as the primary beneficiary on the CD and IRA with charities as contingent beneficiaries. If they trust you to follow their wishes, you can choose whichever asset is best for you at their death (depending on what has been spent down in the meantime or grown) up to $1M, then disclaim the rest. The part you disclaim will then go to the charities listed on that account.

This may or may not match their wishes. They may also want to consider estate planning with an estate planning lawyer.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

WannabeAgAlum
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Re: Help with inheritance choice

Post by WannabeAgAlum » Thu Aug 16, 2018 11:17 pm

On the initial question of whether to pick an inherited retirement plan or CD, and ignoring effect on parent and parent's estate, I am not convinced that the CD is the right answer 100% of the time for everyone, although it seems like the right answer in this case.

I wonder, if the beneficiary is young enough, whether it's possible that the relatively small rmds would be a lesser tax burden than the tax from growth from a non-deferred account. I would think it is possible. And the beneficiary would likely have more wiggle room with investment options in a retirement account since he/she wouldn't be worried about income tax effects of varying investment choices.

If it were me, even if I were 40, I'd run the numbers with reasonable assumptions.

Wannabe

cherijoh
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Re: Help with inheritance choice

Post by cherijoh » Fri Aug 17, 2018 10:00 am

celia wrote:
Thu Aug 16, 2018 11:57 am
cherijoh wrote:
Thu Aug 16, 2018 11:04 am
Everyone seems to be approaching this as though the OP's parents will be gifting the money as soon as they update their wills.
Not me. And you can't gift your IRA to anyone while you are living, not even your spouse.
Is there any chance one (or both) of your parents will need to go in a nursing home? IANAL but I think the only IRA RMD would be accessible to pay for a nursing home, while the entire after-tax account (or at least a large chunk of it) could be eaten up by an extended stay in a nursing home.
After 59.5 you can pull out as much as you want, but after 70.5 you must pull out at least the RMD amount.

If it is an Inherited IRA you can pull out as much as you want each year but need to pull out at least the RMD.

The nursing home doesn't care (or likely doesn't even know) where the money comes from. In fact you may even WANT to pay using IRA withdrawals if the payments to the nursing home are tax-deductible, especially if you have other deductions up to 12,000 (filing Single) or 24,000 (filing MFJ).
Celia,

I think you totally missed my point. If the parents are forced to spend down their money to pay for a nursing home or other expenses, then there will no longer be $1M after tax and $1M in an IRA. That's what I meant by people treating it as though the parents were gifting the money immediately. Everyone is taking for granted that at the time of inheritance there will still be equal amounts of money in the two accounts!

If they are faced will high expenses, they would have a better chance of protecting the IRA money from creditors and being forced to spend it to pay for the nursing home.

not4me
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Re: Help with inheritance choice

Post by not4me » Fri Aug 17, 2018 10:22 am

RadAudit wrote:
Thu Aug 16, 2018 2:00 pm
jminv wrote:
Thu Aug 16, 2018 2:17 am
I’m surprised that someone went for the inherited IRA
Well, now that I look at my original answer and reconsider it based on the various other inputs, so am I. The surprise that one experiences when what you thought was a good answer turns out not to be all that good is part of the learning process I guess. Sorry to send OP off on the wrong path.
Thanks for taking the time to post this & set a good example for me. I'm confident there have been times I should have posted something like this

not4me
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Re: Help with inheritance choice

Post by not4me » Fri Aug 17, 2018 10:38 am

WannabeAgAlum wrote:
Thu Aug 16, 2018 11:17 pm
On the initial question of whether to pick an inherited retirement plan or CD, and ignoring effect on parent and parent's estate, I am not convinced that the CD is the right answer 100% of the time for everyone, although it seems like the right answer in this case.

I wonder, if the beneficiary is young enough, whether it's possible that the relatively small rmds would be a lesser tax burden than the tax from growth from a non-deferred account. I would think it is possible. And the beneficiary would likely have more wiggle room with investment options in a retirement account since he/she wouldn't be worried about income tax effects of varying investment choices.

If it were me, even if I were 40, I'd run the numbers with reasonable assumptions.

Wannabe
This is not in disagreement with the main point of this, but I thought I'd offer an opinion on a portion. I have a concern that the OP (who is admittedly new to this) never did understand all the considerations. Others reading it may not understand some of the reasons either. There are lots of variations -- inherited by non-spouse or spouse? original owner already taking RMDs or not? ETC

But I think it is wrong to say they "wouldn't be worried about income tax effects"...maybe not worry, but understand & consider. The RMDs might be small to start with, but will all be at ordinary income rates. For many/most at age 40, they are going into their highest earning years. Options outside an IRA such as qualified dividends, long term cap gain, tax loss harvesting, muni bonds, treasuries, etc shouldn't be ignored. Assets outside the IRA will get a step up in basis also which is an income tax consideration since IRA assets don't.

Not income tax per se, but the other finances/debts/et al are considerations & right choice isn't always due to taxes alone

Between the tax rate & the basis step up, I think it safe to say what the default choice would be for someone who isn't prepared (or just doesn't want) to drill down into detailed scenarios

NotWhoYouThink
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Re: Help with inheritance choice

Post by NotWhoYouThink » Fri Aug 17, 2018 11:04 am

Newtothis wrote:
Thu Aug 16, 2018 5:07 pm
Thank you all for your thoughtful responses. I asked my parents to name me as beneficiary for 500k in bank CD’s and 500k in retirement account and they agreed. For those who are curious, the rest of the beneficiaries are charities and few other relatives. I requested this mix because they don’t have long term care insurance and they might need help with nursing home etc in future.
By "500k" in each, do you really mean "50%" of each? Because that might make sense. As they continue to live what we all hope will be long lives, they will spend some from the IRA (or at least take RMDs) and some from their after-tax accounts. If they leave you 50% of each, you'll get 50% of the total. If they leave you all of one or all of the other, it could be much more or much less than 50% of the total.

If they work with a good estate attorney, they can avoid mistakes like specifying a dollar amount for a charity from some account, then spending down that account so that it no longer has that much money, or such that you end up with nothing when they meant for you to have half. Because we don't know what will happen between now and when they die, but we can be assured that something will.

WannabeAgAlum
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Re: Help with inheritance choice

Post by WannabeAgAlum » Fri Aug 17, 2018 11:29 pm

not4me wrote:
Fri Aug 17, 2018 10:38 am
WannabeAgAlum wrote:
Thu Aug 16, 2018 11:17 pm
On the initial question of whether to pick an inherited retirement plan or CD, and ignoring effect on parent and parent's estate, I am not convinced that the CD is the right answer 100% of the time for everyone, although it seems like the right answer in this case.

I wonder, if the beneficiary is young enough, whether it's possible that the relatively small rmds would be a lesser tax burden than the tax from growth from a non-deferred account. I would think it is possible. And the beneficiary would likely have more wiggle room with investment options in a retirement account since he/she wouldn't be worried about income tax effects of varying investment choices.

If it were me, even if I were 40, I'd run the numbers with reasonable assumptions.

Wannabe
This is not in disagreement with the main point of this, but I thought I'd offer an opinion on a portion. I have a concern that the OP (who is admittedly new to this) never did understand all the considerations. Others reading it may not understand some of the reasons either. There are lots of variations -- inherited by non-spouse or spouse? original owner already taking RMDs or not? ETC

But I think it is wrong to say they "wouldn't be worried about income tax effects"...maybe not worry, but understand & consider. The RMDs might be small to start with, but will all be at ordinary income rates. For many/most at age 40, they are going into their highest earning years. Options outside an IRA such as qualified dividends, long term cap gain, tax loss harvesting, muni bonds, treasuries, etc shouldn't be ignored. Assets outside the IRA will get a step up in basis also which is an income tax consideration since IRA assets don't.

Not income tax per se, but the other finances/debts/et al are considerations & right choice isn't always due to taxes alone

Between the tax rate & the basis step up, I think it safe to say what the default choice would be for someone who isn't prepared (or just doesn't want) to drill down into detailed scenarios
When I said "wouldn't be worried about income tax effects" I was referring to investment choices in an inherited IRA, which I thought was clear but perhaps it wasn't. Many otherwise normal investment considerations that may come into play in a taxable account (e.g., tax loss harvesting, income tax effects of bonds, etc.) should not be considered in the context of an inherited IRA in the same way as they would be in a taxable account. RMDs are calculated based on life expectancy and account value, not the investment choices (although to the extent investment choices affect account value, then I would agree that they affect RMDs in that sense, if that is your point). In other words, the RMDs are ordinary income no matter the investments. Are you saying investment choices in an inherited IRA affect the income tax consequences beyond their effect on account value? My position is "no, they shouldn't" if investments is the only variable. Please help me understand if my thinking is incorrect.

I think I agree with all your other points.

Wannabe

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celia
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Re: Help with inheritance choice

Post by celia » Sat Aug 18, 2018 1:32 am

Newtothis wrote:
Wed Aug 15, 2018 2:45 pm
My parents who are in their early 80’s have offered me the choice of inheriting 1 million from their TIAA retirement account or 1 million from their bank account CD’s upon their passing. I understand that the retirement account is not taxed yet, it will need required distributions based on my life expectancy.
Let me re-phrase my primary point. This is just a choice between a tax-deferred account and a taxable account. The fact that one is invested in the stock market, bonds, or an annuity containing them and the other is invested in a bank CD is irrelevant, because the receiver can easily change the type of investment to meet her own desired asset allocation. The part that is harder to change is the type of account the asset is in. Withdrawing assets from the retirement account can only be done with a large tax consequence, leaving the receiver with much less money. And putting a wad of taxable money into an IRA is impossible since there are yearly limits to how much can be contributed (besides the receiver needing to have earned income).

Maybe I didn't say it clearly, but:
A dollar in Roth is worth more than a dollar in a taxable account.
A dollar in taxable is worth more than a dollar in a tax-deferred account
(because part of the tax-deferred belongs to the IRS and state).
Last edited by celia on Sat Aug 18, 2018 12:01 pm, edited 1 time in total.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: Help with inheritance choice

Post by not4me » Sat Aug 18, 2018 8:52 am

WannabeAgAlum wrote:
Fri Aug 17, 2018 11:29 pm
In other words, the RMDs are ordinary income no matter the investments. Are you saying investment choices in an inherited IRA affect the income tax consequences beyond their effect on account value? My position is "no, they shouldn't" if investments is the only variable. Please help me understand if my thinking is incorrect.

I think I agree with all your other points.

Wannabe
I don't think your thinking is incorrect & believe if we sat down over a cup of coffee we'd find we were in full agreement. I guess one other point I was trying to say dealt with asset allocation between taxable & tax deferred. Maybe one way to say it is that allocation inside tax deferred should "complement" the allocation outside so that ultimately income taxes are minimized (to the extent we can predict future taxes). Particularly, an inherited IRA has different rules than a traditional -- especially for those younger than 59 1/2 & possibly contributing to a 401k. I don't think you disagreed with that. But I do think there has been some noise around this that might confuse someone unfamiliar with it....again, not you as much as others reading without a background.

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