Secure ACT + FIRE??

[ericbonabike]

Hey all,

Wondering if anybody has thought about the new secure act and it's requirements on inherited IRA's, and more specifically, how this folds into the FIRE movement.  Tax minimization, withdrawal optimization, etc.


For example: 
Let's say you and your wife make ~150k AGI.    And your mom dies, and leaves you ~300k.  (275k in a traditional, 25k in a roth). 

Let's say because of this influx of cash, it's moved your retirement date up from T+7 years to T+3 years.   So, you're gonna be working for another 3 years.


My understanding of the new law basically says:  you have to get 100% of the cash out of inherited IRAs within 10 years of the demise of your loved one. 

So, in the example above, I'm guessing you leave the 25k roth alone, and pull it out on the 10th year.   But how do you spread out the 275k out?  Do you take 27.5k a year for 10 year (even though you make 150k for the first 3 years)?    That extra 27.5k would be taxed at about ~22.5%, which means you're losing ~7k a year.   

Or do you wait until you're retired, and your income drops to basically zero.    If you have non-tax advantaged accounts, you sell these, your AGI is super low.  You start doing roth conversions from your traditional IRA accounts. 

And then finally during the last 4 years of this retirement period, you stop spending your non-tax advantaged accounts, you start pulling out of the inherited traditional IRA 24k+80k = ~104k, up to the 12% mark?   And then the final year, you liquidate the inherited roth IRA?


Is there a better way to do this?  Is this even legal?

[bacchi]

You've figured it out.

Retire, set up the Roth conversion pipeline with your own IRAs, and then, with ~4 years remaining on the 10 year timer, start taking distributions from the inherited IRAs.

It might be worth it to hire a CPA for a few hours.

[ericbonabike]

thank you!  So, just so I understand, you can pull the money out of the IRA's at your own discretion over that 10 year span, just so that the full IRA amount is pulled out by 10 years?

[seattlecyclone]

This is a complex optimization problem, but I think you're honing in on a good solution. Because of progressive taxation you'll generally get to keep the most money by having your taxable income change as little as possible from year to year, so waiting until after retirement for the traditional IRA withdrawals sounds like a good starting point. Waiting until the last minute for the inherited Roth withdrawal also sounds like a good plan; might as well let this money grow tax-free as long as possible.

The $275k from the pre-tax IRA spread out over seven years could be $39k/year all on its own, more if the markets grow over the next decade. Where to fit Roth conversions and other withdrawals into this sequence will depend a lot on your spending plans and where you have your other savings.

For example if you spend $30k per year that withdrawal will be enough to cover your spending, pay your taxes, and also save some in taxable for later. If you start out with a bit of taxable investments already, then maybe you don't need to do any Roth conversions at all during this time. The surplus from your inherited traditional IRA withdrawals plus the $25k from the inherited Roth could be worth more than $100k after a decade of compounding. This, plus your pre-existing taxable savings, would be enough to cover your spending for a few years after your inherited IRAs are depleted. No need to start your Roth conversion ladder until the inherited IRAs are out of the picture in this example.

On the other hand if you spend $60k per year the plan will need to be different. The inherited IRA withdrawals won't be enough to cover your current spending. You'll need to withdraw some from your existing taxable savings or Roth basis, plus make sure you set yourself up to have enough money left in these places to cover all your spending once the inherited IRAs are depleted.

[MDM]

thank you!  So, just so I understand, you can pull the money out of the IRA's at your own discretion over that 10 year span, just so that the full IRA amount is pulled out by 10 years?

Yes.

Probably worth becoming familiar with marginal tax rates in case your specific situation has some "unusual" ones.

[ericbonabike]

I had contemplated two distinct choices:

Is there any advantage to either route:
Option A:  Don't pull any money out of inherited IRA while working.  Upon retirement, begin spending personally owned taxable accounts.  Begin roth pipeline up to the top of the 12% mark.    4 years from the end of the 10 year period, stop pulling money out of taxable accounts, and plug in the inherited traditional.  At 10 years, pull out the roth inherited.


Option B:  Don't pull any money out of inherited IRA while working.  Upon retirement, immediately begin spending inherited traditional up to the top of the 12%.    After that is depleted, begin spending taxable accounts.   Start roth pipeline up to the top of the 12%.  At 10 years, pull out roth inherited.



Maybe this is like squeezing juice out of turnips?
Law of diminishing returns?

[secondcor521]

thank you!  So, just so I understand, you can pull the money out of the IRA's at your own discretion over that 10 year span, just so that the full IRA amount is pulled out by 10 years?

Since you're interested in tax optimization, I'll point out that the law states that the IRA must be completely depleted by the end of the year in which the 10th anniversary of the date of death occurs.

So if the original IRA owner died today, the 10th anniversary of date of death would be August 6, 2030, and the deadline to empty the IRA would be December 31, 2030.

The tax planning point to note here is that this rule gives you 11 tax years to spread the withdrawals out across, not 10.  Assuming the original IRA owner dies early enough in the year to enable you to take a withdrawal that first year.

My first cut plan is to take out 1/11 of the account balance the first year, 1/10 of the account balance the second year, 1/9 ... etc.  However, the general rule of leveling one's taxable income to minimize taxes is a good rule, so I would probably then look ahead to see if my other sources of income were going up or down significantly during that 10 or 11 year period.

Beyond that, it's hard to give advice.  People's goals and plans, risk tolerance, tax situation, other assets and liabilities vary all over the map, so what might make sense for me might not make sense for you.  I think engaging a CPA who does tax planning is a good idea.  Another idea is to learn Excel and how to build financial models and how to use goal seek and similar functions to see, for example, the differences between option A and option B and whether that's amount of money is negligible or not.

If I were in your shoes, I'd be inclined towards option B.  I might look at spending from the inherited IRA and then using some of the taxable to pay taxes on Roth conversions between retirement and age 72 if that made sense otherwise.

I think the only other thing I'd point out is that the inherited Roth is completely tax free to you and could be used during your 10 year window to supply spending money and allow other accounts to grow untapped.  At only $25K it may not be a big consideration, but it may fund a year in there somewhere.  Others with larger Roths may be able to use this fact to improve their strategies.