inherited IRA

[wodehouse]

If I understand, and remember, correctly, with my inherited IRA from parent (she'd been taking distributions) I can:

1- liquidate within 5 years
2- take withdrawals over my own life expectancy
3- liquidate immediately (this is probably a special case of "1")

The push for leaving in an IRA is to postpone income taxes. But I am thinking that for the relatively small size of the account ($20K) and the burdensome paperwork involved, it may be better to liquidate today, pay taxes at my current marginal rate (28%), then invest the lump sum efficiently.

The alternative is to take smaller annual amounts for 5 years (or lump sum within 5 years), pay the 28% in tax then (or higher if rates go up), then I'm left with a smaller amount that may just get frittered away and in any case probably not reinvested as efficiently, and there's more ongoing paperwork burden.

So I'm thinking liquidate now, pay the piper, then invest.

Good plan?

[mwcpa]

with the limited facts presented it may be a decent plan of action.

check IRS pub 501 for the rules on non spousal IRA beneficiaries

"Taking balance within 5 years. A beneficiary who is an individual may be required to take the entire account by the end of the fifth year following the year of the owner's death. If this rule applies, no distribution is required for any year before that fifth year. "

"Owner Died On or After Required Beginning Date


If the owner died on or after his or her required beginning date, and you are the designated beneficiary, you generally must base required minimum distributions for years after the year of the owner's death on the longer of:

•
Your single life expectancy as shown on Table I, or

•
The owner's life expectancy as determined under Death on or after required beginning date, under Beneficiary not an individual, later.








Owner Died Before Required Beginning Date


If the owner died before his or her required beginning date, base required minimum distributions for years after the year of the owner's death generally on your single life expectancy.

If the owner's beneficiary is not an individual (for example, if the beneficiary is the owner's estate), see Beneficiary not an individual, later."

"Example.

Your father died in 2011. You are the designated beneficiary of your father's traditional IRA. You are 53 years old in 2012. You use Table I and see that your life expectancy in 2012 is 31.4. If the IRA was worth $100,000 at the end of 2011, your required minimum distribution for 2012 would be $3,185 ($100,000 ÷ 31.4). If the value of the IRA at the end of 2012 was again $100,000, your required minimum distribution for 2013 would be $3,289 ($100,000 ÷ 30.4). Instead of taking yearly distributions, you could choose to take the entire distribution in 2016 or earlier."

[vonna]

The tax consequence of taking the lump sum may be more than the 28% depending on your personal tax situation. Raising your AGI by 20K may make also affect tax deductions/credits you are used to taking as well, essentially taking more than 28% of the inheritance. Do you pay state taxes as well? That would be another hit.

Seems like you could set the paperwork up to take the minimum distributions over your lifetime and directly invest in a tax efficient fund to minimize taxes and keep more of the investment working for you. Basically move it slowly from one pot to the next -- if both pots are with the same investment company Vanguard, Fidelity, etc.) should be a simple online transaction once initially established.

I think if my goal was to grow the money, I would not take such a big tax hit up front. It would take some big returns to make up for the at least 28% loss.
YMMV

[wodehouse]

Thank you mw and vonna.

In my case I don't see that taking the lump sum will materially impact any other tax issues: I'm already over the Roth ceiling, it's not enough to put me into another tax bracket (maybe I better review the AMT). (ETA, no state income tax either)

I guess I have 5 years to sit and ponder this.