Inherited Inherited IRA RMD strategy

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iilucki
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Joined: Mon Jan 12, 2015 3:21 pm

Inherited Inherited IRA RMD strategy

Post by iilucki » Wed Nov 07, 2018 7:56 pm

Through a series of unfortunate events, I am now the owner of an inherited IRA.

The original owner was my grandfather who died in December 2014 at the age of 88
My mother inherited it at the age of 53 and then passed away 3 years later.

The assets were investing in Wells Fargo Mutual funds in which I quickly moved to Vanguard. I attempted to use the RMD calculator on the Vanguard website but since there was a 0 balance at the beginning of the year it won't calculate my RMD. On 12/31 of last year, the account was approximately 200k. Using a Beneficiary RMD calculator I need to take out approximately 10k this year.

As a 22-year-old buy and hold Boglehead type investor that has no immediate need for this money what is the best strategy for maximizing the long-term value of this money?

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BL
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Re: Inherited Inherited IRA RMD strategy

Post by BL » Wed Nov 07, 2018 8:01 pm

Are you maximizing all retirement accounts if working?

iilucki
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Joined: Mon Jan 12, 2015 3:21 pm

Re: Inherited Inherited IRA RMD strategy

Post by iilucki » Wed Nov 07, 2018 8:18 pm

BL wrote:
Wed Nov 07, 2018 8:01 pm
Are you maximizing all retirement accounts if working?
Currently in school and all my income is considered unearned so unfortunately cannot invest in retirement accounts.

NOLA
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Joined: Sun Jul 10, 2011 1:23 pm

Re: Inherited Inherited IRA RMD strategy

Post by NOLA » Wed Nov 07, 2018 8:37 pm

Sorry for your loss!

chemocean
Posts: 53
Joined: Mon Dec 19, 2016 9:45 pm

Re: Inherited Inherited IRA RMD strategy

Post by chemocean » Wed Nov 07, 2018 8:41 pm

Pay off your undergraduate loans if you have any. That is what a member of my extended family did.

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

Re: Inherited Inherited IRA RMD strategy

Post by ladycat » Wed Nov 07, 2018 8:48 pm

First, I'm sorry for your family losses.

Are you sure the RMD you calculated is correct? It seems high to me. I also inherited IRAs (as a non-spouse), I'm much older than you, and my RMD is not that high (as a percent of account value).

If you can earn income during the year, you could make contributions to a Roth IRA. I'm sure some of the people here may have some creative tips for you. Maybe self-employment is an option for contributing to some type of IRA.

Spirit Rider
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Re: Inherited Inherited IRA RMD strategy

Post by Spirit Rider » Wed Nov 07, 2018 8:50 pm

My condolences on your loss at such a young age.

If your mom had not taken her full RMD for 2018, you will have to take the balance of her RMD by 12/31. You have until 12/31 of the year following the passing of your mom to take your first RMD.

If you are a dependent you need be aware of the new Kiddie Tax rules. Unfortunately, RMDs from an Inherited IRA are considered unearned income and amounts > $2100 will be taxed at trust rates. For 2018 this is:
  1. 10%, $0 - $2550
  2. 24%, $2551 - $9550
  3. 35%, $9551 - $12,500
  4. 37%, $12,501+
Either use RMDs to build up an emergency fund, minimize any unsubsidized loans or efficiently invest in taxable accounts. I suggest Vanguard's Total Stock Market which will minimize taxable distributions and maybe some I Bonds since they came off of the bottom.

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Inherited Inherited IRA RMD strategy

Post by Spirit Rider » Wed Nov 07, 2018 8:57 pm

ladycat wrote:
Wed Nov 07, 2018 8:48 pm
Are you sure the RMD you calculated is correct? It seems high to me. I also inherited IRAs (as a non-spouse), I'm much older than you, and my RMD is not that high (as a percent of account value).
The OP is the successor beneficiary of an already Inherited IRA. As such they must continue to use the divisor schedule of the original beneficiary. Their mother's divisor would have been 31.4 in 2015, 28.4 in 2018 and his will continue as 27.4 in 2019 decrementing each additional year.

ladycat
Posts: 69
Joined: Fri Sep 28, 2018 5:02 pm

Re: Inherited Inherited IRA RMD strategy

Post by ladycat » Wed Nov 07, 2018 9:09 pm

Spirit Rider wrote:
Wed Nov 07, 2018 8:57 pm
ladycat wrote:
Wed Nov 07, 2018 8:48 pm
Are you sure the RMD you calculated is correct? It seems high to me. I also inherited IRAs (as a non-spouse), I'm much older than you, and my RMD is not that high (as a percent of account value).
The OP is the successor beneficiary of an already Inherited IRA. As such they must continue to use the divisor schedule of the original beneficiary. Their mother's divisor would have been 31.4 in 2015, 28.4 in 2018 and his will continue as 27.4 in 2019 decrementing each additional year.
That makes sense. Thanks.

iilucki
Posts: 11
Joined: Mon Jan 12, 2015 3:21 pm

Re: Inherited Inherited IRA RMD strategy

Post by iilucki » Wed Nov 07, 2018 9:39 pm

Spirit Rider wrote:
Wed Nov 07, 2018 8:50 pm
My condolences on your loss at such a young age.

If your mom had not taken her full RMD for 2018, you will have to take the balance of her RMD by 12/31. You have until 12/31 of the year following the passing of your mom to take your first RMD.

If you are a dependent you need be aware of the new Kiddie Tax rules. Unfortunately, RMDs from an Inherited IRA are considered unearned income and amounts > $2100 will be taxed at trust rates. For 2018 this is:
  1. 10%, $0 - $2550
  2. 24%, $2551 - $9550
  3. 35%, $9551 - $12,500
  4. 37%, $12,501+
Either use RMDs to build up an emergency fund, minimize any unsubsidized loans or efficiently invest in taxable accounts. I suggest Vanguard's Total Stock Market which will minimize taxable distributions and maybe some I Bonds since they came off of the bottom.
I am not a dependent both my parents have passed away. The tax rates you mention only apply if I was a dependent correct?

retiringwhen
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Location: New Jersey, USA

Re: Inherited Inherited IRA RMD strategy

Post by retiringwhen » Wed Nov 07, 2018 10:26 pm

If you aren't a dependent, then you are subject to the regular tax rates.

If you are a student with no current earned income, you may actually want to accelerate the distributions to fill in the zero tax bracket in the individual income tables. For now, all you could do is put it in a taxable investment account, but it would at least minimize taxes. Of course if you have other significant unearned income that may not be viable.

Once you have earned income, you could do dollar for dollar tax deferrals into your own IRAs.

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Inherited Inherited IRA RMD strategy

Post by Spirit Rider » Wed Nov 07, 2018 11:21 pm

iilucki wrote:
Wed Nov 07, 2018 9:39 pm
I am not a dependent both my parents have passed away. The tax rates you mention only apply if I was a dependent correct?
That is correct as is @retiringwhen.

Your standard deduction is $12K. So the first $12k in AGI will be tax free.

retiringwhen
Posts: 532
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Location: New Jersey, USA

Re: Inherited Inherited IRA RMD strategy

Post by retiringwhen » Thu Nov 08, 2018 6:51 am

BTW, a small part time job would be very valuable in your situation.

$5,500 of earned income could effectively be 100% put into a Roth IRA. My son (aged 20) is a student and works summer jobs and a 4 hour a week part time job at college for spending money. I am matching (gifting) that income so he can put the earned income value into a Roth IRA. You could use the RMDs to fill up the most valuable tax-deferred space (Roth) with zero taxes off the top. Most people have a short window in their life to achieve that head-start.

Obviously I don't know your situation, but an idea that has significant financial benefit.

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