Inherited IRA with RMD strategy

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avg-bogler
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Inherited IRA with RMD strategy

Post by avg-bogler » Tue Jul 10, 2018 1:08 pm

I've read through the thread path that starts with this one: viewtopic.php?f=1&t=253618. I've also searched, but didnt come
up with anything relevant.

I have an inherited IRA that requires mins be taken. I'm 30 and OK with more risk than the average author on this forum.

I'm planning just putting everything in total stock (VSTAX) and putting the min in a taxable brokerage account after the final dividend is paid out late in year.

I'm wondering if there is any way to avoid taxes (doubt it), or if taking the mins out evenly throughout the year is a better option. Personally I think keeping the most money exposed to the market is the best option plus it maximizes the dividend, but interested in what others think. Thanks in advance for your insight!

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David Jay
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Re: Inherited IRA with RMD strategy

Post by David Jay » Tue Jul 10, 2018 6:33 pm

Any special reason why you want to put the distributions in a taxable account? Are you utilizing 100% of your tax-advantaged space including employer 401K/403B/457 and HSA as well as personal space tIRA/Roth/backdoor? If you have any space available, use the RMDs for living expenses and increase your contributions to your tax-advantaged space.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

avg-bogler
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Re: Inherited IRA with RMD strategy

Post by avg-bogler » Tue Jul 10, 2018 9:51 pm

David Jay wrote:
Tue Jul 10, 2018 6:33 pm
Any special reason why you want to put the distributions in a taxable account? Are you utilizing 100% of your tax-advantaged space including employer 401K/403B/457 and HSA as well as personal space tIRA/Roth/backdoor? If you have any space available, use the RMDs for living expenses and increase your contributions to your tax-advantaged space.
Thanks for responding David. Your thoughts are exactly where mine went - we've been on a plan to maximize our tax-free contributions before the inherited IRA came into play - we are on target to max the tax-advantaged space within 3-ish years, this will simply speed that up. We will probably use the money to live for the next few years in order to increase contributions to tax-free accounts. I'm trying to think long term and make sure I'm not making any (obvious) mistakes for the short term (sounds like I'm OK).

You are confirming taking the required mins later is the best strategy and there is no way to avoid taxes on the mins, which is what I expected. I know this can take an individuals entire financial situation into account, but I'm trying to stay focused on planning correctly for the inherited IRA.

Jablean
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Re: Inherited IRA with RMD strategy

Post by Jablean » Wed Jul 11, 2018 12:29 am

Just confirming that it is a traditional IRA and not a Roth. RMDs are required on both if inherited but the Roth is less likely to be subjected to taxes (depends on how long decedent had it) I have both now so grappling with the RMDs also. Make sure you use the inherited calculation for your first year and then don't use the table again - you'll be subtracting 1 from your original life expectancy each year.

Most will likely recommend not withdrawing until the end of the year to take advantage of the growth by leaving that money in there as long as possible, but you can take it out as soon as you know the prior year's 12/31 dollar amount. Since it is tax advantaged you can also consider holding your dividend receiving funds there but you may feel you have enough in your own accounts.

I'm very close to the ACA cliff so these taxable RMDs are a bit challenging for me. I track them and our self-employed income pretty closely each month. I took the RMDs out early this year as it was just the amount I could put in for my own IRA.

avg-bogler
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Re: Inherited IRA with RMD strategy

Post by avg-bogler » Wed Jul 11, 2018 4:56 pm

Jablean wrote:
Wed Jul 11, 2018 12:29 am
Just confirming that it is a traditional IRA and not a Roth.
Yup, I'm confident it's traditional.
Jablean wrote:
Wed Jul 11, 2018 12:29 am
Make sure you use the inherited calculation for your first year and then don't use the table again - you'll be subtracting 1 from your original life expectancy each year.
I don't think a min has to be taken the first year. I think Vanguard offers a service to calculate and disburse appropriately.
Jablean wrote:
Wed Jul 11, 2018 12:29 am
Most will likely recommend not withdrawing until the end of the year to take advantage of the growth by leaving that money in there as long as possible, but you can take it out as soon as you know the prior year's 12/31 dollar amount. Since it is tax advantaged you can also consider holding your dividend receiving funds there but you may feel you have enough in your own accounts.
Hmm..dividend receiving funds...am I not obligated to put dividends in the same account or is this something different?

Chrono Triggered
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Re: Inherited IRA with RMD strategy

Post by Chrono Triggered » Wed Jul 11, 2018 5:39 pm

avg-bogler wrote:
Tue Jul 10, 2018 9:51 pm
we are on target to max the tax-advantaged space within 3-ish years, this will simply speed that up. We will probably use the money to live for the next few years in order to increase contributions to tax-free accounts.
The second part makes sense, but I'm not understanding why you need to wait until three years to max tax-advantaged space? You could take out more than the MRD this year, and every subsequent year, to ensure the tax-advantaged accounts are maxed out. Not only is this essentially a transfer of assets, but your RMD's will decrease in size as the years go on because you're taking more out. In the later years, money in tax-advantaged accounts in your name will become a lot more valuable than money in your inherited IRA.

avg-bogler
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Re: Inherited IRA with RMD strategy

Post by avg-bogler » Wed Jul 11, 2018 5:55 pm

Chrono Triggered wrote:
Wed Jul 11, 2018 5:39 pm
avg-bogler wrote:
Tue Jul 10, 2018 9:51 pm
we are on target to max the tax-advantaged space within 3-ish years, this will simply speed that up. We will probably use the money to live for the next few years in order to increase contributions to tax-free accounts.
The second part makes sense, but I'm not understanding why you need to wait until three years to max tax-advantaged space? You could take out more than the MRD this year, and every subsequent year, to ensure the tax-advantaged accounts are maxed out. Not only is this essentially a transfer of assets, but your RMD's will decrease in size as the years go on because you're taking more out. In the later years, money in tax-advantaged accounts in your name will become a lot more valuable than money in your inherited IRA.
This is clever, thanks for leading me down this line of thought - I'm focused too much on the mins. So there is no additional tax penalty for withdrawing early from the inherited IRA (correct?) - just federal income taxes? If that's the case, there is no downside to maxing the tax-advantaged space every year by withdrawing the amount needed.

Alan S.
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Re: Inherited IRA with RMD strategy

Post by Alan S. » Wed Jul 11, 2018 6:44 pm

avg-bogler wrote:
Wed Jul 11, 2018 5:55 pm
Chrono Triggered wrote:
Wed Jul 11, 2018 5:39 pm
avg-bogler wrote:
Tue Jul 10, 2018 9:51 pm
we are on target to max the tax-advantaged space within 3-ish years, this will simply speed that up. We will probably use the money to live for the next few years in order to increase contributions to tax-free accounts.
The second part makes sense, but I'm not understanding why you need to wait until three years to max tax-advantaged space? You could take out more than the MRD this year, and every subsequent year, to ensure the tax-advantaged accounts are maxed out. Not only is this essentially a transfer of assets, but your RMD's will decrease in size as the years go on because you're taking more out. In the later years, money in tax-advantaged accounts in your name will become a lot more valuable than money in your inherited IRA.
This is clever, thanks for leading me down this line of thought - I'm focused too much on the mins. So there is no additional tax penalty for withdrawing early from the inherited IRA (correct?) - just federal income taxes? If that's the case, there is no downside to maxing the tax-advantaged space every year by withdrawing the amount needed.

No added tax or penalty as long as you are able to increase your contributions to IRAs or workplace retirement plans in an amount equal to your inherited IRA distributions. That's because the reduction in taxable income for those contributions offsets the additional taxable income from the inherited IRA distribution. That includes erasing the tax on the RMD as well. However, this only produces the maximum advantage if you only count the amount contributed that exceeds what you could have contributed anyway. What you are actually doing is subsidizing the contributions to your owned plans by the distributions from the inherited IRA.

And if you have any basis in the inherited IRA due to non deductible contributions made by the decedent and documented on their 8606, you will end up with an additional tax savings, since you will not be taxed on all of the inherited IRA distributions. While you are subject to penalty if you take out less than your RMD, you can take out as much additional as you please.

GAAP
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Re: Inherited IRA with RMD strategy

Post by GAAP » Thu Jul 12, 2018 9:56 am

avg-bogler wrote:
Wed Jul 11, 2018 4:56 pm
I think Vanguard offers a service to calculate and disburse appropriately.
They do -- but you have to make sure that there's enough cash in the account to do it with. It's only completely-hands-off if your investments throw off more cash than the RMD, and if they are not reinvested.

avg-bogler
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Location: Michigan

Re: Inherited IRA with RMD strategy

Post by avg-bogler » Thu Jul 12, 2018 10:14 am

GAAP wrote:
Thu Jul 12, 2018 9:56 am
avg-bogler wrote:
Wed Jul 11, 2018 4:56 pm
I think Vanguard offers a service to calculate and disburse appropriately.
They do -- but you have to make sure that there's enough cash in the account to do it with. It's only completely-hands-off if your investments throw off more cash than the RMD, and if they are not reinvested.
Thanks for adding this information, GAAP. Sounds like it wouldnt be hands off if you want to keep the money in the market. Luckily with the above discussion, I'll be taking more than needed for the mins for a few years, so I will do skme studying on the rules when I get to the point of only wanting the mins.

Jablean
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Joined: Sat Jun 02, 2018 2:38 pm

Re: Inherited IRA with RMD strategy

Post by Jablean » Sun Jul 15, 2018 12:02 am

avg-bogler wrote:
Wed Jul 11, 2018 4:56 pm
.
Jablean wrote:
Wed Jul 11, 2018 12:29 am
Make sure you use the inherited calculation for your first year and then don't use the table again - you'll be subtracting 1 from your original life expectancy each year.
I don't think a min has to be taken the first year. I think Vanguard offers a service to calculate and disburse appropriately.
In the year of death an RMD has to be taken if the decedent was 70 1/2 and thereby required to take RMDs themselves. Most people don't take till the end of the year so quite often they have not satisfied their RMD for the year. That RMD amount is calculated on their age and uses a specific table. As the beneficiary of the IRA account even though the RMD is taken on behalf of the decedent the actual money that is taken out goes to you and you are taxed on it. (If not taken on time, by year end, you will owe a 50% tax on what should have been taken.

For your first year, that is the year after the decedent's death, and the amount is based on your age and life expectancy. If you're fine with Vangaurd figuring it out for you great, I like to know how the math works.

aristotelian
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Re: Inherited IRA with RMD strategy

Post by aristotelian » Sun Jul 15, 2018 9:36 am

Aside from the forced RMD's, the strategy is the same as other pretax accounts. Unless you are early in your career, you want to delay delay delay until you retire and have less taxable income. Take the minimums for now until you retire, then figure out a withdrawal plan to get the most out of the IRA when your income is lower. Usually that means delay SS and annually take up to the top of the 12% tax bracket.

Hold your bond allocation (whatever that is) in the Inherited IRA or other pre-tax accounts. You want stocks to be growing in Roth and taxable.

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