Dad's IRA - beneficiary/tax advice

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gpburdell
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Dad's IRA - beneficiary/tax advice

Post by gpburdell »

My dad is in bad health and not expected to live more than a few months. Mom and I are trying to figure out what's the best thing to do from a tax perspective with his IRA.

Dad (age 84) - traditional IRA: $550k
Mom (age 80) - traditional IRA: $275k

Currently mom is the beneficiary of dad's IRA and my two brothers and I are the beneficiaries of her IRA (split equally).

When dad passes, she would inherit his IRA and then her RMDs would triple and be filing single instead of married. This would mean higher income taxes and probably higher Medicare premiums down the road.

We're wondering wondering if it makes more sense to have my brothers and I as the beneficiaries of dad's IRA instead of her.

My mom has no problem with this if it reduces overall taxes, costs etc. My parents have between SS and cash/taxable investments at least 15 years of typical expenses so she doesn't need the increased RMDs.

The downside I see is that would increase the taxable income of my brothers and I sooner but it would happen eventually when my mom passes. The upside this would let us build our taxable investments quicker. We each have fairly large 401k/IRA accounts of high 6 to low 7 figures, but taxable accounts are 1/10 of that. Not sure if it matters, we are mid 40s.

Any other cons or suggestions we should think about? I know you could probably do something with a trust, but rather keep it simple. thanks
Gill
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Re: Dad's IRA - beneficiary/tax advice

Post by Gill »

The clear downside is that your mother would be deprived of a half million dollars. Not worth the possible tax savings.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
bsteiner
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Re: Dad's IRA - beneficiary/tax advice

Post by bsteiner »

Another downside is that the 10-year period for complete distribution would begin at his death rather than her death, and she’s younger, female and in better health.
Jablean
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Re: Dad's IRA - beneficiary/tax advice

Post by Jablean »

bsteiner wrote: Fri Jun 18, 2021 5:56 am Another downside is that the 10-year period for complete distribution would begin at his death rather than her death, and she’s younger, female and in better health.
You're thinking that she could treat it as an inherited IRA and not a spousal IRA? If rolled into hers as spousal then it immediately becomes subject to her RMD but if she elects to treat it as inherited (just like the kids would) instead then she has 9 years where she can just ignore it or take out small amounts so she doesn't jump tax brackets. Then at year 10 she'd have to take out anything that's left and accept the tax consequences but just for one year.
Retired2013
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Re: Dad's IRA - beneficiary/tax advice

Post by Retired2013 »

Many variables with this.

Currently their combined RMD is about $50k plus two SS checks. If she receives the IRA and roles it into her account, her new RMD would be about $45k plus one SS check.

What happens if she lived to 90? She has 10 year of drawing down the IRA by RMD. You and your brother will then be in your mid 50s. Early retirement? You and your brother could then live / draw on the inherited IRA and be in a lower tax bracket?

Maybe mom should start gifting to each of you?

On the downside, if her health turns bad, she could end up in a nursing home and the funds all used up.
chemocean
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Re: Dad's IRA - beneficiary/tax advice

Post by chemocean »

Have you considered a large Roth conversion in your Dad's IRA soon ?
You could go to the top of the tax bracket for which your mother as a single would be paying with the triple RMD. In addition, taxes are scheduled to go up in 2026, so you will be saving 2% to 3% in taxes with the conversion this year. She could ask for a waiver of her IRMMA premium two year hence.
The assets in Your Dad's Roth would be available to your Mom tax free for her expenses.
When she passes, you and your sibling could allow the inherited Roth to grow for 10 years before redeeming the inherited IRA from your mother as a tax free event.
Katietsu
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Re: Dad's IRA - beneficiary/tax advice

Post by Katietsu »

chemocean wrote: Fri Jun 18, 2021 8:41 am Have you considered a large Roth conversion in your Dad's IRA soon ?
You could go to the top of the tax bracket for which your mother as a single would be paying with the triple RMD. In addition, taxes are scheduled to go up in 2026, so you will be saving 2% to 3% in taxes with the conversion this year. She could ask for a waiver of her IRMMA premium two year hence.
The assets in Your Dad's Roth would be available to your Mom tax free for her expenses.
When she passes, you and your sibling could allow the inherited Roth to grow for 10 years before redeeming the inherited IRA from your mother as a tax free event.
This is a good suggestion overall. But, from what I have been told, she would need to pay a year of IRMAA, if relevant. Several experienced BH forum members have made it clear that a Roth conversion does not qualify one for an IRMAA waiver.
delamer
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Re: Dad's IRA - beneficiary/tax advice

Post by delamer »

Gill wrote: Fri Jun 18, 2021 5:41 am The clear downside is that your mother would be deprived of a half million dollars. Not worth the possible tax savings.
Gill
Absolutely. However good the intentions of all parties, having an elderly widow/er give up such a large sum/percentage of her net worth is a bad idea. If she needs a few years of skilled nursing care, her 15 years of regular expenses isn’t going to cut it.

As an alternative to the Roth conversion idea (or in come combination), your father could increase his IRA withdrawal to the top of their bracket this year as a way to reduce the tax burden in the future.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
chemocean
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Re: Dad's IRA - beneficiary/tax advice

Post by chemocean »

Katietsu wrote: Fri Jun 18, 2021 9:08 am
chemocean wrote: Fri Jun 18, 2021 8:41 am Have you considered a large Roth conversion in your Dad's IRA soon ?
You could go to the top of the tax bracket for which your mother as a single would be paying with the triple RMD. In addition, taxes are scheduled to go up in 2026, so you will be saving 2% to 3% in taxes with the conversion this year. She could ask for a waiver of her IRMMA premium two year hence.
The assets in Your Dad's Roth would be available to your Mom tax free for her expenses.
When she passes, you and your sibling could allow the inherited Roth to grow for 10 years before redeeming the inherited IRA from your mother as a tax free event.
This is a good suggestion overall. But, from what I have been told, she would need to pay a year of IRMAA, if relevant. Several experienced BH forum members have made it clear that a Roth conversion does not qualify one for an IRMAA waiver.
But death of a spouse is a qualifying life event. Whether she would pay IRMMA would depend on her projected 2023 income as a single.
Lee_WSP
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Re: Dad's IRA - beneficiary/tax advice

Post by Lee_WSP »

gpburdell wrote: Fri Jun 18, 2021 3:50 am
When dad passes, she would inherit his IRA and then her RMDs would triple and be filing single instead of married. This would mean higher income taxes and probably higher Medicare premiums down the road.
Or, think of it as she’s going to have to withdraw the same amount of money, except the tax bracket is halved. At 750k, the RMD’s are not that bad. I seriously doubt you’re in a much lower bracket that this plan would make sense.
Lee_WSP
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Re: Dad's IRA - beneficiary/tax advice

Post by Lee_WSP »

Jablean wrote: Fri Jun 18, 2021 7:44 am
bsteiner wrote: Fri Jun 18, 2021 5:56 am Another downside is that the 10-year period for complete distribution would begin at his death rather than her death, and she’s younger, female and in better health.
You're thinking that she could treat it as an inherited IRA and not a spousal IRA? If rolled into hers as spousal then it immediately becomes subject to her RMD but if she elects to treat it as inherited (just like the kids would) instead then she has 9 years where she can just ignore it or take out small amounts so she doesn't jump tax brackets. Then at year 10 she'd have to take out anything that's left and accept the tax consequences but just for one year.
There are special rules for spousal beneficiaries. They do not follow the 10 year plan.
Katietsu
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Re: Dad's IRA - beneficiary/tax advice

Post by Katietsu »

chemocean wrote: Fri Jun 18, 2021 10:43 am
Katietsu wrote: Fri Jun 18, 2021 9:08 am
chemocean wrote: Fri Jun 18, 2021 8:41 am Have you considered a large Roth conversion in your Dad's IRA soon ?
You could go to the top of the tax bracket for which your mother as a single would be paying with the triple RMD. In addition, taxes are scheduled to go up in 2026, so you will be saving 2% to 3% in taxes with the conversion this year. She could ask for a waiver of her IRMMA premium two year hence.
The assets in Your Dad's Roth would be available to your Mom tax free for her expenses.
When she passes, you and your sibling could allow the inherited Roth to grow for 10 years before redeeming the inherited IRA from your mother as a tax free event.
This is a good suggestion overall. But, from what I have been told, she would need to pay a year of IRMAA, if relevant. Several experienced BH forum members have made it clear that a Roth conversion does not qualify one for an IRMAA waiver.
But death of a spouse is a qualifying life event. Whether she would pay IRMMA would depend on her projected 2023 income as a single.
Sorry, I was just thinking of the Roth conversion in general. I was not considering that it would be a Roth conversion for a then deceased spouse.
Jablean
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Re: Dad's IRA - beneficiary/tax advice

Post by Jablean »

Lee_WSP wrote: Fri Jun 18, 2021 10:45 am
Jablean wrote: Fri Jun 18, 2021 7:44 am
bsteiner wrote: Fri Jun 18, 2021 5:56 am Another downside is that the 10-year period for complete distribution would begin at his death rather than her death, and she’s younger, female and in better health.
You're thinking that she could treat it as an inherited IRA and not a spousal IRA? If rolled into hers as spousal then it immediately becomes subject to her RMD but if she elects to treat it as inherited (just like the kids would) instead then she has 9 years where she can just ignore it or take out small amounts so she doesn't jump tax brackets. Then at year 10 she'd have to take out anything that's left and accept the tax consequences but just for one year.
There are special rules for spousal beneficiaries. They do not follow the 10 year plan.
I just saw that in a Forbes article. I guess I need to write this down on my spreadsheet also.
Surviving spouse as beneficiary. Surviving spouses who are IRA beneficiaries are excluded from the 10-year rule. Surviving spouses have the same options they had before the SECURE Act.

One option of a surviving spouse is to roll over the IRA to an IRA in the surviving spouse’s name. This can be either a new IRA or an existing IRA. This is known as a “fresh start” IRA, because the surviving spouse can treat the IRA as though it always had been his or her IRA, without reference to the IRA of the deceased spouse.

In a fresh start IRA, the surviving spouse takes RMDs based on his or her age and names beneficiaries for the IRA, all without reference to the deceased spouse’s IRA.

Another option for the surviving spouse is to treat the IRA as a regular inherited IRA. The difference is that after the SECURE Act, the surviving spouse isn’t subject to the 10-year rule. The surviving spouse of an inherited IRA uses the old rules, which allow for a Stretch IRA with RMDs taken over the surviving spouse’s life expectancy.
In this case, because of her already reaching RMD age, I'm thinking a stretch probably wouldn't be any more helpful than treating it as her own other than she'd have to use a different table to calculate the RMD from.
tibbitts
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Re: Dad's IRA - beneficiary/tax advice

Post by tibbitts »

delamer wrote: Fri Jun 18, 2021 10:17 am
As an alternative to the Roth conversion idea (or in come combination), your father could increase his IRA withdrawal to the top of their bracket this year as a way to reduce the tax burden in the future.
I can see withdrawals as advantageous at least to a point, since Roth conversions will just push income into years of filing single vs. MFJ this year. A lot probably depends on the certainty of death this year vs. next. In my case one parent died in November and the other early January, and that would make a huge difference under some circumstances. In any case I don't know that you'd have to decide on that strategy yet.
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