Draw down inherited IRA before RMDs start at 72?

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Topic Author
markcoop
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Joined: Fri Mar 02, 2007 8:36 am

Draw down inherited IRA before RMDs start at 72?

Post by markcoop »

I am 55 years old and have been trying to plan out when/how much Roth conversions/withdrawals I want to do before RMDs start at 72. I know my RMDs after 72 will affect my SS taxation and maybe even push me into IRMAA territory. I currently own an inherited IRA that I have been taking RMDs with a current value of $220,000. This inherited IRA is not following the new 10-year rule for draw-downs but rather based on my lifetime. I noticed that RMDs for my inherited IRA have a different rate of draw-down than my regular IRA will have at 72. Given the inherited IRA has a quicker draw-down rate, it seems to me that it makes sense to draw down that account to zero when I'm doing my conversions/withdrawals before I hit 72 so I will have smaller total RMDs after 72.

Does that make sense?
Last edited by markcoop on Sun May 09, 2021 2:01 pm, edited 1 time in total.
Mark
sailaway
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Re: Draw down inherited IRA before RMDs start at 72?

Post by sailaway »

It depends. You mention conversions. Today's tax won't change between drawing down the inherited vs conversions, but you may be able to move the needle on your overall taxes by moving funds that will grow into Roth.
j.click
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Re: Draw down inherited IRA before RMDs start at 72?

Post by j.click »

Worked for us. Beginning in my late 50s we drew down an inherited IRA on an annual pro rata schedule to zero the year before we took pensions at 65 and SS thereafter. If we had waited we would be in a much larger tax bracket/IRMAA class and more of the benefit would have gone to US Treasury.
catchinup
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Re: Draw down inherited IRA before RMDs start at 72?

Post by catchinup »

I thought the assets in the traditional IRA can be converted to Roth IRA and continue to grow tax free, whereas the assets in the inherited IRA would have to be converted to a taxable account which implies paying quarterly taxes on gains. So - under current tax laws - aren't we better sheltered from taxes by converting traditional IRA to Roth IRA?

Doesn't the answer to this question also depend on whether you plan to re-invest the converted assets and how?
Topic Author
markcoop
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Re: Draw down inherited IRA before RMDs start at 72?

Post by markcoop »

Sure, if I'm comparing converting an IRA to a Roth vs withdrawing assets from an IRA, the overall benefit will probably be better do the conversions. In my case, I plan to convert/withdraw to the top of the 22% bracket (or whatever it is at the time) for a period of about 10 years. I say convert/withdraw because I may need some of the money to live on. Just not sure how much at this point. I can convert or withdraw from my regular IRA (or 401K) or I can withdraw from my inherited IRA. Given that I will be doing some withdrawals, I was just thinking about whether it just makes sense to do the withdrawals from the inherited IRA to the point of liquidating the inherited IRA in that time period.

To give a small idea of the difference, at 72 the calculation (balance on Dec 31 divided by a life expectancy factor) for my inherited IRA will use a divisor of 11.5. The calculation for my RMD will use a divisor or 26.5.
Mark
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Mlm
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Re: Draw down inherited IRA before RMDs start at 72?

Post by Mlm »

I have the same situation. I did some projected tax returns through age 72 and also looked at investment returns and related taxation under both scenarios. I don't have a large inherited IRA but it came out better to do Roth conversions in my case.
SuzBanyan
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Re: Draw down inherited IRA before RMDs start at 72?

Post by SuzBanyan »

My husband has a much smaller inherited IRA. Our analysis suggested that if we need to draw spending money from an IRA, it made sense to draw first from the inherited IRA. He made it to 72, however, with no need to make such withdrawals. We did some Roth conversions during this period from the tIRA. Now that RMDs are continuing from the Inherited and beginning from the tIRA, we are using both RMDs for QCDs.
sailaway
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Re: Draw down inherited IRA before RMDs start at 72?

Post by sailaway »

SuzBanyan wrote: Sun May 09, 2021 2:00 pm My husband has a much smaller inherited IRA. Our analysis suggested that if we need to draw spending money from an IRA, it made sense to draw first from the inherited IRA. He made it to 72, however, with no need to make such withdrawals. We did some Roth conversions during this period from the tIRA. Now that RMDs are continuing from the Inherited and beginning from the tIRA, we are using both RMDs for QCDs.
This is what I was trying to say: if you are going to spend the money, then yes, it should come from the inherited IRA. However, if you have room for conversions, they should still be done. I wouldn't draw down the inherited IRA for the sake of draw down unless I had a convincing model that proved this was a much better option.
Topic Author
markcoop
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Re: Draw down inherited IRA before RMDs start at 72?

Post by markcoop »

I'm in agreement that I shouldn't be drawing down an inherited IRA early in place of conversions if I don't need the money. But if I do need the money, it sounds like others are in agreement that better to withdraw from the inherited IRA.

I have another related question - Assuming my AA calls for having some stocks in tax-deferred accounts, would it be better to hold that stock in my regular IRA (or 401K) or in my inherited IRA? I feel if I know I would need the money in that time period, and therefore would be liquidating the inherited IRA in that time period, perhaps it makes more sense to hold the stocks needed in tax-deferred in the inherited IRA. Of course that means the inherited IRA will grow larger but the regular IRA will grow slower yielding smaller RMDs after 72. This one I'm having a harder time getting my arms around.
Mark
Fishing50
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Re: Draw down inherited IRA before RMDs start at 72?

Post by Fishing50 »

markcoop wrote: Sun May 09, 2021 1:41 pm Sure, if I'm comparing converting an IRA to a Roth vs withdrawing assets from an IRA, the overall benefit will probably be better do the conversions. In my case, I plan to convert/withdraw to the top of the 22% bracket (or whatever it is at the time) for a period of about 10 years. I say convert/withdraw because I may need some of the money to live on. Just not sure how much at this point. I can convert or withdraw from my regular IRA (or 401K) or I can withdraw from my inherited IRA. Given that I will be doing some withdrawals, I was just thinking about whether it just makes sense to do the withdrawals from the inherited IRA to the point of liquidating the inherited IRA in that time period.

To give a small idea of the difference, at 72 the calculation (balance on Dec 31 divided by a life expectancy factor) for my inherited IRA will use a divisor of 11.5. The calculation for my RMD will use a divisor or 26.5.
You should maximize the the 22% tax bracket for inherited IRA withdrawals now, if you plan to maximize it in the future.
Invest any excess cash in tax efficient, international or US total equity funds.
1yr from military pension. 80 equites / 20 bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash), 33% taxable, 30% Roth, 37% tax deferred. | Gone Fishing At 52yrs old!
CrossOverGuy
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Re: Draw down inherited IRA before RMDs start at 72?

Post by CrossOverGuy »

I wasn't able to convert directly from an Inherited IRA to a Roth at Vanguard, but if you can take an RMD from the Inherited, you can put it temporarily in a regular taxable (say, a MM account which won't have any capital gains if you sell); then, if you have earned income for the year, use those funds to take a Roth IRA contribution up to your yearly allowable limit.
Exchme
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Re: Draw down inherited IRA before RMDs start at 72?

Post by Exchme »

markcoop wrote: Sun May 09, 2021 2:14 pm I'm in agreement that I shouldn't be drawing down an inherited IRA early in place of conversions if I don't need the money. But if I do need the money, it sounds like others are in agreement that better to withdraw from the inherited IRA.

I have another related question - Assuming my AA calls for having some stocks in tax-deferred accounts, would it be better to hold that stock in my regular IRA (or 401K) or in my inherited IRA? I feel if I know I would need the money in that time period, and therefore would be liquidating the inherited IRA in that time period, perhaps it makes more sense to hold the stocks needed in tax-deferred in the inherited IRA. Of course that means the inherited IRA will grow larger but the regular IRA will grow slower yielding smaller RMDs after 72. This one I'm having a harder time getting my arms around.
Agree with this in your situation, don't pre-convert the inherited IRA if you have enough in taxable to live on, just do bigger Roth conversions up to the maximum you estimate is right for you.

I think the lower RMD requirements would favor the traditional IRA vs Inherited for holding whatever stocks don't fit elsewhere. You want to delay the extra tax drag caused by having to hold the proceeds in taxable - hope so, that's what I've done. Also that retains more balance for QCDs if that's of interest. Note that as you make conversions and your Roth grows, the amount of stock you have to hold in tax deferred to maintain your AA will go down or disappear fairly quickly either way, so it may not matter too much.
Topic Author
markcoop
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Re: Draw down inherited IRA before RMDs start at 72?

Post by markcoop »

Fishing50 wrote: Sun May 09, 2021 3:44 pm You should maximize the the 22% tax bracket for inherited IRA withdrawals now, if you plan to maximize it in the future.
That is a good point, however I am not sure what my total tax picture looks now vs the future. I currently pay close to 8% state taxes. I am reluctant to pay close to 30% taxes now because I may move to Florida and pay 22% or probably 25% if rates increase. Having said that, given I am unsure if I will actually move to Florida, perhaps a middle of the road approach where I penetrate further into the 22% bracket with inherited IRA withdrawals would be prudent.
Echme wrote: I think the lower RMD requirements would favor the traditional IRA vs Inherited for holding whatever stocks don't fit elsewhere. You want to delay the extra tax drag caused by having to hold the proceeds in taxable - hope so, that's what I've done. Also that retains more balance for QCDs if that's of interest. Note that as you make conversions and your Roth grows, the amount of stock you have to hold in tax deferred to maintain your AA will go down or disappear fairly quickly either way, so it may not matter too much.
My taxable accounts are a bit light at the moment, so withdrawing a bit extra from inherited IRAs would not be a bad thing in my situation. So, I am not concerned about extra tax drag with proceeds being added to taxable. As far as QCDs, they will help regardless of whether I have a bit more in tax-deferred due to more stocks in regular IRAs. Your last point makes alot of sense and I agree as Roth space opens up with conversions, so will stock room in Roth vs other accounts.


This whole thing is a big puzzle trying to fit the pieces together. I tried to narrow the focus of one decision here, but they affect so many other things as well. Will I be paying IRMAA? How much of SS will be taxed? Will taxes come down hard on a single survivor? I even have a more current concern about potential aid for my last child in college. My gut is depleting the inherited IRA before 72 will cause extra taxes now, but will ultimately save more later on. Just hard to be sure given all the pieces.
Mark
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