Very small inherited IRA question

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mxs
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Very small inherited IRA question

Post by mxs » Thu Mar 07, 2019 11:52 am

A non-spousal family member passed and left me as the beneficiary for their retirement plan. They were a relatively new employee so the amount to paid is just the amount that they had paid in, less than $500. I have the forms to fill out to elect to either receive the money in a lump sum that will be taxed at 20% or to have it rolled over into an inherited IRA. I do not need the money now. I was born in 1983, and the deceased was born in 1971. If the amount was greater I would lean towards the inherited IRA, but due to the relatively small amount I am leaning towards a lump sum payout.

What should I do, and what are the outcomes of these two choices?

NancyABQ
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Re: Very small inherited IRA question

Post by NancyABQ » Thu Mar 07, 2019 12:21 pm

For $500 I'd say it's not worth the hassle of tracking it as an inherited IRA, so I would vote for the lump sum. This will be taxed as ordinary income, so while they may have said they would withhold 20% for taxes, in reality you will owe taxes (including state if applicable) at whatever your marginal tax rate is for 2019.

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Darth Xanadu
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Re: Very small inherited IRA question

Post by Darth Xanadu » Thu Mar 07, 2019 1:15 pm

NancyABQ wrote:
Thu Mar 07, 2019 12:21 pm
For $500 I'd say it's not worth the hassle of tracking it as an inherited IRA, so I would vote for the lump sum. This will be taxed as ordinary income, so while they may have said they would withhold 20% for taxes, in reality you will owe taxes (including state if applicable) at whatever your marginal tax rate is for 2019.
+1 It's such a small amount, it makes sense to simply take the lump sum.
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Watty
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Re: Very small inherited IRA question

Post by Watty » Thu Mar 07, 2019 1:31 pm

If you elegible for an IRA or 401k that you would not otherwise be maxing out you can contribute an additional $500 to that account and it will usually offset the inherited IRA withdrawl when you do your taxes.

123
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Re: Very small inherited IRA question

Post by 123 » Thu Mar 07, 2019 1:35 pm

Darth Xanadu wrote:
Thu Mar 07, 2019 1:15 pm
+1 It's such a small amount, it makes sense to simply take the lump sum.
+1 Just take the lump sum it's so much simpler in this case. The alternative is potentially dealing with the likely RMD payouts for the rest of your life. You would have to deal with the receipt of the payment as well as the tax reporting every year. You have better things to do with your time.
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Re: Very small inherited IRA question

Post by GAAP » Thu Mar 07, 2019 1:38 pm

I would take the lump sum, pay the taxes, and stick the remainder in a Roth IRA.

Dealing with 3-4% RMDs on $500 just doesn't make sense.
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Earl Lemongrab
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Re: Very small inherited IRA question

Post by Earl Lemongrab » Thu Mar 07, 2019 4:50 pm

It's not going to be taxed at 20%. It will be added to your ordinary income. You are not required to withhold any taxes, and I wouldn't for the tiny amount. I did the same with my mother's TIRA, and it had 5k in it. Just not worth keeping with small RMDs every year.

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Watty
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Re: Very small inherited IRA question

Post by Watty » Thu Mar 07, 2019 7:09 pm

One other thing I thought of is that you might be charged an account closing fee of maybe $75 to $150 dollars so you should check their fee schedule before you close the account.

I don't know if you can get around that by withdrawing $499 dollars or asking them to waive that since the account is so small.

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LadyGeek
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Re: Very small inherited IRA question

Post by LadyGeek » Thu Mar 07, 2019 7:58 pm

This thread is now in the Personal Finance (Not Investing) forum (inherited IRA).
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celia
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Re: Very small inherited IRA question

Post by celia » Fri Mar 08, 2019 5:28 am

Almost everyone with an Inherited traditional IRA has RMDs of at least $500. So take your $500, let the taxman take $100 out of it, and report it on your 2019 tax return. (You will be sent a tax form for this next January.) Your extra 2019 tax liability will be more or less than the $100 that will be withheld, depending on what your other income is on your return.

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Epsilon Delta
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Re: Very small inherited IRA question

Post by Epsilon Delta » Fri Mar 08, 2019 4:09 pm

123 wrote:
Thu Mar 07, 2019 1:35 pm

+1 Just take the lump sum it's so much simpler in this case. The alternative is potentially dealing with the likely RMD payouts for the rest of your life. You would have to deal with the receipt of the payment as well as the tax reporting every year. You have better things to do with your time.
I agree that in this case it's probably best to just take the $500 and be done with it

However note that RMDs are Minimums. You can take more at any time. So it is not an irrevocable option that lasts the rest of your life. It could make sense to take RMDs for a few years then close the account in a low tax year.* If somebody is taking RMDs and decide it is too much work they can close the account and put an end to the paperwork.

* The five year rule is another option if a low tax year is within that time horizon.

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mxs
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Re: Very small inherited IRA question

Post by mxs » Thu Mar 14, 2019 6:50 am

Thanks for the advice. I am going to take the lump sum. For clarification purposes, it is from a retirement pension plan, not an IRA. They are giving me the option of taking a lump sum or transferring it to an inherited IRA. For that reason, there shouldn't be any fee for closing the account and taking a lump sum. Also, the 20% tax withholding is their policy, and I am not inclined to argue with them against it. For this amount of money the lump sum makes sense to me. If it were closer to 10,000 or more I would seriously consider the inherited IRA route.

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