Inherited IRA - withdraw from it to pay expenses first?

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mtwhmemn
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Inherited IRA - withdraw from it to pay expenses first?

Post by mtwhmemn »

Married couple both ~57 filing jointly. My wife inherited an IRA from her Mom a few years ago and we've been taking RMDs until this year when we were allowed to skip 2020 since I may not need the money.

I'm going to have to take money out of sheltered funds to live in the next 6 - 12 months (I'm not working and may be retired and we can't live on cash from wife's job) of which we have IRAs, ROTHs and the Inherited IRA. (We have over $2 million in sheltered and can't afford to contribute more with me not working.)

So, doesn't it make sense to take from the inherited IRA (no penalty as far as I understand) and save the ROTH to use to keep AGI down for when wife retires in a couple years and qualify for ACA if it is still around?

I just had the epiphany that I shouldn't touch the ROTH until the inherited IRA is exhausted. Is that correct? I was thinking the ROTH was where I'd have to take the money from first to supplement my wife's income!

I use i-orp but it doesn't have a cell to fill specifically for inherited IRA. Is there a better calculator that does?

Also, right now the inherited IRA is invested 100% in Total Stock Market Index. (We have a 50/50 Boglehead Total Stk 30% / Total Int'l Stk 20% / Total Bond 50% Portfolio) So, should I have a "baby" Total Stk 30% / Total Int'l Stk 20% / Total Bond 50% Portfolio in the inherited IRA if that is where I should start pulling from first in the next 6 months?

Several questions but I think this is pretty basic stuff to many of you smart folks on the this forum. Just looking to see if I'm thinking about all this in a logical manner. Thanks!
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Kenkat
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by Kenkat »

A lot of this comes down to when does it make sense to pay taxes and when do you want to pay taxes?

If you are in a high tax bracket now and expect to be in a lower tax bracket later, it would potentially make more sense to tap the Roth IRA. If you are in a relatively low tax bracket right now, that, combined with uncertainty around future tax rates, might point towards taking money out of the inherited IRA.

So, you just need to predict the future and it will all be crystal clear! Otherwise, you’re stuck with the rest of us in weighing some assumptions and deciding from there.
HomeStretch
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by HomeStretch »

If in the future you will need to manage taxable income to utilize ACA healthcare coverage with subsidies, consider shifting the Inherited IRA holdings from 100% equity to 100% fixed income. This should give lower expected IRA balance growth and, in turn, lower RMD income that you are required to take during the years you utilize ACA coverage.
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mtwhmemn
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by mtwhmemn »

Kenkat wrote: Sat Jul 18, 2020 12:45 pm A lot of this comes down to when does it make sense to pay taxes and when do you want to pay taxes?

If you are in a high tax bracket now and expect to be in a lower tax bracket later, it would potentially make more sense to tap the Roth IRA. If you are in a relatively low tax bracket right now, that, combined with uncertainty around future tax rates, might point towards taking money out of the inherited IRA.

So, you just need to predict the future and it will all be crystal clear! Otherwise, you’re stuck with the rest of us in weighing some assumptions and deciding from there.
Well, we're certainly in a low tax bracket now because I'm not making any money and we can't live on my wife's income because it isn't enough, so that makes this an easy decision to take from the inherited IRA first! Next year we could be totally dependent on my wife's income, so low bracket again. I can see the future and it is bleak as far as income but at least I don't have to tap my ROTH!
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mtwhmemn
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by mtwhmemn »

HomeStretch wrote: Sat Jul 18, 2020 12:55 pm If in the future you will need to manage taxable income to utilize ACA healthcare coverage with subsidies, consider shifting the Inherited IRA holdings from 100% equity to 100% fixed income. This should give lower expected IRA balance growth and, in turn, lower RMD income that you are required to take during the years you utilize ACA coverage.
Just so I make sure I understand what you are saying...if I'm going to hold fixed income in the amount that is in the inherited IRA, just do it in the inherited IRA so it will likely grow less over the long term requiring lower RMD distributions?
HomeStretch
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by HomeStretch »

Yes, consider holding 100% fixed income in the Inherited IRA to reduce RMDs/taxable income. Also hold fixed income in other accounts as needed to achieve your desired 50% fixed income allocation for your overall portfolio.
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by Spirit Rider »

Notwithstanding the taxable Inherited IRA vs. Roth IRA distribution issues.

It is generally better to use distribute inherited retirement accounts first. You are effectively reducing future RMDs and you are allowing owned retirement accounts to grow. It also has the most options for a spousal beneficiary.

A spousal beneficiary has the choice with an owned retirement account of inheriting it or assuming ownership and treat it as their own. This allows delaying RMDs to the latter of the year they turn 72 or the year you would have turned 72. Also, with assumed ownership, a traditional IRA can be converted to a Roth IRA, but an Inherited traditional IRA cannot,
fyre4ce
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by fyre4ce »

It would help to know some numbers for your financial picture, particularly: planned future income for you and spouse, and traditional, Roth, and taxable balances.

In general, the best strategy is to blend traditional, Roth, and taxable withdrawals so that you keep your marginal tax rate roughly the same throughout your retirement. Constraints include the start of social security, RMDs (of both your own and inherited accounts), and perhaps some others. Living off 100% traditional, then switching to 100% Roth when that's exhausted, usually isn't optimal, because you're not taking advantage of the 0%, 10%, 12% brackets those years.

Your plan of preferentially spending a Traditional inherited IRA now seems like a good one though.
RickyAZ
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by RickyAZ »

Why pay penalties or mess with the growth in the Roth if you can just use the Inherited IRA? The RMDs for a pre SECURE act Inherited IRA are certainly manageable for a 57 year old (unless the IRA is in the several millions $ at which point it doesn't matter). Wouldn't worry about growth too much since you can spread out the withdrawals for 27 years, or just aim for 72 when your own Traditional IRAs are subject to RMDs or 70 if you're holding off on taking SOcial Security. It would affect ACA subsidies after your wife retires so that needs to be accounted for. Can certainly manipulate the tax code to great effect with all those various sources of funds
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celia
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by celia »

mtwhmemn wrote: Sat Jul 18, 2020 12:37 pm (We have over $2 million in sheltered and can't afford to contribute more with me not working.)
This doesn't say how much is tax-deferred and how much is Roth. But I suspect that besides withdrawing from the Inherited IRA for living expenses, you likely should also be converting some of your/your spouse's tax-deferred accounts.

To get you thinking about this, estimate your RMDs at age 72. Assume your/your spouses tax-deferred accounts continue to grow as they have the last few years. Then:

What would be the account balance(s) when you are 72?
Since RMDs start at 3.65% of the previous year ending balance, what could your starting RMD be?
What tax bracket would that put you in, with other income streams going at the same time (two SSs, pensions?, dividends, etc)?
How does that tax bracket compare to this year's tax bracket?

Hopefully, you'll do these calculations and return to tell us what you think about those RMDs. :happy
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celia
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by celia »

mtwhmemn wrote: Sat Jul 18, 2020 12:37 pm Also, right now the inherited IRA is invested 100% in Total Stock Market Index. (We have a 50/50 Boglehead Total Stk 30% / Total Int'l Stk 20% / Total Bond 50% Portfolio) So, should I have a "baby" Total Stk 30% / Total Int'l Stk 20% / Total Bond 50% Portfolio in the inherited IRA if that is where I should start pulling from first in the next 6 months?
This tells me you aren't investing tax-efficiently. It is best if Roths hold stocks where the maximum growth can grow without being taxed. The tax-deferred accounts should hold bonds, since there is no tax benefit to interest income in taxable accounts. That will also hold down the growth in the tax-deferred, as well as future taxes on the withdrawals. And international should be in taxable accounts, if possible.

To get the best analysis on this, I suggest you post your portfolio in percentages such as our Asking Portfolio Questions wiki page explains. Make sure the whole portfolio adds up to 100%, not each account.
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Watty
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by Watty »

mtwhmemn wrote: Sat Jul 18, 2020 12:37 pm (We have over $2 million in sheltered and can't afford to contribute more with me not working.)
A few sort of random points;

If you have money in a 401k and you were 55 in the year that you stopped working at that company then you can make withdraws from that 401k without paying a penalty. The way the dates on this work are odd, for example you could leave your job in January and turn 55 the next December and you would be OK.

Your wife can also use the inherited IRA money to fund retirement accounts. For example she could increase her 401k payroll deductions by $1,000 a month and then also withdraw $1,000 from the inherited IRA to pay for your living expenses. You might also be able to do that with IRA accounts. These would normally cancel each other out on your taxes. The advantage of that is that the next years RMD from the inherited IRA would be smaller.

One thing that I am doing to help manage my taxable income to get an ACA subsidy is that I got a home equity loan on my paid off house that I can draw on to keep my income lower. You might want to consider getting a HELOC set up while your wife is still working since it may be easier to get before she retires.
Topic Author
mtwhmemn
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by mtwhmemn »

fyre4ce wrote: Sat Jul 18, 2020 11:01 pm It would help to know some numbers for your financial picture, particularly: planned future income for you and spouse, and traditional, Roth, and taxable balances.

In general, the best strategy is to blend traditional, Roth, and taxable withdrawals so that you keep your marginal tax rate roughly the same throughout your retirement. Constraints include the start of social security, RMDs (of both your own and inherited accounts), and perhaps some others. Living off 100% traditional, then switching to 100% Roth when that's exhausted, usually isn't optimal, because you're not taking advantage of the 0%, 10%, 12% brackets those years.

Your plan of preferentially spending a Traditional inherited IRA now seems like a good one though.
This is how it is spread out now:

I know I need to restructure what I have below for better tax efficiency as I will be drawing around $1500 per month (Budgeting for around a total of $6-7K per month) from the Inherited IRA starting within the next 6 months.

I’m thinking per advice given…

1. Swap what is in my wife’s inherited IRA to 100% fixed income / Total Bond Index.
2. Swap Vanguard Short-Term Inflation-Protected Securities Index Fund in ROTHS for Total Stock Market Index Fund (I originally thought I’d be taking money from ROTHs starting in the next 6 months but now I realize that doesn’t make sense.)
3. Rebalance back to current AA by exchanges in IRA accounts
4. Convert as much TIRA to ROTH at the end of the year(s) as I can and stay in current tax bracket. (Have already done that once.)


My ROTH
$32K Vanguard Short-Term Inflation-Protected Securities Index Fund
$20K Vanguard Total Stock Market Index Fund Admiral Shares
$125K Vanguard Total International Stock Index Fund Admiral Shares

My IRA
$300K Vanguard Total Bond Market Index Fund Admiral Shares
$80K Vanguard Total International Stock Index Fund Admiral Shares
$300K Vanguard Total Stock Market Index Fund Admiral Shares

Wife’s ROTH
$32K Vanguard Short-Term Inflation-Protected Securities Index Fund Admiral Shares
$110K Vanguard Total International Stock Index Fund Admiral Shares

Wife’s IRA
$580K Vanguard Total Bond Market Index Fund Admiral Shares
$40K Vanguard Total Stock Market Index Fund Admiral Shares

WIfe’s Inherited IRA
$242K Vanguard Total Stock Market Index Fund Admiral Shares

Wife’s 403B
$280K Vanguard Institutional Target Retirement 2025 Fund

Joint Taxable
$30K Vanguard Prime Money Market Fund

If we take SS at 70, I’ll get $28K per year and my wife will get $36K per year.
Last edited by mtwhmemn on Sun Jul 19, 2020 10:57 am, edited 1 time in total.
Topic Author
mtwhmemn
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by mtwhmemn »

HomeStretch wrote: Sat Jul 18, 2020 12:55 pm If in the future you will need to manage taxable income to utilize ACA healthcare coverage with subsidies, consider shifting the Inherited IRA holdings from 100% equity to 100% fixed income. This should give lower expected IRA balance growth and, in turn, lower RMD income that you are required to take during the years you utilize ACA coverage.
That make a lot of sense. I've responded to another poster and put your thoughts there as part of my action plan. Thanks.
Topic Author
mtwhmemn
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by mtwhmemn »

Watty wrote: Sat Jul 18, 2020 11:40 pm
mtwhmemn wrote: Sat Jul 18, 2020 12:37 pm (We have over $2 million in sheltered and can't afford to contribute more with me not working.)
A few sort of random points;

If you have money in a 401k and you were 55 in the year that you stopped working at that company then you can make withdraws from that 401k without paying a penalty. The way the dates on this work are odd, for example you could leave your job in January and turn 55 the next December and you would be OK.

Your wife can also use the inherited IRA money to fund retirement accounts. For example she could increase her 401k payroll deductions by $1,000 a month and then also withdraw $1,000 from the inherited IRA to pay for your living expenses. You might also be able to do that with IRA accounts. These would normally cancel each other out on your taxes. The advantage of that is that the next years RMD from the inherited IRA would be smaller.

One thing that I am doing to help manage my taxable income to get an ACA subsidy is that I got a home equity loan on my paid off house that I can draw on to keep my income lower. You might want to consider getting a HELOC set up while your wife is still working since it may be easier to get before she retires.
Interesting ideas. Thanks.
Topic Author
mtwhmemn
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by mtwhmemn »

celia wrote: Sat Jul 18, 2020 11:16 pm
mtwhmemn wrote: Sat Jul 18, 2020 12:37 pm (We have over $2 million in sheltered and can't afford to contribute more with me not working.)
This doesn't say how much is tax-deferred and how much is Roth. But I suspect that besides withdrawing from the Inherited IRA for living expenses, you likely should also be converting some of your/your spouse's tax-deferred accounts.

To get you thinking about this, estimate your RMDs at age 72. Assume your/your spouses tax-deferred accounts continue to grow as they have the last few years. Then:

What would be the account balance(s) when you are 72?
Since RMDs start at 3.65% of the previous year ending balance, what could your starting RMD be?
What tax bracket would that put you in, with other income streams going at the same time (two SSs, pensions?, dividends, etc)?
How does that tax bracket compare to this year's tax bracket?

Hopefully, you'll do these calculations and return to tell us what you think about those RMDs. :happy
I guess I can use i-orp to do the calculations?
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mtwhmemn
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by mtwhmemn »

RickyAZ wrote: Sat Jul 18, 2020 11:13 pm Why pay penalties or mess with the growth in the Roth if you can just use the Inherited IRA? The RMDs for a pre SECURE act Inherited IRA are certainly manageable for a 57 year old (unless the IRA is in the several millions $ at which point it doesn't matter). Wouldn't worry about growth too much since you can spread out the withdrawals for 27 years, or just aim for 72 when your own Traditional IRAs are subject to RMDs or 70 if you're holding off on taking SOcial Security. It would affect ACA subsidies after your wife retires so that needs to be accounted for. Can certainly manipulate the tax code to great effect with all those various sources of funds
Having the various sources of funds is really good - I get that. I need to work on better distribution of assets in the various accounts. I've outlined where I am now and some changes I'm going to make in another post. Thanks for the thoughts.
Katietsu
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by Katietsu »

mtwhmemn wrote: Sun Jul 19, 2020 10:53 am
fyre4ce wrote: Sat Jul 18, 2020 11:01 pm It would help to know some numbers for your financial picture, particularly: planned future income for you and spouse, and traditional, Roth, and taxable balances.

In general, the best strategy is to blend traditional, Roth, and taxable withdrawals so that you keep your marginal tax rate roughly the same throughout your retirement. Constraints include the start of social security, RMDs (of both your own and inherited accounts), and perhaps some others. Living off 100% traditional, then switching to 100% Roth when that's exhausted, usually isn't optimal, because you're not taking advantage of the 0%, 10%, 12% brackets those years.

Your plan of preferentially spending a Traditional inherited IRA now seems like a good one though.
This is how it is spread out now:

I know I need to restructure what I have below for better tax efficiency as I will be drawing around $1500 per month (Budgeting for around a total of $6-7K per month) from the Inherited IRA starting within the next 6 months.

I’m thinking per advice given…

1. Swap what is in my wife’s inherited IRA to 100% fixed income / Total Bond Index.
2. Swap Vanguard Short-Term Inflation-Protected Securities Index Fund in ROTHS for Total Stock Market Index Fund (I originally thought I’d be taking money from ROTHs starting in the next 6 months but now I realize that doesn’t make sense.)
3. Rebalance back to current AA by exchanges in IRA accounts
4. Convert as much TIRA to ROTH at the end of the year(s) as I can and stay in current tax bracket. (Have already done that once.)


My ROTH
$32K Vanguard Short-Term Inflation-Protected Securities Index Fund
$20K Vanguard Total Stock Market Index Fund Admiral Shares
$125K Vanguard Total International Stock Index Fund Admiral Shares

My IRA
$300K Vanguard Total Bond Market Index Fund Admiral Shares
$80K Vanguard Total International Stock Index Fund Admiral Shares
$300K Vanguard Total Stock Market Index Fund Admiral Shares

Wife’s ROTH
$32K Vanguard Short-Term Inflation-Protected Securities Index Fund Admiral Shares
$110K Vanguard Total International Stock Index Fund Admiral Shares

Wife’s IRA
$580K Vanguard Total Bond Market Index Fund Admiral Shares
$40K Vanguard Total Stock Market Index Fund Admiral Shares

WIfe’s Inherited IRA
$242K Vanguard Total Stock Market Index Fund Admiral Shares

Wife’s 403B
$280K Vanguard Institutional Target Retirement 2025 Fund

Joint Taxable
$30K Vanguard Prime Money Market Fund

If we take SS at 70, I’ll get $28K per year and my wife will get $36K per year.
Looks like a good plan.
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celia
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by celia »

mtwhmemn wrote: Sun Jul 19, 2020 10:53 am 1. Swap what is in my wife’s inherited IRA to 100% fixed income / Total Bond Index.
2. Swap Vanguard Short-Term Inflation-Protected Securities Index Fund in ROTHS for Total Stock Market Index Fund (I originally thought I’d be taking money from ROTHs starting in the next 6 months but now I realize that doesn’t make sense.)
3. Rebalance back to current AA by exchanges in IRA accounts
Do all of this on paper first to see if the portfolio is more tax-efficient and it matches your Asset Allocation (30/20/50). Then make the changes. This is to prevent moving out of a fund and trying to get back in may lock you out for 30 days.
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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Peter Foley
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by Peter Foley »

fyre4ce wrote:
In general, the best strategy is to blend traditional, Roth, and taxable withdrawals so that you keep your marginal tax rate roughly the same throughout your retirement. Constraints include the start of social security, RMDs (of both your own and inherited accounts), and perhaps some others.
I agree. In my humble opinion this is one of the key starting points for planning withdrawals.

In your case mapping out your tax bracket for the next 5 years based on your assumptions regarding your retirement and your wife's would be most helpful. Withdrawing from the inherited IRA within a tax bracket to cover spending needs while adjusting for ACA thresholds is likely an excellent start. Some minor withdrawals from Roth contributions might be advisable to stay within certain income thresholds.

Once you hit 59.5, including your own IRA in the mix of withdrawals will likely produce the lowest sustainable post tax income.

As for calculators, you could try the Retiree Portfolio Model calculator. It is more complex than i-orp, but I find it is more flexible. One of its Excel tabs gives a good read on annual tax rates over time.
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mtwhmemn
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by mtwhmemn »

celia wrote: Sun Jul 19, 2020 1:00 pm
mtwhmemn wrote: Sun Jul 19, 2020 10:53 am 1. Swap what is in my wife’s inherited IRA to 100% fixed income / Total Bond Index.
2. Swap Vanguard Short-Term Inflation-Protected Securities Index Fund in ROTHS for Total Stock Market Index Fund (I originally thought I’d be taking money from ROTHs starting in the next 6 months but now I realize that doesn’t make sense.)
3. Rebalance back to current AA by exchanges in IRA accounts
Do all of this on paper first to see if the portfolio is more tax-efficient and it matches your Asset Allocation (30/20/50). Then make the changes. This is to prevent moving out of a fund and trying to get back in may lock you out for 30 days.
I've been using Vanguards Portfolio Tester before I make any major changes. If you haven't used it I recommend it. Thanks.
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mtwhmemn
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by mtwhmemn »

Peter Foley wrote: Sun Jul 19, 2020 1:24 pm fyre4ce wrote:
In general, the best strategy is to blend traditional, Roth, and taxable withdrawals so that you keep your marginal tax rate roughly the same throughout your retirement. Constraints include the start of social security, RMDs (of both your own and inherited accounts), and perhaps some others.
I agree. In my humble opinion this is one of the key starting points for planning withdrawals.

In your case mapping out your tax bracket for the next 5 years based on your assumptions regarding your retirement and your wife's would be most helpful. Withdrawing from the inherited IRA within a tax bracket to cover spending needs while adjusting for ACA thresholds is likely an excellent start. Some minor withdrawals from Roth contributions might be advisable to stay within certain income thresholds.

Once you hit 59.5, including your own IRA in the mix of withdrawals will likely produce the lowest sustainable post tax income.

As for calculators, you could try the Retiree Portfolio Model calculator. It is more complex than i-orp, but I find it is more flexible. One of its Excel tabs gives a good read on annual tax rates over time.
I just downloaded the Retiree Portfolio Model calculator. Now you've given me a big project. Much appreciated.
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mtwhmemn
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by mtwhmemn »

Peter Foley wrote: Sun Jul 19, 2020 1:24 pm fyre4ce wrote:
In general, the best strategy is to blend traditional, Roth, and taxable withdrawals so that you keep your marginal tax rate roughly the same throughout your retirement. Constraints include the start of social security, RMDs (of both your own and inherited accounts), and perhaps some others.
I agree. In my humble opinion this is one of the key starting points for planning withdrawals.

In your case mapping out your tax bracket for the next 5 years based on your assumptions regarding your retirement and your wife's would be most helpful. Withdrawing from the inherited IRA within a tax bracket to cover spending needs while adjusting for ACA thresholds is likely an excellent start. Some minor withdrawals from Roth contributions might be advisable to stay within certain income thresholds.

Once you hit 59.5, including your own IRA in the mix of withdrawals will likely produce the lowest sustainable post tax income.

As for calculators, you could try the Retiree Portfolio Model calculator. It is more complex than i-orp, but I find it is more flexible. One of its Excel tabs gives a good read on annual tax rates over time.
Why would "including your own IRA in the mix of withdrawals will likely produce the lowest sustainable post tax income". Why wouldn't we restrict withdrawals to the Inherited IRA and Roth IRA?
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Peter Foley
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by Peter Foley »

Initially your would restrict withdrawals to the inherited IRA. Over the long term a mix of your own IRA's with taxable or Roth might be more tax efficient. Part of this depends on when you might start social security, capital gains in a taxable account, etc.

There are a number of moving parts which is why I suggest creating a 5 year plan.
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mtwhmemn
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Re: Inherited IRA - withdraw from it to pay expenses first?

Post by mtwhmemn »

Peter Foley wrote: Tue Sep 15, 2020 7:48 pm Initially you would restrict withdrawals to the inherited IRA.
OK, that makes sense. Thanks for the clarification.
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