Inheritance of Trad IRA

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Rowdie
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Inheritance of Trad IRA

Post by Rowdie » Mon Mar 25, 2019 2:17 pm

I am in the process of splitting up parents estate, I'm the trustee.

I have an estate attorney doing most of the work.

I'm a life long Boglehead type, working on shifting my AA as I just turned 60, but this question addresses just a small portion of the inheritance.

My mother had an IRA with an ending value of 300K, after paying the nursing home bill from this account.

My portion is 100K. I live on a farm, do farm taxes and my CPA told me this year to spend an extra 60K on a tractor, barn, cows ect to offset the taxed income. Spending 60k will save me 22k taxes next year per his worksheet.

Problem is, I really don't need another tractor, barn, or any more cattle.

I went and looked at Kubota tractors last week, the one I looked at was $55,000.

I left feeling foolish wondering about spending such a large sum to save paying the taxes when I really don't need anything.

Any comments or help how to look at this situation.

Thank you

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vineviz
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Re: Inheritance of Trad IRA

Post by vineviz » Mon Mar 25, 2019 2:21 pm

Rowdie wrote:
Mon Mar 25, 2019 2:17 pm
I left feeling foolish wondering about spending such a large sum to save paying the taxes when I really don't need anything.

Any comments or help how to look at this situation.
Unless your marginal tax rate is over 100%, you're better off paying the taxes than buying something you don't need and can't use.

I'm not a CPA, but it seems to me that some sort of charitable gifting arrangement could save you the same amount of money in taxes and ensure the money benefitted someone more in need than your Kubota dealer.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Longdog
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Re: Inheritance of Trad IRA

Post by Longdog » Mon Mar 25, 2019 2:22 pm

Is the only “income” the inheritance of the traditional IRA? If so, you can withdraw that over time (don’t know the exact calculation) - it doesn’t have to be all in one year.
Steve

HereToLearn
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Re: Inheritance of Trad IRA

Post by HereToLearn » Mon Mar 25, 2019 2:25 pm

I have just a tiny bit of knowledge on this topic as I have recently inherited an IRA from my mother.

Won't your mandatory distribution = 1/25 of the $100K you inherited? So....tax on $4000 can't be all that bad. Certainly not enough to purchase a tractor you do not need.

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Re: Inheritance of Trad IRA

Post by fposte » Mon Mar 25, 2019 2:27 pm

It sounds like your CPA is thinking that you're cashing out your portion. Unless there's a pressing need to do that, you'd probably be better off rolling it into an inherited IRA, from which you would take RMDs annually.

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Rowdie
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Re: Inheritance of Trad IRA

Post by Rowdie » Mon Mar 25, 2019 2:33 pm

Longdog wrote:
Mon Mar 25, 2019 2:22 pm
Is the only “income” the inheritance of the traditional IRA? If so, you can withdraw that over time (don’t know the exact calculation) - it doesn’t have to be all in one year.
The estate is in an A B trust so the IRA is the only taxable money.

To settle estate I thought it would need to be all distributed this year between myself and two siblings, but really don't know.

Longdog
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Re: Inheritance of Trad IRA

Post by Longdog » Mon Mar 25, 2019 2:41 pm

Rowdie wrote:
Mon Mar 25, 2019 2:33 pm
Longdog wrote:
Mon Mar 25, 2019 2:22 pm
Is the only “income” the inheritance of the traditional IRA? If so, you can withdraw that over time (don’t know the exact calculation) - it doesn’t have to be all in one year.
The estate is in an A B trust so the IRA is the only taxable money.

To settle estate I thought it would need to be all distributed this year between myself and two siblings, but really don't know.
You will set up an inherited IRA and transfer your share directly into it. That transfer, in and of itself, is not taxable. After that, you will be required by the IRS to withdraw a certain amount from that inherited IRA each year. I don’t know the details of that calculation, but there is a formula depending on a variety of factors. The amount withdrawn will be taxable in the year you withdraw it. You could, but don’t have to, withdraw it all at once - which is what I think you thought you have to do, but you don’t. Probably better to spread it out.
Steve

btenny
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Re: Inheritance of Trad IRA

Post by btenny » Mon Mar 25, 2019 2:42 pm

Something does not add up with your information. I think your CPA and your estate lawyer are making some mistakes. I think your Moms estate should result in you owning a Inherited IRA for $100K. Then the inherited IRA will generate about $4K in required RMD income this year and a little more next year and so on. You do not have to withdraw any of this money beyond RMDs if the estate is handled correctly.

So I do not see how this is connected to your farm income at all. How does this $60K income have anything to do with the IRA? Maybe your CPA thinks you will make a lot of money farming this year so you need to invest to not pay taxes. So please advise after talking to these people.

Good Luck.

Morgan Dollar 1921
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Re: Inheritance of Trad IRA

Post by Morgan Dollar 1921 » Mon Mar 25, 2019 2:53 pm

Just a quick question, does you CPA hope for you to build social security income, or do you avoid that entirely due to having to fully fund as self-employed?

fujiters
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Re: Inheritance of Trad IRA

Post by fujiters » Mon Mar 25, 2019 2:56 pm

Why not do RMD from the inherited IRA according to your age? At age 60, you will only have to pull ~$4k this year based on the IRS Single Life Expectancy table.
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

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BL
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Re: Inheritance of Trad IRA

Post by BL » Mon Mar 25, 2019 2:58 pm

btenny wrote:
Mon Mar 25, 2019 2:42 pm
Something does not add up with your information. I think your CPA and your estate lawyer are making some mistakes. I think your Moms estate should result in you owning a Inherited IRA for $100K. Then the inherited IRA will generate about $4K in required RMD income this year and a little more next year and so on. You do not have to withdraw any of this money beyond RMDs if the estate is handled correctly.

So I do not see how this is connected to your farm income at all. How does this $60K income have anything to do with the IRA? Maybe your CPA thinks you will make a lot of money farming this year so you need to invest to not pay taxes. So please advise after talking to these people.

Good Luck.
+1
Perhaps you told him you would be cashing in the whole thing this year; thus the reason for increasing expenses.
I think you need advice or research on this IRA. Normally you can cash it in within 5 years or make it an inherited IRA with Required Minimum Distributions throughout your life, assuming it was in the name of your parent at death and not an inherited IRA owned by your parent, AFAIK.

Here is one link with info:
https://www.schwab.com/public/schwab/in ... awal_rules
Last edited by BL on Mon Mar 25, 2019 3:05 pm, edited 1 time in total.

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Rowdie
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Re: Inheritance of Trad IRA

Post by Rowdie » Mon Mar 25, 2019 3:02 pm

fposte wrote:
Mon Mar 25, 2019 2:27 pm
It sounds like your CPA is thinking that you're cashing out your portion. Unless there's a pressing need to do that, you'd probably be better off rolling it into an inherited IRA, from which you would take RMDs annually.
Yes, he did, per what I told him. I got the comment from attorneys office, it was the paralegal actually at this meeting, that a 100K IRA wasn't big enough to deal with as an inherited IRA, she recommended cashing it out and having a "clean break".

She could be all wrong. I need to ask him. Thank you

not4me
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Re: Inheritance of Trad IRA

Post by not4me » Mon Mar 25, 2019 3:08 pm

I think there are 2 matters here -- OPs 2018 income tax as farmer & settling estate as separate matter. I don't know OPs situation, but I do know there are cases in which farmers need to (heavy paraphrase) "use or lose" some benefits. This gets too complicated for me too quickly, but there are considerations for type of structure (that is LLC, S Corp, etc), work with a Coop...They can get bonus depreciation on equipment, defer some tax liability, and on and on.

Point is that cpa MAY be saying that there is a chance to avoid a tax liability of $22k next year if action taken now. How to fund that purchase? Just happens that he MIGHT pull from IRA. Of course, that would generate taxes & whether cpa has factored everything in??? Well, I don't even know what "all" is. CPA would need to address "why"

ladycat
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Re: Inheritance of Trad IRA

Post by ladycat » Mon Mar 25, 2019 3:09 pm

Longdog wrote:
Mon Mar 25, 2019 2:41 pm
Rowdie wrote:
Mon Mar 25, 2019 2:33 pm
Longdog wrote:
Mon Mar 25, 2019 2:22 pm
Is the only “income” the inheritance of the traditional IRA? If so, you can withdraw that over time (don’t know the exact calculation) - it doesn’t have to be all in one year.
The estate is in an A B trust so the IRA is the only taxable money.

To settle estate I thought it would need to be all distributed this year between myself and two siblings, but really don't know.
You will set up an inherited IRA and transfer your share directly into it. That transfer, in and of itself, is not taxable. After that, you will be required by the IRS to withdraw a certain amount from that inherited IRA each year. I don’t know the details of that calculation, but there is a formula depending on a variety of factors. The amount withdrawn will be taxable in the year you withdraw it. You could, but don’t have to, withdraw it all at once - which is what I think you thought you have to do, but you don’t. Probably better to spread it out.
This is what I did with my mother's estate, which was split between multiple beneficiaries. In our case it was at Fidelity. Each beneficiary set up an account and a portion of the IRA assets were transferred to the new accounts. Fidelity took care of the transfers and titling each account properly. As executor, my only decision was to sell all funds/stocks first, or transfer everything "in kind" to each beneficiary. We opted for "in kind" so each beneficiary could make their own decisions about what to sell or hold. I take an RMD from the inherited IRA each year and pay income tax on that distribution, according to IRS rules.

Hug401k
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Re: Inheritance of Trad IRA

Post by Hug401k » Mon Mar 25, 2019 3:12 pm

I inherited half of my mothers IRA. It was $23k but still worth rolling over IMHO. I've invested it in a low cost index fund and it's now worth more. It was pretty simple to rollover and I did not have to pay taxes on it. I have it at Fidelity, they had specific reps who specialized in beneficiary events who were very helpful. Fidelity automatically calculates how much I need to take out in RMDs each year and have it distributed on the date of my choice (my birthday).

I'm not sure why you would need a "clean break" from your mother's estate? I'd roll it over if you don't need it now. To be fair, I know nothing about farm taxes.

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BL
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Re: Inheritance of Trad IRA

Post by BL » Mon Mar 25, 2019 3:15 pm

Once it is set up properly as an Inherited IRA, you are required to take the RMD, but also are able to withdraw more if your tax situation makes it suitable. So there is no limit on the amount you withdraw, you just pay the tax at your current rate that year. You can also transfer it to your preferred (low-cost!) broker if you choose. Selling everything within the account so you are dealing in cash might be a good choice if siblings agree.

fposte
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Re: Inheritance of Trad IRA

Post by fposte » Mon Mar 25, 2019 3:24 pm

Rowdie wrote:
Mon Mar 25, 2019 3:02 pm
fposte wrote:
Mon Mar 25, 2019 2:27 pm
It sounds like your CPA is thinking that you're cashing out your portion. Unless there's a pressing need to do that, you'd probably be better off rolling it into an inherited IRA, from which you would take RMDs annually.
Yes, he did, per what I told him. I got the comment from attorneys office, it was the paralegal actually at this meeting, that a 100K IRA wasn't big enough to deal with as an inherited IRA, she recommended cashing it out and having a "clean break".

She could be all wrong. I need to ask him. Thank you
I think she's all wrong. 100k is not a small IRA, and it would also be quite a big tax hit in one year to cash it out. Vanguard and, I suspect, most other brokerages will calculate the RMD for you annually and you can have it withdrawn automatically if you like, so it's virtually no hassle (I'm guessing hassle was her objection? I don't really get it).

J295
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Re: Inheritance of Trad IRA

Post by J295 » Mon Mar 25, 2019 3:36 pm

Need more information to fully advise you, but I would typically expect a rollover of a $100,000 IRA into an inherited IRA.

Dottie57
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Re: Inheritance of Trad IRA

Post by Dottie57 » Mon Mar 25, 2019 3:41 pm

Rowdie wrote:
Mon Mar 25, 2019 3:02 pm
fposte wrote:
Mon Mar 25, 2019 2:27 pm
It sounds like your CPA is thinking that you're cashing out your portion. Unless there's a pressing need to do that, you'd probably be better off rolling it into an inherited IRA, from which you would take RMDs annually.
Yes, he did, per what I told him. I got the comment from attorneys office, it was the paralegal actually at this meeting, that a 100K IRA wasn't big enough to deal with as an inherited IRA, she recommended cashing it out and having a "clean break".

She could be all wrong. I need to ask him. Thank you

I think the paralegal is wrong. Was your mom’s IRA also inherited? I think that might change things.

maj
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Re: Inheritance of Trad IRA

Post by maj » Mon Mar 25, 2019 3:55 pm

you might want to other professionals than those you are using
nothing wrong with comparing advice you are receiving

some of what you are being told just sounds weird!

peace

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Rowdie
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Re: Inheritance of Trad IRA

Post by Rowdie » Mon Mar 25, 2019 3:56 pm

not4me wrote:
Mon Mar 25, 2019 3:08 pm
I think there are 2 matters here -- OPs 2018 income tax as farmer & settling estate as separate matter. I don't know OPs situation, but I do know there are cases in which farmers need to (heavy paraphrase) "use or lose" some benefits. This gets too complicated for me too quickly, but there are considerations for type of structure (that is LLC, S Corp, etc), work with a Coop...They can get bonus depreciation on equipment, defer some tax liability, and on and on.

Point is that cpa MAY be saying that there is a chance to avoid a tax liability of $22k next year if action taken now. How to fund that purchase? Just happens that he MIGHT pull from IRA. Of course, that would generate taxes & whether cpa has factored everything in??? Well, I don't even know what "all" is. CPA would need to address "why"
Yes, this sounds like what CPA explained, a big expense all depreciated in one-year vs spread out over 10-15 yrs. He said if there was ever a year I needed to buy a new tractor or build a new barn that this would be it. I need to offset beef cattle sales and IRA distribution all in one big swoop.

I still don't need another tractor though( have 3) or anything else, so need to ask attorney himself and CPA again about this versus inherited IRA. Thank you.

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Rowdie
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Re: Inheritance of Trad IRA

Post by Rowdie » Mon Mar 25, 2019 3:57 pm

Dottie57 wrote:
Mon Mar 25, 2019 3:41 pm
Rowdie wrote:
Mon Mar 25, 2019 3:02 pm
fposte wrote:
Mon Mar 25, 2019 2:27 pm
It sounds like your CPA is thinking that you're cashing out your portion. Unless there's a pressing need to do that, you'd probably be better off rolling it into an inherited IRA, from which you would take RMDs annually.
Yes, he did, per what I told him. I got the comment from attorneys office, it was the paralegal actually at this meeting, that a 100K IRA wasn't big enough to deal with as an inherited IRA, she recommended cashing it out and having a "clean break".

She could be all wrong. I need to ask him. Thank you

I think the paralegal is wrong. Was your mom’s IRA also inherited? I think that might change things.
Nope, it was not inherited.

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Rowdie
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Re: Inheritance of Trad IRA

Post by Rowdie » Mon Mar 25, 2019 4:04 pm

Morgan Dollar 1921 wrote:
Mon Mar 25, 2019 2:53 pm
Just a quick question, does you CPA hope for you to build social security income, or do you avoid that entirely due to having to fully fund as self-employed?
I worked full time off farm until age 52 in addition to running beef cattle so my SS numbers are good. Great question though. Thank you

Morgan Dollar 1921
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Re: Inheritance of Trad IRA

Post by Morgan Dollar 1921 » Mon Mar 25, 2019 4:12 pm

You are welcome, my father farmed, I wanted to make sure you were aware that you need thirty five years of numbers. I was shocked when my best AIME was from 1978. even though I earned three times as much years later. Good luck, farming is tough.

not4me
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Re: Inheritance of Trad IRA

Post by not4me » Mon Mar 25, 2019 4:52 pm

Rowdie wrote:
Mon Mar 25, 2019 3:56 pm
not4me wrote:
Mon Mar 25, 2019 3:08 pm
I think there are 2 matters here -- OPs 2018 income tax as farmer & settling estate as separate matter. I don't know OPs situation, but I do know there are cases in which farmers need to (heavy paraphrase) "use or lose" some benefits. This gets too complicated for me too quickly, but there are considerations for type of structure (that is LLC, S Corp, etc), work with a Coop...They can get bonus depreciation on equipment, defer some tax liability, and on and on.

Point is that cpa MAY be saying that there is a chance to avoid a tax liability of $22k next year if action taken now. How to fund that purchase? Just happens that he MIGHT pull from IRA. Of course, that would generate taxes & whether cpa has factored everything in??? Well, I don't even know what "all" is. CPA would need to address "why"
Yes, this sounds like what CPA explained, a big expense all depreciated in one-year vs spread out over 10-15 yrs. He said if there was ever a year I needed to buy a new tractor or build a new barn that this would be it. I need to offset beef cattle sales and IRA distribution all in one big swoop.

I still don't need another tractor though( have 3) or anything else, so need to ask attorney himself and CPA again about this versus inherited IRA. Thank you.
Since my previous post, I noticed that the CPA may have factored in a full liquidation of the IRA based on what you said. So, I'd definitely talk to him again. I'm confident that the IRA can be rolled over & only RMDs taken out each year. I would expect the lawyer will either say he doesn't give that kind of advice or concur.

Most of us are conditioned that we want to pay no tax until we have to as well as hold down income each year so as to keep the tax in check. BUT...your case may be different if you would lose a tax benefit by not acting this year. Keeping it as an inherited IRA allows you to defer taxes now, but also on the gains each year. But, if outside the IRA, you can occasionally take advantage of tax loss harvesting and also a step-up in basis upon death.

And estate planning was my main purpose in this post. 1st, consider the tax situation of who you would have as beneficiary of an inherited IRA. If their tax rate is higher than yours this might negate any benefit to deferring. (Inheriting an already inherited IRA has slightly different rules).

2nd, It is good your cpa is considering options for you. If it were me, I'd rather get to make a decision as to whether I needed a new tractor than find out later I paid extra taxes because my cpa didn't suggest the option. But, if you haven't already, you may want to ask him how this might affect your retirement/estate plan. You can only defer tax so long. Let's say you are think of stopping farming in 3 years. Will you get a big tax hit then if you keep deferring now? That lower income year might be a better option to draw down the IRA (as you can always take out more than the RMD).

Good luck

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Epsilon Delta
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Re: Inheritance of Trad IRA

Post by Epsilon Delta » Mon Mar 25, 2019 9:32 pm

Morgan Dollar 1921 wrote:
Mon Mar 25, 2019 4:12 pm
You are welcome, my father farmed, I wanted to make sure you were aware that you need thirty five years of numbers.
You do not need 35 years. You need 40 quarters (in most cases that's 10 years) to qualify. After that extra earnings lead to higher benefits, but you can end up with fairly high SS benefits even if you have less than 35 years of covered earnings.

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Epsilon Delta
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Re: Inheritance of Trad IRA

Post by Epsilon Delta » Mon Mar 25, 2019 9:41 pm

not4me wrote:
Mon Mar 25, 2019 4:52 pm
Most of us are conditioned that we want to pay no tax until we have to as well as hold down income each year so as to keep the tax in check. BUT...your case may be different if you would lose a tax benefit by not acting this year.
If the IRA is rolled to an inherited IRA you must take RMDs every year but you can take more at any time. So if you don't need a Kubota today, but may need a barn in five years you can keep most of the money in the IRA for five years and take the withdrawal as income in a year that takes advantage of real (rather than manufactured) expense.

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Peter Foley
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Re: Inheritance of Trad IRA

Post by Peter Foley » Mon Mar 25, 2019 10:48 pm

We often talk about RMDs in these threads without parsing out the words in the acronym: required minimum distributions. They are just that "minimums." No reason not to set it up as an inherited IRA and then take $5k to 10K per year as needed. You might want to take it out over a 5 to 10 year period and fund your own IRA with the proceeds. If you did have a year with a lot of depreciation, take more out in that year.

You have a lot of flexibility.

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Rowdie
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Re: Inheritance of Trad IRA

Post by Rowdie » Tue Mar 26, 2019 8:53 am

ladycat wrote:
Mon Mar 25, 2019 3:09 pm
Longdog wrote:
Mon Mar 25, 2019 2:41 pm
Rowdie wrote:
Mon Mar 25, 2019 2:33 pm
Longdog wrote:
Mon Mar 25, 2019 2:22 pm
Is the only “income” the inheritance of the traditional IRA? If so, you can withdraw that over time (don’t know the exact calculation) - it doesn’t have to be all in one year.
The estate is in an A B trust so the IRA is the only taxable money.

To settle estate I thought it would need to be all distributed this year between myself and two siblings, but really don't know.
You will set up an inherited IRA and transfer your share directly into it. That transfer, in and of itself, is not taxable. After that, you will be required by the IRS to withdraw a certain amount from that inherited IRA each year. I don’t know the details of that calculation, but there is a formula depending on a variety of factors. The amount withdrawn will be taxable in the year you withdraw it. You could, but don’t have to, withdraw it all at once - which is what I think you thought you have to do, but you don’t. Probably better to spread it out.
This is what I did with my mother's estate, which was split between multiple beneficiaries. In our case it was at Fidelity. Each beneficiary set up an account and a portion of the IRA assets were transferred to the new accounts. Fidelity took care of the transfers and titling each account properly. As executor, my only decision was to sell all funds/stocks first, or transfer everything "in kind" to each beneficiary. We opted for "in kind" so each beneficiary could make their own decisions about what to sell or hold. I take an RMD from the inherited IRA each year and pay income tax on that distribution, according to IRS rules.
I have received so many thoughtful and helpful responses and appreciate them all. I am reading and rereading them all. I am realizing an inherited IRA may be what I need to plan for. Thanks to HereToLearn, BL, fposte, fujiters, Hug401K, 3295, maj and all others.

Does anyone know if all siblings need to receive their portion in the trad IRA the same way?

The money is now held at an expensive brokerage. He would need to split it into three equal portions but I have one sibling that would do absolutely anything to cause problems if we all need to do the same thing.

Could Vanguard pull out just my third since it is all in one traditional IRA? I need to call Vanguard, attorney and parents broker all again.

Ladycat, It sounds like your family all worked together peacefully to settle the estate. I envy that.

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Rowdie
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Re: Inheritance of Trad IRA

Post by Rowdie » Tue Mar 26, 2019 9:01 am

Peter Foley wrote:
Mon Mar 25, 2019 10:48 pm
We often talk about RMDs in these threads without parsing out the words in the acronym: required minimum distributions. They are just that "minimums." No reason not to set it up as an inherited IRA and then take $5k to 10K per year as needed. You might want to take it out over a 5 to 10 year period and fund your own IRA with the proceeds. If you did have a year with a lot of depreciation, take more out in that year.

You have a lot of flexibility.
I am glad you brought this to my attention as I somehow thought I would have to set up and take small RMDs from the inherited IRA for years and years.

This may be the best option and application of the tax situation. Thank you.

Morgan Dollar 1921
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Re: Inheritance of Trad IRA

Post by Morgan Dollar 1921 » Tue Mar 26, 2019 9:54 am

Epsilon Delta wrote:
Mon Mar 25, 2019 9:32 pm
Morgan Dollar 1921 wrote:
Mon Mar 25, 2019 4:12 pm
You are welcome, my father farmed, I wanted to make sure you were aware that you need thirty five years of numbers.
You do not need 35 years. You need 40 quarters (in most cases that's 10 years) to qualify. After that extra earnings lead to higher benefits, but you can end up with fairly high SS benefits even if you have less than 35 years of covered earnings.
Point well taken, I erred, to maximize your PIA from your AIME, you do need 35 years, the 40 quarter statement is valid, thanks for the correction. I intent is to help others here, not mislead.

Ybsybs
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Re: Inheritance of Trad IRA

Post by Ybsybs » Tue Mar 26, 2019 10:02 am

Rowdie wrote:
Tue Mar 26, 2019 8:53 am
ladycat wrote:
Mon Mar 25, 2019 3:09 pm
Longdog wrote:
Mon Mar 25, 2019 2:41 pm
Rowdie wrote:
Mon Mar 25, 2019 2:33 pm
Longdog wrote:
Mon Mar 25, 2019 2:22 pm
Is the only “income” the inheritance of the traditional IRA? If so, you can withdraw that over time (don’t know the exact calculation) - it doesn’t have to be all in one year.
The estate is in an A B trust so the IRA is the only taxable money.

To settle estate I thought it would need to be all distributed this year between myself and two siblings, but really don't know.
You will set up an inherited IRA and transfer your share directly into it. That transfer, in and of itself, is not taxable. After that, you will be required by the IRS to withdraw a certain amount from that inherited IRA each year. I don’t know the details of that calculation, but there is a formula depending on a variety of factors. The amount withdrawn will be taxable in the year you withdraw it. You could, but don’t have to, withdraw it all at once - which is what I think you thought you have to do, but you don’t. Probably better to spread it out.
This is what I did with my mother's estate, which was split between multiple beneficiaries. In our case it was at Fidelity. Each beneficiary set up an account and a portion of the IRA assets were transferred to the new accounts. Fidelity took care of the transfers and titling each account properly. As executor, my only decision was to sell all funds/stocks first, or transfer everything "in kind" to each beneficiary. We opted for "in kind" so each beneficiary could make their own decisions about what to sell or hold. I take an RMD from the inherited IRA each year and pay income tax on that distribution, according to IRS rules.
I have received so many thoughtful and helpful responses and appreciate them all. I am reading and rereading them all. I am realizing an inherited IRA may be what I need to plan for. Thanks to HereToLearn, BL, fposte, fujiters, Hug401K, 3295, maj and all others.

Does anyone know if all siblings need to receive their portion in the trad IRA the same way?

The money is now held at an expensive brokerage. He would need to split it into three equal portions but I have one sibling that would do absolutely anything to cause problems if we all need to do the same thing.

Could Vanguard pull out just my third since it is all in one traditional IRA? I need to call Vanguard, attorney and parents broker all again.

Ladycat, It sounds like your family all worked together peacefully to settle the estate. I envy that.
The siblings should be able to each do theirs in the way they choose. But I see no reason NOT to go with the option that allows leaving the most money in tax deferred status until you are ready to use it.You could choose to rollover into a correctly titled IRA which allows RMDs based on your age and then cash out ever bit of it in year two to pay some unexpected major expense.

Alan S.
Posts: 8477
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Inheritance of Trad IRA

Post by Alan S. » Tue Mar 26, 2019 2:54 pm

I don't see a clear statement of the actual beneficiary named on the IRA account.

Was it multiple individuals?
a trust including a testamentary trust?
estate?
Some combination of above?
No beneficiary, meaning the IRA agreement will state the default beneficiary?

The answer determines the RMD amounts and process to be followed.

Topic Author
Rowdie
Posts: 16
Joined: Sat Sep 17, 2016 10:48 am
Location: Missouri Ozarks

Re: Inheritance of Trad IRA

Post by Rowdie » Tue Mar 26, 2019 3:53 pm

Alan S. wrote:
Tue Mar 26, 2019 2:54 pm
I don't see a clear statement of the actual beneficiary named on the IRA account.

Was it multiple individuals?
a trust including a testamentary trust?
estate?
Some combination of above?

No beneficiary, meaning the IRA agreement will state the default beneficiary?

The answer determines the RMD amounts and process to be followed.
The trust was not a testamentary trust.

It was a Revocable living A B trust. Fathers has been disbursed, now doing mothers.

The beneficiary of the IRA account is the trust.

The will states that all money be split in three equal portions to the three siblings.

The broker said the RMDs would be based off older siblings birthday if I took it was an inherited IRA, he could be wrong.

ladycat
Posts: 178
Joined: Fri Sep 28, 2018 5:02 pm

Re: Inheritance of Trad IRA

Post by ladycat » Tue Mar 26, 2019 7:02 pm

Rowdie wrote:
Tue Mar 26, 2019 8:53 am
ladycat wrote:
Mon Mar 25, 2019 3:09 pm
Longdog wrote:
Mon Mar 25, 2019 2:41 pm
Rowdie wrote:
Mon Mar 25, 2019 2:33 pm
Longdog wrote:
Mon Mar 25, 2019 2:22 pm
Is the only “income” the inheritance of the traditional IRA? If so, you can withdraw that over time (don’t know the exact calculation) - it doesn’t have to be all in one year.
The estate is in an A B trust so the IRA is the only taxable money.

To settle estate I thought it would need to be all distributed this year between myself and two siblings, but really don't know.
You will set up an inherited IRA and transfer your share directly into it. That transfer, in and of itself, is not taxable. After that, you will be required by the IRS to withdraw a certain amount from that inherited IRA each year. I don’t know the details of that calculation, but there is a formula depending on a variety of factors. The amount withdrawn will be taxable in the year you withdraw it. You could, but don’t have to, withdraw it all at once - which is what I think you thought you have to do, but you don’t. Probably better to spread it out.
This is what I did with my mother's estate, which was split between multiple beneficiaries. In our case it was at Fidelity. Each beneficiary set up an account and a portion of the IRA assets were transferred to the new accounts. Fidelity took care of the transfers and titling each account properly. As executor, my only decision was to sell all funds/stocks first, or transfer everything "in kind" to each beneficiary. We opted for "in kind" so each beneficiary could make their own decisions about what to sell or hold. I take an RMD from the inherited IRA each year and pay income tax on that distribution, according to IRS rules.
I have received so many thoughtful and helpful responses and appreciate them all. I am reading and rereading them all. I am realizing an inherited IRA may be what I need to plan for. Thanks to HereToLearn, BL, fposte, fujiters, Hug401K, 3295, maj and all others.

Does anyone know if all siblings need to receive their portion in the trad IRA the same way?

The money is now held at an expensive brokerage. He would need to split it into three equal portions but I have one sibling that would do absolutely anything to cause problems if we all need to do the same thing.

Could Vanguard pull out just my third since it is all in one traditional IRA? I need to call Vanguard, attorney and parents broker all again.

Ladycat, It sounds like your family all worked together peacefully to settle the estate. I envy that.
Others may have answered, but I think your options might depend not just on what you (and your siblings) want to do, but also what the brokerage will do for you. If you are the executor/trustee, the decision is probably yours alone. Taking family members' opinion is nice but not required.

The attorney who helped me settle the estate was amazed at how quickly and easily everything was handled. He said that is unusual.

ladycat
Posts: 178
Joined: Fri Sep 28, 2018 5:02 pm

Re: Inheritance of Trad IRA

Post by ladycat » Tue Mar 26, 2019 7:04 pm

Rowdie wrote:
Tue Mar 26, 2019 3:53 pm
Alan S. wrote:
Tue Mar 26, 2019 2:54 pm
I don't see a clear statement of the actual beneficiary named on the IRA account.

Was it multiple individuals?
a trust including a testamentary trust?
estate?
Some combination of above?

No beneficiary, meaning the IRA agreement will state the default beneficiary?

The answer determines the RMD amounts and process to be followed.
The trust was not a testamentary trust.

It was a Revocable living A B trust. Fathers has been disbursed, now doing mothers.

The beneficiary of the IRA account is the trust.

The will states that all money be split in three equal portions to the three siblings.

The broker said the RMDs would be based off older siblings birthday if I took it was an inherited IRA, he could be wrong.
I don't know about your situation, but we have 5 siblings with a wide age range and we are all taking RMDs on inherited IRA based on our own ages. The important thing we had to do in the first year was to make sure the correct total RMD amount was taken (parent's RMD amount, say $10,000). We agreed to all take 1/5 ($2000), but we just had to make sure $10k came out between the 5 of us. Maybe yours is different because the beneficiary is the trust. I'd have to dig out the paperwork, but I think we were all named as beneficiaries (not the trust).

HereToLearn
Posts: 420
Joined: Sat Mar 17, 2018 5:53 pm

Re: Inheritance of Trad IRA

Post by HereToLearn » Tue Mar 26, 2019 10:39 pm

Rowdie wrote:
Tue Mar 26, 2019 3:53 pm
Alan S. wrote:
Tue Mar 26, 2019 2:54 pm
I don't see a clear statement of the actual beneficiary named on the IRA account.

Was it multiple individuals?
a trust including a testamentary trust?
estate?
Some combination of above?

No beneficiary, meaning the IRA agreement will state the default beneficiary?

The answer determines the RMD amounts and process to be followed.
The trust was not a testamentary trust.

It was a Revocable living A B trust. Fathers has been disbursed, now doing mothers.

The beneficiary of the IRA account is the trust.

The will states that all money be split in three equal portions to the three siblings.

The broker said the RMDs would be based off older siblings birthday if I took it was an inherited IRA, he could be wrong.
I didn't realize that a trust was the beneficiary of the IRA when I responded a while back. My own experience was with an IRA with four children listed as beneficiaries.

The broker's reference to using older sibling's age to determine RMD is what happens if one of the IRA beneficiaries does not set up his inherited IRA by the end of the year following the year of death.

"When IRA assets are inherited by several individuals, each beneficiary should set up their own Inherited IRA by December 31 of the year following the year of death.
Any beneficiaries who do not separate their inherited IRA assets by that date will generally need to base their RMDs on the age of the oldest remaining beneficiary on the account as of December 31.

However, now that we know there is a trust involved, I have no idea how this will be handled. I found this on the Fidelity site, but it does not fully answer your question.

"If the beneficiary is an entity, charity, or non-qualifying trust, and the owner was still living by April 1 of the year following reaching age 70½, the distributions would be based on the remaining Single Life Expectancy of the IRA owner. If the owner was younger than 70½, the assets must be completely distributed by December 31 of the fifth year following the year of the IRA owner's death.

An exception is a "look-through" trust. If certain requirements are met, including that the trust is structured in such a way that the beneficiary is identifiable, the beneficiary may be able to take RMDs based on the date of birth of the oldest beneficiary of the trust. Consult your tax advisor to determine if a trust that names you as the beneficiary may be eligible for this RMD treatment."

https://www.fidelity.com/building-savin ... lsrc=aw.ds

Alan S.
Posts: 8477
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Inheritance of Trad IRA

Post by Alan S. » Tue Mar 26, 2019 11:51 pm

The basic answer is that when a trust qualified for look through inherits an IRA, the RMD is based on the oldest beneficiary of the trust including remainder beneficiaries.

If the trust can be terminated (check with estate attorney), you can assign the inherited IRA to separate inherited IRA accounts for each trust beneficiary, but that will not change the RMDs. It will just provide a separate inherited IRA for each beneficiary who can then manage the investments in the IRA and have full control of distributions.

One possible sticking point is whether the IRA Custodian will cooperate with the assignment of separate inherited IRAs. Some will not, and if that happens and you cannot convince them you would need to find another IRA custodian that will accept assignments and transfer the inherited IRA to that custodian. But if you each take a full distribution of 100k, it will be taxable in a single year instead of having a multi year stretch period.

There are other questions about what transpired in the past that resulted in an AB trust being the beneficiary, but am not even sure if your mother was the last parent to pass. Are you sure her IRA was owned and not already an inherited IRA?

NOTE: The situation you mentioned with one of the siblings is almost typical when there are multiple beneficiaries. It is one of the reasons that IRA custodians often do not much like inherited IRAs. There are frequent estate related problems, and the custodian might end up with dozens of small inherited IRAs. Finally, if the trust existed upon her death and was named beneficiary, her will has no bearing on the situation.

Topic Author
Rowdie
Posts: 16
Joined: Sat Sep 17, 2016 10:48 am
Location: Missouri Ozarks

Re: Inheritance of Trad IRA

Post by Rowdie » Thu Mar 28, 2019 10:31 pm

Alan S. wrote:
Tue Mar 26, 2019 11:51 pm
The basic answer is that when a trust qualified for look through inherits an IRA, the RMD is based on the oldest beneficiary of the trust including remainder beneficiaries.

If the trust can be terminated (check with estate attorney), you can assign the inherited IRA to separate inherited IRA accounts for each trust beneficiary, but that will not change the RMDs. It will just provide a separate inherited IRA for each beneficiary who can then manage the investments in the IRA and have full control of distributions.

One possible sticking point is whether the IRA Custodian will cooperate with the assignment of separate inherited IRAs. Some will not, and if that happens and you cannot convince them you would need to find another IRA custodian that will accept assignments and transfer the inherited IRA to that custodian. But if you each take a full distribution of 100k, it will be taxable in a single year instead of having a multi year stretch period.

There are other questions about what transpired in the past that resulted in an AB trust being the beneficiary, but am not even sure if your mother was the last parent to pass. Are you sure her IRA was owned and not already an inherited IRA?

NOTE: The situation you mentioned with one of the siblings is almost typical when there are multiple beneficiaries. It is one of the reasons that IRA custodians often do not much like inherited IRAs. There are frequent estate related problems, and the custodian might end up with dozens of small inherited IRAs. Finally, if the trust existed upon her death and was named beneficiary, her will has no bearing on the situation.
Alan, You asked some good questions that led to me learn more about the estate.

I found out it is not a look through trust.

Your hunch was correct, I found out it is considered an inherited IRA, father passed two years prior, his IRA transferred into mothers.

IRA custodian stated that although it is not impossible to do, it could complicate the closure of estate and could drag it on into next year, or longer.

I am starting to believe that although setting up inherited IRAs and taking RMDs is the preferred way, in my situation a single year taxable event will work best. It would also prevent irrational (an understatement) sibling from having her fun causing grief and turmoil for myself and nice sibling.

It also seems like it was my fathers intention to have it handled in this manner.

In addition, I really wouldn't want to torture the IRA custodian with her as a client. :happy

I appreciate everyone's input and hope the generosity of contributors helps others too. Heretolearn, ladycat, Alan S, Thanks!

HereToLearn
Posts: 420
Joined: Sat Mar 17, 2018 5:53 pm

Re: Inheritance of Trad IRA

Post by HereToLearn » Thu Mar 28, 2019 11:41 pm

Rowdie wrote:
Thu Mar 28, 2019 10:31 pm
Alan S. wrote:
Tue Mar 26, 2019 11:51 pm
The basic answer is that when a trust qualified for look through inherits an IRA, the RMD is based on the oldest beneficiary of the trust including remainder beneficiaries.

If the trust can be terminated (check with estate attorney), you can assign the inherited IRA to separate inherited IRA accounts for each trust beneficiary, but that will not change the RMDs. It will just provide a separate inherited IRA for each beneficiary who can then manage the investments in the IRA and have full control of distributions.

One possible sticking point is whether the IRA Custodian will cooperate with the assignment of separate inherited IRAs. Some will not, and if that happens and you cannot convince them you would need to find another IRA custodian that will accept assignments and transfer the inherited IRA to that custodian. But if you each take a full distribution of 100k, it will be taxable in a single year instead of having a multi year stretch period.

There are other questions about what transpired in the past that resulted in an AB trust being the beneficiary, but am not even sure if your mother was the last parent to pass. Are you sure her IRA was owned and not already an inherited IRA?

NOTE: The situation you mentioned with one of the siblings is almost typical when there are multiple beneficiaries. It is one of the reasons that IRA custodians often do not much like inherited IRAs. There are frequent estate related problems, and the custodian might end up with dozens of small inherited IRAs. Finally, if the trust existed upon her death and was named beneficiary, her will has no bearing on the situation.
Alan, You asked some good questions that led to me learn more about the estate.

I found out it is not a look through trust.

Your hunch was correct, I found out it is considered an inherited IRA, father passed two years prior, his IRA transferred into mothers.

IRA custodian stated that although it is not impossible to do, it could complicate the closure of estate and could drag it on into next year, or longer.

I am starting to believe that although setting up inherited IRAs and taking RMDs is the preferred way, in my situation a single year taxable event will work best. It would also prevent irrational (an understatement) sibling from having her fun causing grief and turmoil for myself and nice sibling.

It also seems like it was my fathers intention to have it handled in this manner.

In addition, I really wouldn't want to torture the IRA custodian with her as a client. :happy

I appreciate everyone's input and hope the generosity of contributors helps others too. Heretolearn, ladycat, Alan S, Thanks!
Is it the presence of the trust that complicates this issue? As I commented above, I only know how I handled my mother's inherited IRA and it was quite easy. Each of the four siblings had to open an inherited IRA account, a brokerage account, and an inherited Roth at her brokerage firm, and then the funds were distributed into those twelve accounts. I suppose that was a hassle for the brokerage but the money was transferred one month after she died, and would have been faster had it not been year end.

I am guessing the trust adds a layer of complexity? Am just asking to learn as I know nothing about trusts. Thanks!

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LilyFleur
Posts: 276
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Re: Inheritance of Trad IRA

Post by LilyFleur » Fri Mar 29, 2019 2:52 am

Rowdie wrote:
Mon Mar 25, 2019 3:02 pm
fposte wrote:
Mon Mar 25, 2019 2:27 pm
It sounds like your CPA is thinking that you're cashing out your portion. Unless there's a pressing need to do that, you'd probably be better off rolling it into an inherited IRA, from which you would take RMDs annually.
Yes, he did, per what I told him. I got the comment from attorneys office, it was the paralegal actually at this meeting, that a 100K IRA wasn't big enough to deal with as an inherited IRA, she recommended cashing it out and having a "clean break".

She could be all wrong. I need to ask him. Thank you
I dealt with an inherited IRA half that size. It is a little bit of work to set up an inherited IRA at Schwab, but not too bad.

Paralegals and attorneys are not CPAs. They should not be giving financial advice. I found this out the hard way and lost money unnecessarily (in my divorce).

It would be better to ask your CPA what would save you more money in taxes, a lump-sum distribution from an IRA and the associated taxes, or an inherited IRA with RMDs every year.

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