Inherited IRA Advice

[Dollarafterdollar]

Hey Everyone!
My wife just inherited a "Inherited IRA". It is currently with a big fancy financial advisor and we want to move the money to Vanguard ASAP. What is the best way for someone in their 20's to handle and inherited IRA? I have read conflicting articles. Some stating you have to start withdrawing. If anyone has any experience we would love the advice as we don't want to leave any money on the table.

[KBecks]

I would suggest you call and talk to an advisor at Vanguard if that's where you want to go with the funds.   They might be able to help you understand the rules and give some guidelines for asset allocation, etc.  You can also Google and read up on the IRA rules.  You could also check with your tax advisor, who should know these things too.  Good luck. 

[mbl]

See this article in Forbes, some helpful information

http://www.forbes.com/forbes/2010/0628/investment-guide-stretch-ira-beneficiary-five-rules-inherited-iras.html

[Genevieve]

I assume this is a traditional IRA?

With an inherited traditional IRA, you can choose to "stretch" it so you take payments over your entire life. Basically, there's a formula based on your age and the assets about your required minimum distribution. The government wants their tax on the money and doesn't want you keeping it in the IRA forever.

Make sure you take all of the minimum distributions. When did the original owner die? If they died in 2016, did they take their distribution in 2016? You get a big penalty tax for not taking the distribution out in time.

It used to be more common that you had to take all the money out within 5 years and get the big tax bill. Most providers allow for a stretch IRA now.

Vanguard will help walk you through the process.

[Mr. Paws]

I have one and I do have to take a minimum distribution every year.  They send you a form to fill out asking how much you want taken out and how much for taxes.  I was looking into moving it or doing something else when i first inherited it but it seemed like it was very difficult.  This was several years ago so my memory is hazy.  I haven't really pursued it much more because it isn't much money. 

[NeonPegasus]

I assume this is a traditional IRA?

With an inherited traditional IRA, you can choose to "stretch" it so you take payments over your entire life. Basically, there's a formula based on your age and the assets about your required minimum distribution. The government wants their tax on the money and doesn't want you keeping it in the IRA forever.

Make sure you take all of the minimum distributions. When did the original owner die? If they died in 2016, did they take their distribution in 2016? You get a big penalty tax for not taking the distribution out in time.

It used to be more common that you had to take all the money out within 5 years and get the big tax bill. Most providers allow for a stretch IRA now.

Vanguard will help walk you through the process.

Yes, make sure you're not supposed to be taking distributions.

As for the penalty, well, you can get out of that. I didn't know we were supposed to take distributions out of my mother in law's account until, years later, my father in law asked if we were doing so. Um, what?

I immediately took a distribution for the entire amount I was supposed to have taken and paid the tax. I set up automatic distributions with tax withheld. Then I wrote a letter to the IRS explaining that we had no idea about the distributions when we inherited it, were overwhelmed with grief at my MIL's passing, then had our second child and generally didn't think about it. I said we had rectified the situation, both past and ongoing, and asked them to waive the penalties. It worked. No penalty.

[Dicey]

I assume this is a traditional IRA?

With an inherited traditional IRA, you can choose to "stretch" it so you take payments over your entire life. Basically, there's a formula based on your age and the assets about your required minimum distribution. The government wants their tax on the money and doesn't want you keeping it in the IRA forever.

Make sure you take all of the minimum distributions. When did the original owner die? If they died in 2016, did they take their distribution in 2016? You get a big penalty tax for not taking the distribution out in time.

It used to be more common that you had to take all the money out within 5 years and get the big tax bill. Most providers allow for a stretch IRA now.

Vanguard will help walk you through the process.

Yes, make sure you're not supposed to be taking distributions.

As for the penalty, well, you can get out of that. I didn't know we were supposed to take distributions out of my mother in law's account until, years later, my father in law asked if we were doing so. Um, what?

I immediately took a distribution for the entire amount I was supposed to have taken and paid the tax. I set up automatic distributions with tax withheld. Then I wrote a letter to the IRS explaining that we had no idea about the distributions when we inherited it, were overwhelmed with grief at my MIL's passing, then had our second child and generally didn't think about it. I said we had rectified the situation, both past and ongoing, and asked them to waive the penalties. It worked. No penalty.

Oh, smart! Congratulations on successfully navigating in IRS tax code waters without being eaten by alligators, VBACmama!

[Spork]

I assume this is a traditional IRA?

With an inherited traditional IRA, you can choose to "stretch" it so you take payments over your entire life. Basically, there's a formula based on your age and the assets about your required minimum distribution. The government wants their tax on the money and doesn't want you keeping it in the IRA forever.

Make sure you take all of the minimum distributions. When did the original owner die? If they died in 2016, did they take their distribution in 2016? You get a big penalty tax for not taking the distribution out in time.

It used to be more common that you had to take all the money out within 5 years and get the big tax bill. Most providers allow for a stretch IRA now.

Vanguard will help walk you through the process.

Yes, make sure you're not supposed to be taking distributions.

As for the penalty, well, you can get out of that. I didn't know we were supposed to take distributions out of my mother in law's account until, years later, my father in law asked if we were doing so. Um, what?

I immediately took a distribution for the entire amount I was supposed to have taken and paid the tax. I set up automatic distributions with tax withheld. Then I wrote a letter to the IRS explaining that we had no idea about the distributions when we inherited it, were overwhelmed with grief at my MIL's passing, then had our second child and generally didn't think about it. I said we had rectified the situation, both past and ongoing, and asked them to waive the penalties. It worked. No penalty.

It's complicated.

If the owner of the IRA was already taking distributions (i.e., he/she was > 70.5 years old), then person that inherits it must also take distributions.
There are oddball cases for if the person that inherits it is a spouse.
There are oddball cases for if the owner took a distribution the year he/she died.  (This gets really weird if multiple people inherit it.)

I'm trudging through the same issues.  And "what you should do" is going to vary depending on your age, the amount of money in the iIRA and your tax bracket.

What I urge you to do is this: 
* first and foremost, try to understand how the iIRA distributions work.  Look at this thread where I mostly tried to understand it myself: http://forum.mrmoneymustache.com/taxes/rmd's/20/
* dear god, yes, get it the hell out of the high cost advisor.  Look at this report: https://www.personalcapital.com/assets/whitepapers/PC_Fees_WhitePaper.pdf  -- but ignore the fact that it comes to the conclusion that Personal Capital is the way to invest.  They purposefully ignored low cost investing like Vanguard.  But it totally illustrates how advisors like Merrill Lynch may cost you a cool $1Million over your lifetime.
* build yourself a spreadsheet and run the numbers.  You want to look at the tax consequences of the iIRA.  If you inherited a largish amount (and especially if you're middle aged or older) then you a might do better to try to draw down the iIRA as fast as you can.  If you don't, the RMD will sneak up on you.  It is a rapidly increasing amount.  Each year, you're dividing the previous year's total by a number and each year that number decreases by 1.  At some point it zooms up in value.  You may very well be sitting there with a pretty huge required income every year.

[Ramblin' Ma'am]

It's complicated.

If the owner of the IRA was already taking distributions (i.e., he/she was > 70.5 years old), then person that inherits it must also take distributions.
There are oddball cases for if the person that inherits it is a spouse.
There are oddball cases for if the owner took a distribution the year he/she died.  (This gets really weird if multiple people inherit it.)

I'm trudging through the same issues.  And "what you should do" is going to vary depending on your age, the amount of money in the iIRA and your tax bracket.

I inherited an IRA when my mother died and had to begin taking RMDs the following year, even though she wasn't 70.5 yet. I wasn't familiar with inherited IRA's before this, but later I learned that this is the norm for non-spousal inherited IRA's.

[Spork]

It's complicated.

If the owner of the IRA was already taking distributions (i.e., he/she was > 70.5 years old), then person that inherits it must also take distributions.
There are oddball cases for if the person that inherits it is a spouse.
There are oddball cases for if the owner took a distribution the year he/she died.  (This gets really weird if multiple people inherit it.)

I'm trudging through the same issues.  And "what you should do" is going to vary depending on your age, the amount of money in the iIRA and your tax bracket.

I inherited an IRA when my mother died and had to begin taking RMDs the following year, even though she wasn't 70.5 yet. I wasn't familiar with inherited IRA's before this, but later I learned that this is the norm for non-spousal inherited IRA's.

It looks like you're correct.  Like I said ... it's complicated.

Here's the IRS's rules:
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

    Spouses who are the sole designated beneficiary can:
    *    treat an IRA as their own, or
    *    base RMDs on their own current age,
    *    base RMDs on the decedent’s age at death, reducing the distribution period by one each year, or
    *    withdraw the entire account balance by the end of the 5th year following the account owner’s death, if the account owner died before the required beginning date.

    If the account owner died before the required beginning date, the surviving spouse can wait until the owner would have turned 70˝ to begin receiving RMDs

    Individual beneficiaries other than a spouse can:
     *   withdraw the entire account balance by the end of the 5th year following the account owner’s death, if the account owner died before the required beginning date, or
     *   calculate RMDs using the distribution period from the Single Life Table based on:
            If the owner died after RMDs began, the longer of the:
                beneficiary’s remaining life expectancy determined in the year following the year of the owner’s death reduced by one for each subsequent year or
                owner’s remaining life expectancy at death, reduced by one for each subsequent year
            If the account owner died before RMDs began, the beneficiary’s age at year-end following the year of the owner’s death, reducing the distribution period by one for each subsequent year.

[Ramblin' Ma'am]

Yeah, it's definitely complicated. AND THEN, after I set it up correctly, my mom's broker lost my IRA distribution paperwork and never set up the account for RMDs. So now I'm dealing with tax issues for this year. Luckily it was a small amount of money, so even if I can't get the tax waived for some reason, it isn't catastrophic.

And people wonder why I think a lot of financial advisers are overrated!

[Genevieve]

As this discussion shows, the rules depend on:
- whether or not this is your spouse (if your spouse, usually the best option is to "assume" it -- aka take it over and it's like a regular IRA for you -- but then the traditional penalties for early withdrawal apply.)

If it's a non-spouse beneficiary, then you have some choices:
- inheriting it
- disclaiming it (passes to next beneficiaries)

With inheriting it, you can:
- take out all of it over 5 years
- stretch out the required minimum distributions over your lifetime (or the deceased account owner's previously expected lifetime, if you are older than the person who passed) (Also, if you are a person or a trust, you should be able to do this. Special rules for charities and the like.)

I was a bit wrong above -- both traditional and Roth IRAs require RMDs if passed to non-spousal beneficiaries. 

Usually with traditional inherited IRAs, you'll want to do the stretch IRA to reduce taxes. In this case, it's super important to stay on top of the RMDs including for the year the person passed. Not taking them can trigger the 5 year distribution schedule and the penalty on missed RMD money is 50%! Yes! That sucks. You can also take more than the minimum any time you'd like. As Spork said, having too much in the traditional IRA in retirement means you could have a bigger tax bill, so it might make sense to take out extra in lower income years.

Roth inherited IRAs are more complicated since you don't have to pay taxes on the withdrawals. To keep the Roth benefits as long as possible, use the stretch IRA. But you could make a case for withdrawing over 5 years to use for some other purpose and there would be no negative tax consequences. Once again a 50% penalty can apply for not withdrawing the RMD, including the one for the year the IRA owner passed away.

If you have multiple beneficiaries, it's more complicated. Basically best case scenario is that everyone has their shit together and opens their own accounts and the RMDs are calculated individually instead of on the oldest beneficiaries' age.

[Goldielocks]

Well,  as complicated as it is....  think of this.  in Canada, an adult recipient of an inherited retirement account (RRSP) gets it AFTER all of the tax has been taken out of it and taxed in a single year.  Simple -- but expensive!

Technically, the RRSP taxes are paid from the deceased estate, and the entire amount is transferred to the beneficiary, but often there is not enough money in the estate, so the RRSP is reduced before being paid out..

*Assuming not via a trust and not including a disabled receipient.

[Pushkina2]

Just chiming in to say I have an inherited IRA from my grandmother and take a required distribution every year. Each year the amount is a little higher than the previous year.

[Catbert]

Genevieve walked you through your choices.  With regard to computing RMDs, you can set it up so Vanguard automatically computes the RMD and issues you a check.  That's how I have my inherited IRA set up with Fidelity.   The RMD itself is pretty small.  My inherited IRA is a bit over 40K and my RMD is around 2K, I think.  And I'm much older than you.

An inherited IRA is a great fall back emergency fund.  Not for those "emergencies" that happen every year or so, but in reserve for a really big one.  Remember you can always take out more than the RMD, you just pay taxes on the withdrawal.

[Spork]

My plan is basically this:
* Assuming we still have ACA... I plan to wait until late in December when I can estimate my other income, then take enough out of the iIRA to hit about 395% of FPL.  Pay applicable taxes.
* If ACA does go away, I may actually accelerate and take out enough from the iIRA to hit the top of the 15% tax bracket.

Whatever comes out will likely be rolled into taxable Vanguard funds.

This is based on numbers I've run ... trying to draw down the iIRA before I hit 70.5 and I am forced to start drawing down my traditional IRA.  If I can deplete the iIRA early, I can start doing tIRA->Roth conversions up to the top of the 15% bracket.

[Genevieve]

Smart planning Spork!

[RedBaron3]

Piggybacking on this topic instead of starting a new one...

My dad passed away a few weeks ago and I'm helping my mom figure everything out (he planned well, fortunately).  I'm clear on what to do with pensions, social security, and annuities but I'm not as familiar with IRA rules.  She will turn 59.5 in July.  From what I've read, it seems it would make it easier on all parties to wait a few months until she's 59.5 to initiate a rollover.  Is there any reason not to wait?

[Spork]

Piggybacking on this topic instead of starting a new one...

My dad passed away a few weeks ago and I'm helping my mom figure everything out (he planned well, fortunately).  I'm clear on what to do with pensions, social security, and annuities but I'm not as familiar with IRA rules.  She will turn 59.5 in July.  From what I've read, it seems it would make it easier on all parties to wait a few months until she's 59.5 to initiate a rollover.  Is there any reason not to wait?

First off, I'm sorry for your loss. 

I don't know the spousal rules very well because I haven't had to deal with them.  But I know there are a lot more options.  The only things I can think of that might change your decision one way or the other:
* Was your dad already taking RMDs?  (Was he over 70.5?)
* Does your mom need access to this money right away? 

If both were true, getting it rolled immediately might give her access to funds immediately.  I think she would be able to move it to an inherited IRA and take his RMD if cash was needed.  It would be penalty free but taxed at her normal rate.

Otherwise, I'm not sure if it matters.  I believe you have until September 30, 2018 to get it settled.

[trollwithamustache]

Dare we ask what the fancy financial advisor has advised? He may actually be willing to give good advice  if you are too small to be a client and happily send you off elsewhere.

[Secretly Saving]

Here is a quick calculator you can use to see what the RMDs will be: 

http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/ira_calculators/beneficiary_rmd