With the passing of my mother earlier this summer, i inherited some IRAs that need to be withdrawn by the end of 2034. It’s not a lot of money but enough that if managed correctly could wind up being a significant contributor to generational wealth.
I guess what I’m looking for is the opposite of these: one of the absolute worst strategies would be to either take all of it now and not get any benefit of a decade plus of market returns (I’m 50). Another bad strategy might be to wait the entire time and face a huge tax bill at the end. I’d also like to not expose myself to a 2008-09 style 50% decrease in value.
Anyone done this and have pointers or have a strategy to suggest ?
If you are looking to minimize the impact and do not expect to be in a lower tax bracket in the next 10 years, do some projections of your taxable income in November and take an amount from the Inherited IRA that will keep you from bumping up to the next marginal tax bracket.
Otherwise, just let it ride for 10 years and take a big hit in year 10, unless you need to take RMDs because your mom was past her RBD when she died.
Yeah, if you’re far enough away from the next marginal rate to take at least 10% a year then you can basically get it all taxed at your marginal rate.
If, however, it’s looking like at some point it’s going to push you into the next bracket, you want to make sure that it doesn’t ever push you two brackets above your current bracket. If it’s not huge then maybe that’s not an issue, but something to think about.
Assuming your bracket isn’t dropping in the next 10 years:
Maximize amount taxed at current bracket.
Maximize amount taxed at next higher bracket
etc.
If you’re currently at 22% try to get it all at 22%. If you can’t, get as much taxed at 22% as possible and the rest taxed at 24%. You don’t want to leave most until year 10 and get a piece taxed at 32% when you could have had more of it taxed at 24% in earlier years.
Depending on current & future income and changes to tax rates and value of the IRA there’s a lot of guess work involved of course but do your best & don’t worry about the rest.
Also if Harris wins the election I would err on the side of putting it in your 2024 & 2025 income. Tax rates on folks making actuary money are not going to go down during a Harris presidency but they may well go up.
I have a few unknowns at the moment. The largest is that I’m in the midst of a divorce that I filed for about 2 months before mom died. That process could last another 6-9 months or go fairly quickly if soon-to-be-ex gets realistic. Between that and inheritance (protected in my state) that isn’t IRA, I’ll have a decent amount of money without any tax implications also. Also, I’ll be getting about 1/3rd of a pension that is dependent on when she wants to retire (the minimum without “blowing it up” would be 7 years from now or she could choose to be difficult and try to outwork my lifespan). My best bet is that should she not get a significant promotion, she’ll try and retire to go work in the private sector in 2031 or shortly thereafter.
I’d have to say I don’t think about early retirement unless it’s in the form of part time work in my late 50s but I do anticipate for health insurance I’ll be working until 65.
If the inherited IRA is separate property, I’d try to not take any of it before the divorce is final unless you are required by law.
As for your wife’s pension that you will be entitled to a part of, I assume that will be addressed in a QDRO and the date you apply for your benefits might be difference than the date your wife applies for hers but when you can start might be tied to the earliest retirement date your wife “could” elect and when you chose to elect your benefits. It can be tricky and government plans can have different rules than private sector so make sure you have an attorney who is familiar with that or works with an outfit that is competent in drafting orders dividing pension in divorce. You might also ask her plan if they have a preapproved model they prefer.
I think the amount matters. I got a few thousand when my mom died. Wasn’t worth my time spreading that so like you I cashed it out an paid the taxes. But had it been $50K or $500K I probably would have done it differently.
First off, and most importantly, sorry to hear about your mom. Parents getting old sucks, them dying and leaving money doesn’t always make things better. Unless it’s someone like my mom, who hated Mrs. Hoffman and barely gave my kids the time of day and spent much of her life loathing everyone around her who didn’t do exactly what she wanted, in which case her dying left us some money + when her dad died his will left us even more money, and my kids got to enjoy that a whole lot more.
One thing that comes into play with inherited IRAs: RMDs. If your mom was subject to RMDs, you will be too. I was leaning toward “leave it in for as long as possible, draw down only when needed” but Dad was well into RMD territory so that’s not an option. But, we’re also high enough in the current tax bracket that we’ve had to make moves to limit AGI in case we need to pull out more and avoid having RMDs push us into the next bracket. It’s definitely worth talking with a tax advisor to get ideas on how to plot out distributions depending on different scenarios.
Our current plan is to pull out what we need to pay for taxes we expect to owe, so that at the end (federal + state tax) ends up being near zero. But, we’re trying to free up space so that if we need to accelerate distributions because of expected future taxes we’ve got room in the current tax bracket to do so.
Neither Mom nor Dad was of age to have RMD (dad was 60 and died in 2011, mom died at age 71). I’ll seek out someone more versed than my current tax guy, that’s an idea that I was already considering and hearing it from someone with a similar situation confirms that I should.
I can do my own research, but can you elaborate a touch to guide me on where to look?
We are seeking to retire early, and I don’t truly know our in-laws financial situation but they are not skint on net worth with their house considered. They might not have any IRA, or if they rolled lots into an IRA they may have several million - or $800k because they spent a lot and sucked at investing. I don’t know, but we will eventually find out. We may have a sizeable IRA in our mid-future.
On the other hand, they don’t believe in medicine now, so perhaps they die fast from preventable disease, or maybe in their old age they cling to all medicine and drain everything but the home. (We think they have some… hangups with their Christian faith that’ll be interesting at end of life, but that’s a new thread. We think Mom-in-law in particular doesn’t really believe, but is kind of stuck in the lifestyle and scared.)
As far as investing, I would treat it like your other stuff and not do anything special. If a 2007-2009 kind of decrease worries you, invest accordingly. If you’re counting on a March 2009 - February 2020 surge or a late March 2020 - end of 2021 surge, invest accordingly. The bigger issue IMO is the tax treatment on those withdrawals and how that plays into the rest of your tax picture. What you don’t want is to delay and suddenly have to take everything out at say 28% for a tax rate, when you could have been taking it out over time at something less.
Also going to circle to Rastlin’s comment: I would not plan anything in your personal situation today based on what might be left to you later on. Yeah, it’s possible that someone dies and leaves you money and there’s a huge tax bill that has to be dealt with. It’s also possible they spend everything and leave you with nothing. Those are first world problems; it’s not like if you end up with a big tax bill later on, you were left with money but taxes will wipe it all out so you’ve got a net zero. Tax mitigation strategies for that might be helpful to you, but ultimately they have to be exercised by whoever holds the money today. If they don’t care, you’re probably not going to be able to do anything to convince them otherwise.
I don’t believe,you can convert inherited IRA to ROtH
And a backdoor conversion is a conversion of after tax monies not pretax. At least as i understand it. Otherwise it’s just a regular conversion to Roth