Decision to Withdraw from INHERITED IRA

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grettman
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Decision to Withdraw from INHERITED IRA

Post by grettman »

BLUF: I am thinking about withdrawing $10,000 cash from an inherited traditional IRA which is currently making virtually 0.0% so that I can buy an I-BOND at the current rate of 7.12%. From a tax perspective, based on the info I provide below, I want to know if it makes no difference to withdraw this cash from my INHERITED IRA now or to wait until I retire (~6 years from now). I am NOT asking if investing in I-BONDs is the right thing to do. My question is only about the timing of this withdraw (do it now or wait until later) from a tax perspective..

MY THOUGHTS: From a tax perspective, it will make no difference because of the following facts and assumptions.

1. Withdrawing now will not impact the child tax credit I am currently getting because I make a lot less than $400,000 annually (MFJ) which is the threshold of CTC phase out.

2. Withdrawing now will not have an impact on our current tax bracket. We will remain at the 22% bracket because our taxable income (~$148,000), even after the withdraw, will not exceed the threshold (~$178,000).

3. It will not have an impact on our ability to contribute to a Roth IRA because our MAGI is about ~$172,500 will not exceed the $204,000 ROTH phase out.

4. My pension plus my wife's income will be about $120,000 (today's dollars) which means, assuming no changes in tax code/law, we will still be at 22% tax bracket when I retire in ~6 years.

5. All funds from INHERITED IRA must be fully withdrawn by 12/31/2030 (10 years after my mom’s death)

I understand I need to pay taxes on the money I withdraw from this inherited traditional IRA.

QUESTION: Have I overlooked anything? Is there something else I need to account for? Essentially I want to make sure that I do no harm.

Thank you!!!
Affable at 50
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Re: Decision to Withdraw from INHERITED IRA

Post by Affable at 50 »

I look at this question the same way you have. Withdraw the money when you need it or at the lowest marginal tax available during your 10-year window. If this helps you buy the I-bond sooner, I think this is ok.
Sand101
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Re: Decision to Withdraw from INHERITED IRA

Post by Sand101 »

Looks like you're stuck at 22% no matter what, so it really doesn't matter when you withdraw from a tax perspective. There is no telling where you'll actually be 10 years from now at the end of the tracks, so I wouldn't overthink it. All of this is under the assumption that this withdrawal satisfies your RMD, which is priority 1 with these vehicles.
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grettman
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Re: Decision to Withdraw from INHERITED IRA

Post by grettman »

Sand101 wrote: Mon Jan 17, 2022 12:24 pm Looks like you're stuck at 22% no matter what, so it really doesn't matter when you withdraw from a tax perspective. There is no telling where you'll actually be 10 years from now at the end of the tracks, so I wouldn't overthink it. All of this is under the assumption that this withdrawal satisfies your RMD, which is priority 1 with these vehicles.
Thanks. RMDs are no longer required of Inherited IRAs because they got rid of the stretch. Only requirement is all funds need to be withdrawn 10 years after death. Someone correct me if I’m wrong. Mom died in 2020 after the rules changed.
Fortitude
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Re: Decision to Withdraw from INHERITED IRA

Post by Fortitude »

grettman wrote: Mon Jan 17, 2022 12:55 pm
Thanks. RMDs are no longer required of Inherited IRAs because they got rid of the stretch. Only requirement is all funds need to be withdrawn 10 years after death. Someone correct me if I’m wrong. Mom died in 2020 after the rules changed.
That’s correct. Pursuant to the SECURE Act passed in December 2019 pertaining to an inherited IRA received from a decedent who passed away after December 31, 2019:

“Generally, a designated beneficiary is required to liquidate the account by the end of the 10th year following the year of death of the IRA owner (this is known as the 10-year rule). During the 10-year period, the beneficiary may take distributions of any amount at any frequency”.

This does not apply to spouses of the decedent with the spouse as the beneficiary of the IRA. IRA transfers to the spouse and RMD’s kick in when spouse turns 72 (assuming the spouse isn’t already at least that old).
Last edited by Fortitude on Mon Jan 17, 2022 1:20 pm, edited 1 time in total.
Topic Author
grettman
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Re: Decision to Withdraw from INHERITED IRA

Post by grettman »

Fortitude wrote: Mon Jan 17, 2022 1:16 pm
grettman wrote: Mon Jan 17, 2022 12:55 pm
Thanks. RMDs are no longer required of Inherited IRAs because they got rid of the stretch. Only requirement is all funds need to be withdrawn 10 years after death. Someone correct me if I’m wrong. Mom died in 2020 after the rules changed.
That’s correct. Pursuant to the SECURE Act passed in December 2019 pertaining to an inherited IRA received from a decedent who passed away after December 31, 2019:

“Generally, a designated beneficiary is required to liquidate the account by the end of the 10th year following the year of death of the IRA owner (this is known as the 10-year rule). During the 10-year period, the beneficiary may take distributions of any amount at any frequency”.
Thanks for the confirmation.
Fortitude
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Re: Decision to Withdraw from INHERITED IRA

Post by Fortitude »

grettman wrote: Mon Jan 17, 2022 1:18 pm
Fortitude wrote: Mon Jan 17, 2022 1:16 pm
grettman wrote: Mon Jan 17, 2022 12:55 pm
Thanks. RMDs are no longer required of Inherited IRAs because they got rid of the stretch. Only requirement is all funds need to be withdrawn 10 years after death. Someone correct me if I’m wrong. Mom died in 2020 after the rules changed.
That’s correct. Pursuant to the SECURE Act passed in December 2019 pertaining to an inherited IRA received from a decedent who passed away after December 31, 2019:

“Generally, a designated beneficiary is required to liquidate the account by the end of the 10th year following the year of death of the IRA owner (this is known as the 10-year rule). During the 10-year period, the beneficiary may take distributions of any amount at any frequency”.
Thanks for the confirmation.
I added the spousal exception to my post above just in case others read it and thought that the 10 year rule applied to all situations. There are a few other exceptions other than the spousal exceptions that are included in the legislation.
MTKRC
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Re: Decision to Withdraw from INHERITED IRA

Post by MTKRC »

Under your scenario, my thought is that you are better off making the withdrawal now. If the Tax Cuts & Job Act expires in 2025, your income tax rate could revert to the previous level of 25%. Better to pay the taxes now at 22%...
Topic Author
grettman
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Re: Decision to Withdraw from INHERITED IRA

Post by grettman »

MTKRC wrote: Mon Jan 17, 2022 1:31 pm Under your scenario, my thought is that you are better off making the withdrawal now. If the Tax Cuts & Job Act expires in 2025, your income tax rate could revert to the previous level of 25%. Better to pay the taxes now at 22%...
I never thought about that! Thanks!
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CAsage
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Re: Decision to Withdraw from INHERITED IRA

Post by CAsage »

Is there some reason you have that Inherited IRA invested in a crummy savings account? Why not invest it in something else, like you would other investments? Not what you are asking, but it's still all yours now. Is that part of your overall plan?
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
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grettman
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Re: Decision to Withdraw from INHERITED IRA

Post by grettman »

CAsage wrote: Tue Jan 18, 2022 12:09 pm Is there some reason you have that Inherited IRA invested in a crummy savings account? Why not invest it in something else, like you would other investments? Not what you are asking, but it's still all yours now. Is that part of your overall plan?
Most of it is invested in SWTSX. This cash portion I want to move to bonds so that I can grow my bond position as I get closer to retirement.
aristotelian
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Re: Decision to Withdraw from INHERITED IRA

Post by aristotelian »

Why is the IRA earning 0%?

How much is left in the IRA? Is your tax bracket going up, down, or staying the same any time in the near future?

As long as you are still in the 22% bracket I think you are fine to withdraw. What you do with the money is a completely separate question. My only question is whether you might want to withdraw more than $10k to avoid being hit by taxes later.
Skiandswim
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Re: Decision to Withdraw from INHERITED IRA

Post by Skiandswim »

FWIT, If you have a HSA you could make a qualified Health Savings Account funding distribution (one in a lifetime - $7300 max with family coverage in 2022). No income tax impact for "transfer" and when funds are used for qualified health cost you have no tax upon withdrawal. Some good BH threads on the topic.
Navillus1968
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Re: Decision to Withdraw from INHERITED IRA

Post by Navillus1968 »

grettman wrote: Mon Jan 17, 2022 11:53 am BLUF: I am thinking about withdrawing $10,000 cash from an inherited traditional IRA which is currently making virtually 0.0% so that I can buy an I-BOND at the current rate of 7.12%. From a tax perspective, based on the info I provide below, I want to know if it makes no difference to withdraw this cash from my INHERITED IRA now or to wait until I retire (~6 years from now). I am NOT asking if investing in I-BONDs is the right thing to do. My question is only about the timing of this withdraw (do it now or wait until later) from a tax perspective..

MY THOUGHTS: From a tax perspective, it will make no difference because of the following facts and assumptions.

<snip>
2. Withdrawing now will not have an impact on our current tax bracket. We will remain at the 22% bracket because our taxable income (~$148,000), even after the withdraw, will not exceed the threshold (~$178,000).
<snip>
4. My pension plus my wife's income will be about $120,000 (today's dollars) which means, assuming no changes in tax code/law, we will still be at 22% tax bracket when I retire in ~6 years.
<snip>
Thank you!!![/b]
Money is fungible-

Do you have a taxable brokerage account? If yes, why not sell $10K of stock Mutual fund/ETF in taxable at LTCG tax rates & buy I-Bonds with that cash?
Meanwhile, in the Inherited IRA, use the IRA cash to buy $10k of VTI or similar mutual fund/ETF to replace your equity asset allocation that was sold in taxable?

Assuming (conservatively) that your cap gains are 50% of the $10k stock position, you'll be taxed on $5k gains at 15% vs being taxed at 22% on the full $10k distributed from IRA!

Wouldn't you rather pay LTCG of $750 ($5,000 x 0.15%) vs OI tax of $2,200 ($10,000 x 0.22%)?

When finished with this scheme, your equity AA is unchanged & you've turned $10k of IRA cash into $9,250 of I-Bonds in taxable. Your plan only nets you $7,800 worth of I-Bonds after paying 22% tax on $10k.

Of course, if you picked a high-basis stock lot that you've owned for >1 year, your cap gains could easily be a *lot* lower than the 50% of $10k total in my example, buying you even more bonds.
Weathering
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Re: Decision to Withdraw from INHERITED IRA

Post by Weathering »

Is there a “cost” basis for the inherited IRA? Meaning, do you know the amount of the inherited IRA that was contributed to it with after tax $?

I have an inherited IRA and I’m reluctant to withdraw from it because the withdrawal may only be partially taxable if any after tax $ was used when it was originally funded. I have no way of finding out if any after tax $ was used in funding this inherited IRA.
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KingRiggs
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Re: Decision to Withdraw from INHERITED IRA

Post by KingRiggs »

Weathering wrote: Wed Jan 19, 2022 1:22 pm Is there a “cost” basis for the inherited IRA? Meaning, do you know the amount of the inherited IRA that was contributed to it with after tax $?

I have an inherited IRA and I’m reluctant to withdraw from it because the withdrawal may only be partially taxable if any after tax $ was used when it was originally funded. I have no way of finding out if any after tax $ was used in funding this inherited IRA.
If after-tax money was used to fund the inherited IRA, wouldn't it be labeled as an inherited Roth IRA?

That makes a big difference tax-wise, as I'm sure you're aware.
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celia
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Re: Decision to Withdraw from INHERITED IRA

Post by celia »

If the numbers in the original post are firm (unlikely to change), I would withdraw $30k instead. But plan for the increase in your taxes for this year.

And the tax brackets could revert to 2017 levels in 2026 unless Congress comes up with something else before then.
aristotelian
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Re: Decision to Withdraw from INHERITED IRA

Post by aristotelian »

KingRiggs wrote: Wed Jan 19, 2022 3:00 pm
Weathering wrote: Wed Jan 19, 2022 1:22 pm Is there a “cost” basis for the inherited IRA? Meaning, do you know the amount of the inherited IRA that was contributed to it with after tax $?

I have an inherited IRA and I’m reluctant to withdraw from it because the withdrawal may only be partially taxable if any after tax $ was used when it was originally funded. I have no way of finding out if any after tax $ was used in funding this inherited IRA.
If after-tax money was used to fund the inherited IRA, wouldn't it be labeled as an inherited Roth IRA?

That makes a big difference tax-wise, as I'm sure you're aware.
Not always. Non-deductible is not the same as Roth (although the usual purpose for making nondeductible contributions is to convert them to Roth). I am custodian for an Inherited IRA my kids received and was advised by a tax pro friend to try to find out if any contributions were nondeductible. Ultimately we had no records of the contributions so I am assuming that it's all taxable, but it's possible some portion was nondeductible.
exodusNH
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Re: Decision to Withdraw from INHERITED IRA

Post by exodusNH »

Weathering wrote: Wed Jan 19, 2022 1:22 pm Is there a “cost” basis for the inherited IRA? Meaning, do you know the amount of the inherited IRA that was contributed to it with after tax $?

I have an inherited IRA and I’m reluctant to withdraw from it because the withdrawal may only be partially taxable if any after tax $ was used when it was originally funded. I have no way of finding out if any after tax $ was used in funding this inherited IRA.
If you inherited it recently, you may need drain it in 10 years. If you're unsure of the taxable status, you might want to keep your bond allocation here so that you limit the growth.

You'd need the tax records of the original owner to have a chance of figuring out the tax status.
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celia
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Re: Decision to Withdraw from INHERITED IRA

Post by celia »

Weathering wrote: Wed Jan 19, 2022 1:22 pm Is there a “cost” basis for the inherited IRA? Meaning, do you know the amount of the inherited IRA that was contributed to it with after tax $?

I have an inherited IRA and I’m reluctant to withdraw from it because the withdrawal may only be partially taxable if any after tax $ was used when it was originally funded. I have no way of finding out if any after tax $ was used in funding this inherited IRA.
If the deceased was in their 80s or 90s, this very unlikely. The rules were different when they were working. And you have to do withdrawals even if you don’t know. Just assume the whole withdrawal is pre-tax.

The way to confirm if there was any basis in the IRA or not is to look at the last few tax returns that the deceased filed. Was there a Form 8606 in there? If yes, the basis on line 14 is split among all the beneficiaries of all the traditional IRAs. If a form 8606 is not found, there is no basis.

A Form 8606 was required if there were any non-deductible contributions or withdrawals or Roth conversions that year.

And if their highest wages weren’t above the Roth eligibilty threshold, they most likely never made non-deductible contributions.
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.
Navillus1968
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Re: Decision to Withdraw from INHERITED IRA

Post by Navillus1968 »

Weathering wrote: Wed Jan 19, 2022 1:22 pm Is there a “cost” basis for the inherited IRA? Meaning, do you know the amount of the inherited IRA that was contributed to it with after tax $?

I have an inherited IRA and I’m reluctant to withdraw from it because the withdrawal may only be partially taxable if any after tax $ was used when it was originally funded. I have no way of finding out if any after tax $ was used in funding this inherited IRA.
As Celia noted above, the pre-1986 rules allowed universal deductibility. After 1986, IRA deductibility phased out, starting at $40k MFJ AGI for those covered by 401k-type plans. Note: $40k in 1986 is about $102k today. Did the IRA owner make that kind of money?
Also, did they have a 401k (or similar)? If not, IRAs were/are still 100% deductible.

If not, chances are near 100% that your IRA is 100% pre-tax.

"Other taxpayers could take full IRA deductions if their adjusted gross income is less than $40,000 for a married couple or $25,000 for a single person, even if covered by pension plans."
https://www.washingtonpost.com/archive/ ... 3d624dd86/

Again echoing what Celia said- check for a form 8606 in any tax documents you have for the IRA owner. The trustee for the estate should have these. You might also check with the IRA custodian, sometimes they track non-deductible money, although they're not required to.

Depending on the size of the IRA, you could be wasting precious years of low TCJA brackets by waiting. OTOH, if you plan to retire soon, once your W-2 income goes away would be an opportune time to drain the IRA, prior to starting SSI.
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celia
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Re: Decision to Withdraw from INHERITED IRA

Post by celia »

Navillus1968 wrote: Wed Jan 19, 2022 5:21 pm …You might also check with the IRA custodian, sometimes they track non-deductible money, although they're not required to.
No, the custodian doesn’t have a place to record this since it isn’t any of their business. You many be talking with the custodian and mention that the pro rata rule applies to your withdrawal or you made previous non-deductible contributions. This may help them understand where you are coming from, if you have a question, but they aren’t supposed to give you tax advice. Even if they had a field to record this, how would they confirm it? It is just word of mouth info.

The fact that you made non-deductible contributions is between you and the IRS and possibly a tax preparer, if you used one.
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.
chemocean
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Re: Decision to Withdraw from INHERITED IRA

Post by chemocean »

You indicated that you are six-years from retiring.
Making QCDs from your own and inherited traditional IRAs is one method of getting money out of traditional IRAs tax-free.
Then the funds you would have dedicated to charitable contributions can be invested in a taxable investment.
Do you have enough other IRA to make QCDs for your lifetime charitable contributions when you reach 70.5?
Navillus1968
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Re: Decision to Withdraw from INHERITED IRA

Post by Navillus1968 »

celia wrote: Wed Jan 19, 2022 9:57 pm
Navillus1968 wrote: Wed Jan 19, 2022 5:21 pm …You might also check with the IRA custodian, sometimes they track non-deductible money, although they're not required to.
No, the custodian doesn’t have a place to record this since it isn’t any of their business. You many be talking with the custodian and mention that the pro rata rule applies to your withdrawal or you made previous non-deductible contributions. This may help them understand where you are coming from, if you have a question, but they aren’t supposed to give you tax advice. Even if they had a field to record this, how would they confirm it? It is just word of mouth info.

The fact that you made non-deductible contributions is between you and the IRS and possibly a tax preparer, if you used one.
My wife's Merrill Lynch TIRA statement lists "Tax Year 2021 non-deductible contributions- $7,000" & another line on the MER statement says: "Lifetime non-deductible contributions- $40,500"

I agree 100% that it's not the custodian's business to know our tax status & who knows how/why MER does this, but there it is.
I certainly wouldn't expect most IRA custodians to do anything similar.
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celia
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Re: Decision to Withdraw from INHERITED IRA

Post by celia »

Navillus1968 wrote: Thu Jan 20, 2022 2:30 pm My wife's Merrill Lynch TIRA statement lists "Tax Year 2021 non-deductible contributions- $7,000" & another line on the MER statement says: "Lifetime non-deductible contributions- $40,500"

I agree 100% that it's not the custodian's business to know our tax status & who knows how/why MER does this, but there it is.
I certainly wouldn't expect most IRA custodians to do anything similar.
Do you agree that that amount is accurate?

Where do you think they got that info from?

Did your wife rollover an After-tax 401K? The 401k custodian could have also reported the pre-tax and post-tax parts.
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.
Navillus1968
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Re: Decision to Withdraw from INHERITED IRA

Post by Navillus1968 »

celia wrote: Thu Jan 20, 2022 6:28 pm
Navillus1968 wrote: Thu Jan 20, 2022 2:30 pm My wife's Merrill Lynch TIRA statement lists "Tax Year 2021 non-deductible contributions- $7,000" & another line on the MER statement says: "Lifetime non-deductible contributions- $40,500"

I agree 100% that it's not the custodian's business to know our tax status & who knows how/why MER does this, but there it is.
I certainly wouldn't expect most IRA custodians to do anything similar.
Do you agree that that amount is accurate?
Yes, 100%. Basically all the contributions since we opened the account in 2016, the year our MAGI made us Roth IRA pariahs.
Where do you think they got that info from?

Did your wife rollover an After-tax 401K? The 401k custodian could have also reported the pre-tax and post-tax parts.
LOL, my wife work? No, this was all spousal TIRA opened after our income exceeded the Roth MAGI limits.

I can only speculate that our MER rep knew the reason we were opening the TIRA was Roth IRA ineligibilty, which would put our MAGI way above deductible TIRA MAGI?
Of course, there's nothing preventing us since then from having our MAGI drop & taking a deductible contribution, right? I find it as curious as you do, not a custodian's job, nor in his purview, to track IRA basis.

PS- To clarify, she works her tail off keeping house, making gourmet meals, and generally making me happy, but there's no 401k.
Big Jim24
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Re: Decision to Withdraw from INHERITED IRA

Post by Big Jim24 »

chemocean wrote: Thu Jan 20, 2022 7:17 am You indicated that you are six-years from retiring.
Making QCDs from your own and inherited traditional IRAs is one method of getting money out of traditional IRAs tax-free.
Then the funds you would have dedicated to charitable contributions can be invested in a taxable investment.
Do you have enough other IRA to make QCDs for your lifetime charitable contributions when you reach 70.5?
This is what I'm thinking of doing with an inherited IRA of about $16K, which is a smaller portion of an inheritance. At $1,600/year, that would double what I contribute to a charity every year. To my thinking, if I just make my QCD directly from this account every year, it would get 2x the amount to the charity and I'd avoid any taxes on this. Thanks for the tip!
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