Advice on unexpected inheritance IRA

[eastcoaster]

Hi - a family member recently left me about 200,000$ in an IRA. I am in the process of setting up an inheritance IRA. I understand the distributions need to be complete in 10 years and I’m trying to figure out how to work this in to our plan.

I had already planned to cut back on work next year so likely will not take distribution this year for tax purposes.
I contribute max to 401k and 457 and my husband has a pension and a 457 that we have not fully funded.  So does it make sense to maximize his 457 to offset the distributions I’m required to make? Should the IRA be invested more conservatively?
Any thing else I should consider?

[cool7hand]

Posting to follow. Great question.

[IsThisAGoodUsername]

I'm no expert, but I think the community here would want you to provide more information before making any suggestions. Relevant info to start with:
How old are you? How old is your husband?
What is your desired asset allocation?
Have you created an Investor Policy Statement?
How much is the pension?
Do you have traditional or Roth IRA accounts already, and if so, what are their balances?
What were your contributions to the IRA accounts for 2020/2021?
Do you own a home and if so, what is the interest rate and the outstanding mortgage balance?
Do you file taxes jointly or separately?
In what state do you live?
What is your/husband's federal marginal tax bracket?
What is your/husband's desired/planned retirement date?

[ChpBstrd]

This question is complicated enough that you probably want to ask a tax attorney rather than an Internet forum. Apparently some changes were made to the relevant laws in 2019.

https://www.investopedia.com/terms/i/inherited_ira.asp[/i]]https://www.investopedia.com/terms/i/inherited_ira.asp

If it’s a small amount, like <$50k, I’d be tempted to lump sum it and pay my lumps, because that would be cheaper than the tax attorney and the time suck. With bigger amounts there are ways to optimize for taxes and RMD’s.

I haven’t found any reason to invest the accounts differently than your normal AA.

[Dee18]

I am assuming this is a traditional IRA and not a Roth IRA. I would not bother with a tax attorney for this (and I rarely say don’t bother with an attorney). I inherited an IRA.  You can roll it over to whatever company you prefer, Vanguard, Fidelity, etc.  They will be able to provide you with accurate info about distributions.  Investing more conservatively may be a wise choice at least for what you will withdraw in the next few years.  When you take each distribution, you can then invest it in mutual funds that match your goals.  I would call both Fidelity and Vanguard and discuss it with them.  Whichever one seems clearer, more helpful, is the one I would choose.  I did my rollover with Fidelity so the inherited traditional IRA went there as an inherited IRA.  I set up a brokerage account with Vanguard where I invest the money in VTSAX when I receive each annual distribution. Fidelity calculates the proper amount to distribute. So basically you will have $20,000 per year for 10 years that will be taxed as income. I have Fidelity withhold federal taxes on my distributions so I don’t have to bother making quarterly payments.  It is no trouble at all.

[ericrugiero]

As I understand it, you will want to spread the money out so that you stay in the lowest average tax bracket over the next ten years.  Investing enough in the 457 to offset the income you are taking seems like a good idea.  If your income will stay level over 10 years then taking out $20-30K per year so the IRA ($200K + Gains) is depleted in 10 years makes sense (as Dee18 described).  If your income will fluctuate then you could be better off taking out more in low income years to take advantage of lower tax brackets. 

[gardenstash]

I recently went through a similar inheritance. The rollover process was pretty simple within Fidelity. I moved it to a more aggressive investment since I'm considerably younger than the retirement age family member I inherited from. I'm planning on investing it as I would my own income while keeping an eye on any income or capital gains tax changes that may be coming down the pike post-Trump. I'm distributing it to myself in as equal allotments as I can spaced out over 10 years at the moment. My accountant who I really like was pretty nonchalant about the whole thing.

[seattlecyclone]

The idea to increase contributions to your own retirement accounts seems solid. It will allow you to deplete the inherited IRA with minimal net impact on your own current income, while also moving money into a tax shelter that you can deplete on your own timeline.

The plan to wait until next year to start withdrawing, since you plan to work less then, also seems solid.

[Dicey]

I believe you must deplete the account by year ten, but you do not have to do so in equal amounts. It can be as lumpy as you choose.

[ender]

https://www.fidelity.com/learning-center/personal-finance/retirement/secure-act-inherited-iras

I'd take time to read this, assuming the person here died after January 1, 2020.

If you plan on cutting back work significantly or otherwise retiring in under 10 years, you can just delay taking withdrawals from this until later in that 10 year period. You could certainly take withdrawals to increase 457 contributions.

How old are you?

I might plan on using this for the first years of early retirement assuming I was planning on retiring in 5-10 years.

[Beach_Stache]

Fidelity has great customer service, they have made my rollovers very easy in the past, but I know this is a Vanguard community, I just had Fidelity setup much younger, so was easier for me.  I agree that some more information is needed. 

I know there are specific rules regarding the inherited IRA, some you can delay taking money depending on who you inherited it from and what age they were at death, but that should be fairly standard Q&A.

If you have to start receiving RMD's in the current year or next year, and your 401k/527 are under-funded, you will be taxed on the RMD's, so you could use it as an opportunity to fully fund retirement plans at tax-deferment and use the RMD's from the inherited to supplement what you're putting into your retirement plan(s).

I wouldn't take a lump sum unless you're not working, as that'll be taxed at a higher rate, so spacing it out probably makes sense.  But it all depends on when you'll retire and what money you're making now and the years of RMD and how much you'll be taking out during retirement.  It's all about trying to pay the least amount of tax possible based on your current and future situation.