Inherited IRA distribution vs Trad IRA Roth Conversion timing

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FinishLine
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Inherited IRA distribution vs Trad IRA Roth Conversion timing

Post by FinishLine »

All: I am retiring from Megacorp January 2022 (age 55), my wife is retiring June 2022 (age 56). In pre-tax, we have $2.6 million in traditional IRAs, plus $340K in an inherited IRA (inherited 2020). My wife will receive a pension, and I have a side business that will continue to bring in solid income, but there will be some room for IRA distributions up to the current 24% MFJ bracket. My thought is to take distributions to deplete inherited IRA first because the 10 year clock is running, and then do Roth conversions until we reach 72 (or whatever the RMD age is when we get there).

Would there by any reasons to do the Roth conversions first, and deal with the inherited IRA distributions closer to the end of the 10 year window?
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David Jay
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Re: Inherited IRA distribution vs Trad IRA Roth Conversion timing

Post by David Jay »

If I had 2.6 million in tax-deferred, I think I would get some conversions done first as that will reduce the amount of growth in the tax-deferred account. Otherwise you could be looking at a 6 or 7 million dollar tIRA balance in 15 years.
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Eagle33
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Re: Inherited IRA distribution vs Trad IRA Roth Conversion timing

Post by Eagle33 »

Roth conversations early before the year(s) you turn 63 gives you more room for higher incomes. That is when Medicare begins their annual 2-year look back at your income in determining if IRMAA is applicable to your Medicare premiums.
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Exchme
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Re: Inherited IRA distribution vs Trad IRA Roth Conversion timing

Post by Exchme »

First, ensure you have your assets placed in the most tax efficient manner. That is, fill your Inherited IRA with bonds first and then put the rest of your bonds in your tax deferred IRA.

After that, in general you want to get money into Roth as quickly as possible while keeping marginal tax bracket balanced each year. So I think the math will favor doing Roth Conversions first. It would not surprise me if the best answer was to do conversions to the top of the 32% bracket now. Once you are 63, IRMAA basically adds another 4% to the tax bracket and the brackets are set to increase another 3-5 points in 2026 with expiration of TCJA. With $3M between the inherited and traditional IRAs and you having continuing income, you may not be able to hide in the 24% bracket.

The main reason to consider any withdrawals from the inherited IRA in the next few years instead of Roth Conversions is if you need cash to live on and pay taxes. Since the inherited IRA will be taxed during your lifetime, but your capital gains in taxable will get a step up in basis on death, there is some driving force to use the inherited IRA for necessary expenses rather than sell assets.
retire2022
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Re: Inherited IRA distribution vs Trad IRA Roth Conversion timing

Post by retire2022 »

op

https://www.investopedia.com/articles/p ... iaries.asp

Inherited IRA, under the SECURE Act you have to withdraw it within 10 years.

Non-spousal beneficiaries must withdraw all funds from an inherited IRA within 10 years of the original owner's death.

Special IRA Transfer Rule
You can transfer up to $100,000 from an IRA directly to a qualified charity.11 The transfer, which is called a qualified charitable distribution (QCD) even though no tax deduction is allowed, is tax-free and can include RMDs (i.e., they become non-taxed). In other words, the transfer can satisfy your RMD for the year up to $100,000 and you're not taxed on the amount. This tax break was made permanent by the Consolidated Appropriations Act of 2016, which became law on Dec. 18, 2015.12
chemocean
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Re: Inherited IRA distribution vs Trad IRA Roth Conversion timing

Post by chemocean »

retire2022 wrote: Wed Nov 24, 2021 11:24 pm op

https://www.investopedia.com/articles/p ... iaries.asp

Inherited IRA, under the SECURE Act you have to withdraw it within 10 years.

Non-spousal beneficiaries must withdraw all funds from an inherited IRA within 10 years of the original owner's death.

Special IRA Transfer Rule
You can transfer up to $100,000 from an IRA directly to a qualified charity.11 The transfer, which is called a qualified charitable distribution (QCD) even though no tax deduction is allowed, is tax-free and can include RMDs (i.e., they become non-taxed). In other words, the transfer can satisfy your RMD for the year up to $100,000 and you're not taxed on the amount. This tax break was made permanent by the Consolidated Appropriations Act of 2016, which became law on Dec. 18, 2015.12
QCDs can only be taken when the owner of the inherited IRA or traditional IRA reaches the age of 70.5. Note that you can make QCDs 1-2 years (depending on your birthday) before you have to take RMDs. In the case of this post, the inherited IRA will have been disbursed before either spouse reaches 70.5.

If you are charitably inclined, this situation suggests leaving your lifetime charitable contributions in traditional IRA rather than converting all traditional IRAs to Roth. Then disburse QCDs as part of your RMD on an annual basis.

Although a bit harder to predict, increased end-of-life medical expense that are deductible (above the standard deduction after considering the 7.5% AGI threshold) could also benefit by being paid by withdrawals from a traditional IRA.
gotlucky
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Re: Inherited IRA distribution vs Trad IRA Roth Conversion timing

Post by gotlucky »

I'd probably deplete the inherited IRA first. Here's why:

Any successor beneficiary, spouse or non-spouse, of the inherited IRA needs to clear it out within the original 10-year timeframe. So if you wait until the 10th year to distribute it and die just before that, your successor beneficiary won't have much flexibility.

A non-spouse beneficiary or your IRA gets, worst-case, a new 10-year timeframe.

Also, a QLAC can be purchased within a traditional IRA but not an inherited IRA.

Lastly, RMD start date rules were recently changed by the SECURE Act. There is a lot of discussion about further changes in the near future. You can look those up yourself since we can't discuss proposed changes here. Either way, the rules may change and you have more time before you are subject to traditional IRA RMDs than you have before the inherited IRA has to be fully distributed.

All that being said, I would accelerate either the inherited IRA or Roth conversions if you are confident you will have pension or other passive income in perpetuity and you want to maximize SS. Other sources of income, including RMDs, can really affect the taxation of SS.
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cowdogman
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Re: Inherited IRA distribution vs Trad IRA Roth Conversion timing

Post by cowdogman »

It sounds like you might have Schedule C income in retirement--your "side business." If so, then you will be able to establish a solo 401(k). If your wife participates in the business, she too could be a plan participant. This would provide you (and possibly your wife) with an opportunity to contribute a substantial amount to the 401(k)--pre-tax or, at least at Vanguard, Roth.

If so, one option for the inherited IRA is to use distributions from the inherited IRA to fund pre-tax contributions to the solo 401(k)--essentially rolling over part of the inherited IRA into the solo-401(k) each year--income from the inherited IRA distribution offset by downward adjustment to income from the 401(k) contribution. I realize this is just "kicking the can down the road" in terms of dealing with the pre-tax balance in the Trad IRA, but it deals with the 10 year clock.
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