Inherited tIRA Considerations

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powermega
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Inherited tIRA Considerations

Post by powermega »

I'm wondering how fellow bogleheads have treated their inherited IRAs, or how they would treat them if they had them...

I have an inherited tIRA and an inherited rIRA. The inherited IRAs have RMDs based on my life expectancy, so the inherited tIRA generates taxable income for me every year (inherited rIRA is tax-free). Those RMDs are used to fund my personal rIRA contributions, so I feel good about how those RMDs are being used.

I allocate my investments across all accounts in a manner consistent with the "tax-efficient fund placement" Wiki article (my favorite Wiki article). In the course of doing so, I found myself loading up the inherited tIRA with more income investments. My overall allocation is modeled after the Vanguard 2035 Target Date Fund (TDF). Since I bias my rIRAs (both inherited and personal) and the taxable account with more equity allocations (TSM and TISM), I end up balancing out those accounts with TBM and TIBM in the inherited tIRA. I bias the inherited tIRA to bonds this way even more than I do with my 401k, which is almost all in the TDF.

The thinking is that since the inherited tIRA is generating RMDs right now, that it should have the lowest return allocations (TBM and TIBM) so as to reduce how much taxable income I generate from those RMDs. Since those RMDs are taxed as income (28% + 5% bracket), I thought it would make the most sense to "match up" the allocations in the tIRA as much as possible to allocations that generate income returns. This, as opposed to having equity allocations that would generate more capital gains. It doesn't make as much sense to me to get taxed at current income tax rates for returns that could be taxed at LTCG rates of 15%. I also have some of my REIT tilt in the inherited tIRA for the same reasons.

What do you think of this approach? Does it make sense? Do you (or would you) bias your inherited tIRA like this? Would you do something different? Why?
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jackholloway
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Re: Inherited tIRA Considerations

Post by jackholloway »

Depends on your age, expected lifespan, and time to retirement. If the inherited IRA will mostly throw of RMDs during retirement, then it is mostly tax advantaged. If you are young and intend to work past typical retirement age so most of the RMDs will be during your high rate years, treat it as more taxable than not. Model it as having two components - one that will produce income during your high rate years, and one that is tax advantage, with the benefit that if you have a job loss or other low income year, you can withdraw much more than your RMD.
Bill M
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Re: Inherited tIRA Considerations

Post by Bill M »

powermega wrote:The thinking is that since the inherited tIRA is generating RMDs right now, that it should have the lowest return allocations (TBM and TIBM) so as to reduce how much taxable income I generate from those RMDs. Since those RMDs are taxed as income (28% + 5% bracket), I thought it would make the most sense to "match up" the allocations in the tIRA as much as possible to allocations that generate income returns. This, as opposed to having equity allocations that would generate more capital gains. It doesn't make as much sense to me to get taxed at current income tax rates for returns that could be taxed at LTCG rates of 15%. I also have some of my REIT tilt in the inherited tIRA for the same reasons.
It seems that no matter how the gains are generated inside the IRA's (whether inherited or not), they are taxed as ordinary income when the RMD is paid. So I fail to see the distinction you are making between inherited IRAs and your own IRA/401k.

Once we set our asset allocation (60/40), and did the fund placement (we had 50/50 NQ/Q), we ended up with taxable accounts being all stock funds, and qualified accounts being both stocks and bonds. RMDs moved money from the qualified accounts to the taxable accounts -- we purchase more of the stock funds and then re-shuffle the balances in the IRA accounts to get the proper asset allocation back. Nothing special about inherited vs non-inherited accounts.
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powermega
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Re: Inherited tIRA Considerations

Post by powermega »

Bill M wrote:
powermega wrote:The thinking is that since the inherited tIRA is generating RMDs right now, that it should have the lowest return allocations (TBM and TIBM) so as to reduce how much taxable income I generate from those RMDs. Since those RMDs are taxed as income (28% + 5% bracket), I thought it would make the most sense to "match up" the allocations in the tIRA as much as possible to allocations that generate income returns. This, as opposed to having equity allocations that would generate more capital gains. It doesn't make as much sense to me to get taxed at current income tax rates for returns that could be taxed at LTCG rates of 15%. I also have some of my REIT tilt in the inherited tIRA for the same reasons.
It seems that no matter how the gains are generated inside the IRA's (whether inherited or not), they are taxed as ordinary income when the RMD is paid. So I fail to see the distinction you are making between inherited IRAs and your own IRA/401k.
The distinction I made was that the inherited tIRA is generating RMDs right now, at an income tax rate that is likely higher than my retirement income tax rate. Once in retirement, I would not see any distinction either.
Even a stopped clock is right twice a day.
livesoft
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Re: Inherited tIRA Considerations

Post by livesoft »

Our inherited IRAs are rather small. For instance, neither qualify for Admiral shares. The RMDs are rather small, too. So we just have them in bond funds as part of our fixed income allocation for the reasons you mentioned. We are going to have a fixed income allocation, so we might as well make RMDs as small as possible and last as long as possible.
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