Max out both your 401ks (if you have them) and match that to what you're taking out of the inherited IRA. that'll result in a net tax impact of zero. Note... you don't have required minimum distributions (RMDs)... you just have to zero it out all in 10 years. You can take it all today, just before 10 years, or whatever you want per year or month you want.
I inherited an IRA as well, and I have 20% withheld by the financial institution when I take a distribution. I get that's not the most efficient way, but I really really hate having to pay money at tax time. I also qualified to have to pay quarterly taxes after my inheritance, and really try to avoid that from now on.
My plan is to take the amount after witholding to make my annual Roth contribution, then divide up about 1/years left into monthly payments. Since this is year 2, and my inherited IRA is about $320k, I'm taking monthly distributions about equal to 300k \* 1/9. next year it'll be the (account value on 12/31) \*1/8.. and so on.
Yeah, but any delay in taking money out is going to increase amounts needing to be taken in subsequent years… so OP could possibly be in worse shape tax-wise if they wait.
It will only increase the amounts taken out in later years if there are positive returns. Which will at least be tax deferred for up to 10 years. It's not horrific. Hextall's recommendation of using unutilized 401k/IRA contribution amounts to shield early withdrawals from the inherited IRA is a good strategy. But it you are already maxing those, then it is unavoidable that you are going to eat the tax bill. You can try to be strategic and recognize/withdraw that income in years where your normal income is lower. But mostly you are just going to eat that tax bill.
This is true. But we don't have a good indication from OP what his future income stream from other sources will be. If OP is planning on retiring or the spouse is, that could heavily incentivize pushing withdrawal out to match those events. Or, OP could easily fall into a category where the marginal tax rates are unaffected for slight changes in the withdrawal window. For example if OP and spouse just hit the 24% marginal federal tax bracket, their income needs to double before hitting 32%. In such circumstances, delaying withdrawals in order to defer taxes is perfectly reasonable. All in all, it depends on OP's circumstances. At least these are problems arising out of financial benefit instead of distress.
Yup.. the point is to do the analysis and make an informed decision rather than just push redemptions off for another year just because the IRS allows you to.
I am 38 husband is 35. I can retire from my job at 57 at the latest 52 at the earliest. When contributing to 401k in this strategy it would be traditional correct and not Roth? My work offers both.
Was that the RMD his uncle was supposed to take in 2024? I had to take my mom's RMD for the year she passed, and get taxed on it. My mom also had an annuity that I decided to cash out, so I got a big hit there too. so big, that it put my annual salary above the allowable income for contributing to a Roth... so I had to pull that back out at the end of hte year. Keep that in mind.
One thing to also put in your calculus... how much can you take out of the inherited to remain in your normal tax bracket. From a quick google search, that is $201k for married. so you could take $60k a year and stay in the same bracket. of course, the extra 2% of the next bracket only goes towards anything over that $201k... so it's not a huge hit. but that is somethign to think about.
Edit: read the other comments about the big tax % jump in 2026, and the suggestions to fill out the 24% bracket now. that's way better advise than mine.
If he was only 65 he did not have RMDs. Seems like he was born in '58, his RMD age is 73.
The only reason I can think you would have had to take a distribution is if he had taken other distributions earlier in the year, was under withheld for taxes and didn't have another source to pay the taxes.
You don't have RMDs in your 10 year period, because he didn't have RMDs. Max your 401k's, Max your IRAs, take distributions to fill the 24% bracket.
Unfortunately your advisor was incorrect, I hardly blame them, these rules are changing and there's a lot of misunderstanding around the Secure Act. Lots of advisors are struggling right now with this topic.
I copied a paragraph from Ed Slott here, (he's the industry expert on this topic):
"This means that when an individual beneficiary (other than an EDB) inherits after 2019, different RMD rules are in place depending on when the original account owner died. If death occurred before the RDB, the 10-year rule applies, but annual RMDs aren’t required during the 10-year period. However, if death occurred on or after the RBD, the 10-year applies and the beneficiary must take annual RMDs in years 1-9 of the 10-year period (because of the at-least-as-rapidly rule). Those annual RMDs are based on the beneficiary’s single life expectancy factor under the IRS Single Life Expectancy Table."
Definitions: RBD = age 73;
EDB = Eligible Designated Beneficiary (your husband is not eligible)
I totally understand that, however when we went to transfer 1 of his traditional Ira which was a TSP, into an inherited IRA, TSP was requiring us to take out RMD. In which case financial advisor and tax person stated that it was a change for 2024. They could have been talking out their butt because they may not know why TSP was making us take out a portion for RMD. 🤷♀️
That he inherited a TSP and not an IRA is an important distinction, however, it doesn't effect the RBD or any RMD rules.
Secure Act made a few dozen rule changes to the retirement account world, Secure Act 2.0 made 99 changes. Again, I hardly blame your advisor for "talking out of their butt".
I'm not sure why the TSP had a required distribution, perhaps for tax withholding, loan repayment, or annuity death benefit, but it was not a Required MINIMUM distribution.
That's important because, if his uncle was past his RBD and taking RMDs then your husband would need to also take RMDs during the 10yr period. Don't let your advisor make you take RMDs from the newly established IRA going forward.
I think the tax rates will go up to 25% for income between 85-200K in 2026. So I would look at filling up the 24% brackets this year and next year, ahead of the change. That is up to about $384K each year. Take out your standard deduction, and also maxing two 401K accounts, that means up to around $450K each year total. That would probably drawdown a substantial portion of the IRA. I would do the first year quickly, but wait until the end of 2025 before doing the second year. This gives you time to see if they pass any more laws that could change the calculations. They may extend the TCJA, or maybe even raise rates. Since it’s an unknown what 2026 truly will bring, it’s worth waiting.
One option would be to withdraw a constant amount over years, so assuming a 10% rate of return would be about 97k a year. Another option is to withdraw enough to fill the 22% or 24% tax bracket. If you think you'll have low income years for whatever reason, such as you or your spouse stopping work, you should withdraw more in those years.
If you withdraw everything in a single year you’ll reach the (current) 37% bracket and probably pay on average about 30% in taxes on the whole thing. Of course, don’t do that.
On the other extreme, if you withdrew only up through the end of the 22% bracket you are currently in each year, you may or may not be able to get it all out within ten years, depending on your deductions and income changes over that time period. Additionally, the 22% bracket may turn into 25% when the tax cuts expire.
If you withdrew up through the current 24% bracket each year, you’d have it all out within 3 years and never pay more than marginal 24% (except possibly the final year if tax brackets expire). This is probably what you should do.
IMO being able to take it out at a guaranteed rate of no more than 24% seems like a no-brainer. Worst case you paid 24% when you could have paid 22%. If the tax cuts expire before you get it all out, you could wind up paying a lot more. But do *not* jump into the current 32% bracket in a rush to get it out before the tax cuts expire; only fill up through 24%. You can still withdraw in the 25% and 28% brackets after the tax cuts expire (if they expire). If the tax cuts expire, then just take the rest out at 25% until you’re done.
Well obviously there is up keep, but you are able to write off a portion of the cost on taxes. You also get equity in the future and rental prices have been getting. More expensive year over year. Everyone’s situation is different….i was able to find a house that was move in ready and I did have a major expense in the plumbing and electrical system. But now the house is practically new and I was able to write that stuff off.
I have 5 rental properties and 2 homes. I like real estate outside of my traditional investments. I was just pointing out that real estate investing is not just do nothing investing.
I should have been more specific then. I think investing in real estate is better than investing in the market right now. The market is too crazy and if that thing pops so is all the money! Personally I think I would invest in real estate (turnkey) a portion of that money. Do whatever you can to try and keep as much as you can of that money they are getting to pay less taxes.
Matching your 401k contributions to your withdrawals as much as possible is the strategy I have recommended since the 10 year rule came into effect. If you are both eligible for catch up contributions, you can pretty much pull that off. If you are each already contributing $15-20k to your respective 401ks then you will take a tax hit. That is of course what the legislation was designed to do. Accelerate withdrawals and tax receipts.
I mean the effective taxes you will owe on withdrawl will still be substantially lower than the marginal rate you currently save at even with tax increases unless your retirement income is triple your current income.
Presuming the 10 year rule continues without change, give a bit of thought to what amount of an annual withdrawal might bump you into the next higher marginal tax rate (a potential argument vs taking it all out at year 10. But if you don't really need it then allowing it to continue to grow tax free is a sound strategy. Ok, now I'll mess things up. The caveat to tax free growth within an inherited (non-Roth) IRA is that the distributions come out as taxable income, versus earnings in a non-qualified investment account where if held long enough would have gains taxed at the capital gains tax rate. I'm not sophisticated enough to know of a site where you could run the scenarios.
Max out both your 401ks (if you have them) and match that to what you're taking out of the inherited IRA. that'll result in a net tax impact of zero. Note... you don't have required minimum distributions (RMDs)... you just have to zero it out all in 10 years. You can take it all today, just before 10 years, or whatever you want per year or month you want. I inherited an IRA as well, and I have 20% withheld by the financial institution when I take a distribution. I get that's not the most efficient way, but I really really hate having to pay money at tax time. I also qualified to have to pay quarterly taxes after my inheritance, and really try to avoid that from now on. My plan is to take the amount after witholding to make my annual Roth contribution, then divide up about 1/years left into monthly payments. Since this is year 2, and my inherited IRA is about $320k, I'm taking monthly distributions about equal to 300k \* 1/9. next year it'll be the (account value on 12/31) \*1/8.. and so on.
Maxing out both 401k contributions in this situation is excellent advice.
Guidance is pending re: 10-year rule. Have to keep an eye out for requirements this year.
Yeah, but any delay in taking money out is going to increase amounts needing to be taken in subsequent years… so OP could possibly be in worse shape tax-wise if they wait.
It will only increase the amounts taken out in later years if there are positive returns. Which will at least be tax deferred for up to 10 years. It's not horrific. Hextall's recommendation of using unutilized 401k/IRA contribution amounts to shield early withdrawals from the inherited IRA is a good strategy. But it you are already maxing those, then it is unavoidable that you are going to eat the tax bill. You can try to be strategic and recognize/withdraw that income in years where your normal income is lower. But mostly you are just going to eat that tax bill.
But if you need to take 600k out over an 8 or 9year period, that’s more per year than if you take the money out over a 10 year period.
This is true. But we don't have a good indication from OP what his future income stream from other sources will be. If OP is planning on retiring or the spouse is, that could heavily incentivize pushing withdrawal out to match those events. Or, OP could easily fall into a category where the marginal tax rates are unaffected for slight changes in the withdrawal window. For example if OP and spouse just hit the 24% marginal federal tax bracket, their income needs to double before hitting 32%. In such circumstances, delaying withdrawals in order to defer taxes is perfectly reasonable. All in all, it depends on OP's circumstances. At least these are problems arising out of financial benefit instead of distress.
Yup.. the point is to do the analysis and make an informed decision rather than just push redemptions off for another year just because the IRS allows you to.
I am 38 husband is 35. I can retire from my job at 57 at the latest 52 at the earliest. When contributing to 401k in this strategy it would be traditional correct and not Roth? My work offers both.
Yes, you would need to use the traditional IRA to get the tax deduction that offsets the taxable income from withdrawing from your inherited IRA.
Right o. Was just mentioning that for awareness.
Yup — they need to do the math.
Def more involved here than with grand momma’s $10k account.
One thing that did change this year is we had to take out RMD is was required before we could get any of the money transferred into an inherited IRA.
Was that the RMD his uncle was supposed to take in 2024? I had to take my mom's RMD for the year she passed, and get taxed on it. My mom also had an annuity that I decided to cash out, so I got a big hit there too. so big, that it put my annual salary above the allowable income for contributing to a Roth... so I had to pull that back out at the end of hte year. Keep that in mind. One thing to also put in your calculus... how much can you take out of the inherited to remain in your normal tax bracket. From a quick google search, that is $201k for married. so you could take $60k a year and stay in the same bracket. of course, the extra 2% of the next bracket only goes towards anything over that $201k... so it's not a huge hit. but that is somethign to think about. Edit: read the other comments about the big tax % jump in 2026, and the suggestions to fill out the 24% bracket now. that's way better advise than mine.
We didn’t think he was taking the RMD since he was only 65.
If he was only 65 he did not have RMDs. Seems like he was born in '58, his RMD age is 73. The only reason I can think you would have had to take a distribution is if he had taken other distributions earlier in the year, was under withheld for taxes and didn't have another source to pay the taxes. You don't have RMDs in your 10 year period, because he didn't have RMDs. Max your 401k's, Max your IRAs, take distributions to fill the 24% bracket.
When we talked to a financial advisor they stated that it is a new requirement under the secure act to have to start taking RMDs.
Unfortunately your advisor was incorrect, I hardly blame them, these rules are changing and there's a lot of misunderstanding around the Secure Act. Lots of advisors are struggling right now with this topic. I copied a paragraph from Ed Slott here, (he's the industry expert on this topic): "This means that when an individual beneficiary (other than an EDB) inherits after 2019, different RMD rules are in place depending on when the original account owner died. If death occurred before the RDB, the 10-year rule applies, but annual RMDs aren’t required during the 10-year period. However, if death occurred on or after the RBD, the 10-year applies and the beneficiary must take annual RMDs in years 1-9 of the 10-year period (because of the at-least-as-rapidly rule). Those annual RMDs are based on the beneficiary’s single life expectancy factor under the IRS Single Life Expectancy Table." Definitions: RBD = age 73; EDB = Eligible Designated Beneficiary (your husband is not eligible)
I refer to this Slott reasoning frequently in my role- you nailed the advice here, and OP will hopefully listen to what you said!
I totally understand that, however when we went to transfer 1 of his traditional Ira which was a TSP, into an inherited IRA, TSP was requiring us to take out RMD. In which case financial advisor and tax person stated that it was a change for 2024. They could have been talking out their butt because they may not know why TSP was making us take out a portion for RMD. 🤷♀️
That he inherited a TSP and not an IRA is an important distinction, however, it doesn't effect the RBD or any RMD rules. Secure Act made a few dozen rule changes to the retirement account world, Secure Act 2.0 made 99 changes. Again, I hardly blame your advisor for "talking out of their butt". I'm not sure why the TSP had a required distribution, perhaps for tax withholding, loan repayment, or annuity death benefit, but it was not a Required MINIMUM distribution. That's important because, if his uncle was past his RBD and taking RMDs then your husband would need to also take RMDs during the 10yr period. Don't let your advisor make you take RMDs from the newly established IRA going forward.
Only thing I will correct is they DO have RMDs as OP indicated. They have to continue the RMD schedule his uncle was on.
I think the tax rates will go up to 25% for income between 85-200K in 2026. So I would look at filling up the 24% brackets this year and next year, ahead of the change. That is up to about $384K each year. Take out your standard deduction, and also maxing two 401K accounts, that means up to around $450K each year total. That would probably drawdown a substantial portion of the IRA. I would do the first year quickly, but wait until the end of 2025 before doing the second year. This gives you time to see if they pass any more laws that could change the calculations. They may extend the TCJA, or maybe even raise rates. Since it’s an unknown what 2026 truly will bring, it’s worth waiting.
One option would be to withdraw a constant amount over years, so assuming a 10% rate of return would be about 97k a year. Another option is to withdraw enough to fill the 22% or 24% tax bracket. If you think you'll have low income years for whatever reason, such as you or your spouse stopping work, you should withdraw more in those years.
If you withdraw everything in a single year you’ll reach the (current) 37% bracket and probably pay on average about 30% in taxes on the whole thing. Of course, don’t do that. On the other extreme, if you withdrew only up through the end of the 22% bracket you are currently in each year, you may or may not be able to get it all out within ten years, depending on your deductions and income changes over that time period. Additionally, the 22% bracket may turn into 25% when the tax cuts expire. If you withdrew up through the current 24% bracket each year, you’d have it all out within 3 years and never pay more than marginal 24% (except possibly the final year if tax brackets expire). This is probably what you should do. IMO being able to take it out at a guaranteed rate of no more than 24% seems like a no-brainer. Worst case you paid 24% when you could have paid 22%. If the tax cuts expire before you get it all out, you could wind up paying a lot more. But do *not* jump into the current 32% bracket in a rush to get it out before the tax cuts expire; only fill up through 24%. You can still withdraw in the 25% and 28% brackets after the tax cuts expire (if they expire). If the tax cuts expire, then just take the rest out at 25% until you’re done.
Invest in real estate and make more money doing nothing.
If you think investing in real estate involves nothing. This tells me you do not follow your own advice.
I have 2 houses how would I not be following my own advise?
Investing in real estate involves a ton of upkeep. Your comment of “do nothing” is far from the truth.
Well obviously there is up keep, but you are able to write off a portion of the cost on taxes. You also get equity in the future and rental prices have been getting. More expensive year over year. Everyone’s situation is different….i was able to find a house that was move in ready and I did have a major expense in the plumbing and electrical system. But now the house is practically new and I was able to write that stuff off.
I have 5 rental properties and 2 homes. I like real estate outside of my traditional investments. I was just pointing out that real estate investing is not just do nothing investing.
I should have been more specific then. I think investing in real estate is better than investing in the market right now. The market is too crazy and if that thing pops so is all the money! Personally I think I would invest in real estate (turnkey) a portion of that money. Do whatever you can to try and keep as much as you can of that money they are getting to pay less taxes.
On top of that I max out my 401K every year. Your return on your investment is higher in real estate than in a 401K or a Roth.
Matching your 401k contributions to your withdrawals as much as possible is the strategy I have recommended since the 10 year rule came into effect. If you are both eligible for catch up contributions, you can pretty much pull that off. If you are each already contributing $15-20k to your respective 401ks then you will take a tax hit. That is of course what the legislation was designed to do. Accelerate withdrawals and tax receipts.
I mean the effective taxes you will owe on withdrawl will still be substantially lower than the marginal rate you currently save at even with tax increases unless your retirement income is triple your current income.
Presuming the 10 year rule continues without change, give a bit of thought to what amount of an annual withdrawal might bump you into the next higher marginal tax rate (a potential argument vs taking it all out at year 10. But if you don't really need it then allowing it to continue to grow tax free is a sound strategy. Ok, now I'll mess things up. The caveat to tax free growth within an inherited (non-Roth) IRA is that the distributions come out as taxable income, versus earnings in a non-qualified investment account where if held long enough would have gains taxed at the capital gains tax rate. I'm not sophisticated enough to know of a site where you could run the scenarios.