Is there a reason why you would not want to stretch out IRA withdraw

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gavinsiu
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Is there a reason why you would not want to stretch out IRA withdraw

Post by gavinsiu »

For inherited retirement accounts for certain class of investors, they can stretch out the withdraw over life expectancy, 10 years, or 5 years. Is there a reason not to take life expectancy. Would one case be if you expect a lot of RMD income in the future and you are trying reduce it in the present?

Update
In my opinion, RMD over life expectancy is still probably the most flexible choice. It is possible to take more than the RMD. The only thing the 5 or 10 year give you is the ability not to be able to withdraw anything for years, so if you are expecting income to drop in a particular year, you can withdraw most or all during that year.

However, it appears that IRS may be taking away that flexibility

https://www.forbes.com/sites/kristinmck ... 729732c51a

So if you take the 10 year option, you would still need to take all of the money out by the 10th year, but it appears IRS will take away the flexibility of what to withdraw each year.

One exception would be with a Roth IRA that the owner established less than 5 years ago. You may want to use 5-10 year rule to hold off withdrawing the IRA until the 5 years age has been reached. Accounts less than 5 year old are likely to be on the smaller side.
Last edited by gavinsiu on Wed Aug 10, 2022 6:58 am, edited 2 times in total.
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typical.investor
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by typical.investor »

gavinsiu wrote: Tue Aug 09, 2022 11:31 pm For inherited retirement accounts for certain class of investors, they can stretch out the withdraw over life expectancy, 10 years, or 5 years. Is there a reason not to take life expectancy. Would one case be if you expect a lot of RMD income in the future and you are trying reduce it in the present?
The reason to not choose life expectancy would be to comply with the 2019 Secure Act. I don’t think you can anymore.

Actually there seems to be confusion if you can wait even 10 years before …
new IRS guidance would require heirs subject to the 10-year rule to take annual withdrawals from the accounts during that period if the original owner died on or after his or her “required beginning date” for payouts. Under current law, that’s April 1 after the year in which the IRA owner turns 72.

Aaaah sorry ….

rule does not apply if the heir is a spouse, someone less than 10 years younger (often a sibling) or a disabled individual.
Last edited by typical.investor on Tue Aug 09, 2022 11:59 pm, edited 1 time in total.
sailaway
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by sailaway »

-It is a penalty free source of money for those who want to spend it
-taking out more now might be optimal long term for balancing taxes, especially as tax rates are scheduled to increase in less than five years.
RetiredAL
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by RetiredAL »

gavinsiu wrote: Tue Aug 09, 2022 11:31 pm For inherited retirement accounts for certain class of investors, they can stretch out the withdraw over life expectancy, 10 years, or 5 years. Is there a reason not to take life expectancy. Would one case be if you expect a lot of RMD income in the future and you are trying reduce it in the present?
sailaway wrote: Tue Aug 09, 2022 11:50 pm -It is a penalty free source of money for those who want to spend it
-taking out more now might be optimal long term for balancing taxes, especially as tax rates are scheduled to increase in less than five years.
gavinsiu --
This 10yr technique can be beneficial to a spouse that is too young to withdraw from a regular spousal IRA without incurring the 10% penalty.
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FreddieFIRE
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by FreddieFIRE »

If I was now, and expected to remain, in the top individual income tax bracket. I would cash it all out year one, pay the taxes, and invest in something where growth would be taxed at capital gains rates. This is assuming a pre-tax IRA.
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123
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by 123 »

If you have an inherited traditional IRA which you hold in 100% stocks/equity you could end up paying a higher tax rate on gains in the IRA (they are taxed as ordinary income when distributed) than you would if you distributed the IRA and invested the funds in stocks/equities. The money invested in stocks/equities in the taxable account is potentially eligible for favorable long-term capital gains tax treatment. If you take a large distribution to convert the taxation of the stock/equity holdings it should be done with care to consider the consequences of any increase in the marginal tax rate that occurs.

The standard advice is to hold bonds and fixed income allocations in traditional IRA accounts to the extent possible. This assumes you have sufficient taxable or Roth space to accommodate your desired level of stocks/equities.
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dboeger1
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by dboeger1 »

I know this might sound like a trivial thing, but us Bogleheads often get so caught up in trying to maximize tax efficiency that we forget to live a little. One obvious reason would be to spend it. Depending on the size of the Roth relative to your net worth, it may very well impact your life goals, and you may decide to buy a house, start a business, retire early, etc. I realize OP was probably asking about from a purely tax-centric perspective, but I figure it might be worth pointing out for others who might be in similar situations.
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celia
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by celia »

gavinsiu wrote: Tue Aug 09, 2022 11:31 pm For inherited retirement accounts for certain class of investors, they can stretch out the withdraw over life expectancy, 10 years, or 5 years. Is there a reason not to take life expectancy. Would one case be if you expect a lot of RMD income in the future and you are trying reduce it in the present?
Since the Secure act, the Life expectancy option has gone away (except possibly for disabled?). That was a common option before and we had Inherited IRAs before that (and still have one going).

For the traditional Inherited IRA, we always withdrew more than the minimum since we wanted it emptied before our own IRAs were subject to RMDs. We also controlled the amount of withdrawal since we were in early retirement and wanted to save some space in our tax brackets for Roth conversions instead. We also wanted to simplify our life and getting rid of RMDs was one thing we could do by doing QCDs to empty out the Inherited IRA faster.

Now the Inherited Roth IRA is another story. When that account arrived, it was much smaller than the Inherited tIRA. We made it all stock funds and have managed to make it grow more than the RMDs each year. But when we get to our late 80s, the growing RMDs are expected to overtake the yearly growth. Soon after we will raise the flag to surrender and hide the remaining “gold” in a corner of our Taxable.account.
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VanGar+Goyle
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by VanGar+Goyle »

gavinsiu wrote: Tue Aug 09, 2022 11:31 pm For inherited retirement accounts for certain class of investors, they can stretch out the withdraw over life expectancy, 10 years, or 5 years. Is there a reason not to take life expectancy. Would one case be if you expect a lot of RMD income in the future and you are trying reduce it in the present?
There are a few reasons to not stretch an inherited IRA RMD as long as you can, such as impending social security benefits or other income, which would put you later in a higher marginal tax bracket. In general, if you can select stretch distributions, you still take more than the RMD, so if later circumstances change, you could still complete distributions in 5 or 10 ( or 15 ... years ).

If a spouse inherits an IRA, they might choose to treat it as their own ( delay RMDs to age 72 ), rather than use Life Expectancy.
It gets more complicated, based on the year of death, age of the deceased, how many beneficiaries, what kind of IRA.
Publication 590-B (2021), Distributions from Individual Retirement Arrangements (IRAs) For use in preparing 2021 Returns
has many details, but 2022 may have significant changes.
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gavinsiu
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by gavinsiu »

Out of curiousity, if you can take the spousal transfer action, do you lose the ability to withdraw the fund without penalty before the retirement age?

Right now, if you pick the other options, you can withdraw the fund and you will have to pay the taxes, but you don't get penalty.
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by Ping Pong »

FreddieFIRE wrote: Wed Aug 10, 2022 12:44 am If I was now, and expected to remain, in the top individual income tax bracket. I would cash it all out year one, pay the taxes, and invest in something where growth would be taxed at capital gains rates. This is assuming a pre-tax IRA.
Your investments would grow slower if you did this. Leaving investments in the Traditional IRA would cause the after-tax value to grow tax-free in your tax scenario. Assuming tax rates stay the same.
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Eagle33
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by Eagle33 »

gavinsiu wrote: Wed Aug 10, 2022 6:56 am Out of curiousity, if you can take the spousal transfer action, do you lose the ability to withdraw the fund without penalty before the retirement age?

Right now, if you pick the other options, you can withdraw the fund and you will have to pay the taxes, but you don't get penalty.
If the living spouse is younger than 59.5 and transfer the IRA to their own, then must pay 10% penalty if withdrawing prior to 59.5. That is why it can be wise for remaining spouse to create an inherited IRA up to 59.5 or for 9 years, then transfer the inherited IRA to their own IRA.
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gavinsiu
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by gavinsiu »

Eagle33 wrote: Wed Aug 10, 2022 8:49 pm If the living spouse is younger than 59.5 and transfer the IRA to their own, then must pay 10% penalty if withdrawing prior to 59.5. That is why it can be wise for remaining spouse to create an inherited IRA up to 59.5 or for 9 years, then transfer the inherited IRA to their own IRA.
Wait, this is not a one time action? I thought at the time of transfer you can either transfer to a inherited IRA or do a spousal transfer. You can actually create a inherited IRA and then transfer it later?
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by SuzBanyan »

gavinsiu wrote: Wed Aug 10, 2022 9:25 pm
Eagle33 wrote: Wed Aug 10, 2022 8:49 pm If the living spouse is younger than 59.5 and transfer the IRA to their own, then must pay 10% penalty if withdrawing prior to 59.5. That is why it can be wise for remaining spouse to create an inherited IRA up to 59.5 or for 9 years, then transfer the inherited IRA to their own IRA.
Wait, this is not a one time action? I thought at the time of transfer you can either transfer to a inherited IRA or do a spousal transfer. You can actually create a inherited IRA and then transfer it later?
Yes. For a spouse.
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gavinsiu
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by gavinsiu »

SuzBanyan wrote: Wed Aug 10, 2022 9:27 pm
Yes. For a spouse.
Thanks, since you can transfer only if you are a spouse. I just didn't realize you can can do it later.
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by VanGar+Goyle »

gavinsiu wrote: Wed Aug 10, 2022 10:00 pm
SuzBanyan wrote: Wed Aug 10, 2022 9:27 pm
Yes. For a spouse.
Thanks, since you can transfer only if you are a spouse. I just didn't realize you can can do it later.
Yes you can, but there are details and complications. For example
For any year after the owner’s death, where a surviving spouse is the sole designated beneficiary of the account and he or she fails to take a required minimum distribution (if one is required) by December 31 under the rules discussed below for beneficiaries, he or she will be deemed the owner of the IRA.
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gavinsiu
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Re: Is there a reason why you would not want to stretch out IRA withdraw

Post by gavinsiu »

VanGar+Goyle wrote: Thu Aug 11, 2022 4:48 am Yes you can, but there are details and complications. For example
For any year after the owner’s death, where a surviving spouse is the sole designated beneficiary of the account and he or she fails to take a required minimum distribution (if one is required) by December 31 under the rules discussed below for beneficiaries, he or she will be deemed the owner of the IRA.
Interesting. I thought one of the possible option was to hold it and not do anything for 10 years and then withdraw all fo the money by the end of the tenth year. If we exercise this option, there wouldn't be a RMD but that it be empty out by year 10. What you are saying is that you must take out money accordig to life expectancy or it will revert to the spousal transfer?
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