Author Topic: Confused Finance Dummy (Re-Investing Inherited IRA)  (Read 3863 times)

VanBrocklin

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Confused Finance Dummy (Re-Investing Inherited IRA)
« on: May 12, 2017, 06:47:56 PM »
Maybe I'm making this too complicated... or just thinking about it incorrectly.
If I've inherited an IRA (non-spouse) I will be required to take RMD's annually until the account 'depletes.'

So... would the smart option be to simply do this and reinvest these RMD's into my own account?

Is there a good reason to move everything all at once over into my own account?
Wouldn't that be heavily taxed?

Obviously, I can't throw it back into this account... because it's inherited... right?

Just not sure what my best options are here... and honestly I called and Schwab was pretty clueless (at least initially) themselves.
I am expecting a call on Monday to dive into it deeper but was curious what other people may have done in this situation.

Basically... I want all of these funds in a Total Market Index and I'm just not sure how to get there or what I should be doing with RMD's, etc.
Thanks for the input very much.

Frankies Girl

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #1 on: May 12, 2017, 07:24:08 PM »
First and foremost - speak with the rep at Schwab and ask for a pro at inherited IRAs. If they don't have one, then they're stupid, but they really should have SOMEONE there that can confirm all the moves you need to make. I had my accounts with Fidelity and they held my hand and literally did 90% of what had to be done - I had to fill out some paperwork, send in some letters/certificates, and answer some questions.

Make sure to set up the RMD as soon as possible otherwise you will be forced to take it all out within 5 years. You usually must take the first RMD by the end of calendar year, but make sure to confirm that the deceased took their RMD if they were at that age to be required - over 70.5 - because it must be taken on the deceased's behalf or else other penalties will kick in. Doing this way (over your lifetime) is referred to as a "stretch" inherited IRA.

Once the account is correctly titled as an inherited IRA in your name/beneficiary of XXX, any distributions taken out of this account will count towards your income, so if it is a large account, it could mean you are screwed as far as taxes for the years of forced distributions. I personally had my RMDs set up and automatically done with federal taxes withheld automatically and directed into my taxable account so I could then redirect it to my own and my husband's traditional IRAs.

Do not remove all of it unless you like paying more in taxes.

Once the RMD is in your savings/taxable/checking account, you may do with it whatever you wish. If you want to fund your Roth or traditional IRA, great. Spend it? Also great. Throw it in a taxable, super, as long as you already filled up the other stuff (Roth or traditional depending on which works best for you, if you can, max it out)... the one thing you can't do is put it back in the inherited IRA. That's why they force RMDs - they want you to get that money out of there, and it is a one way street.

RMDs are calculated based on your age and a percentage amount based on your life expectancy. So if you deplete it and it never grows (say you keep it in cash for some weird reason) then as you age, the amount should bump up each year since you are one year older, with it being depleted by the time you are "expected" to die. But if you have it invested, in most cases you'll see it grow and each year your RMD amount grows larger both because you're one year older AND the amount to draw down is higher.

That being said, you can still invest the money inside the iIRA in whatever you'd like and optimally you'd invest it well enough that it keeps growing. My iIRA is like an ever-filling bucket. No matter how much I pull out, it fills right backup and then some. I'm actually trying to pull more out now because it has grown so much that it's a fine line now between paying a tiny bit of taxes now, or having giant sized RMDs 10 years from now and owing waaaaay more to the IRS due to the RMDs growing as well. There are no penalties no matter how young you are (typically you'd pay a 10% penalty for withdrawing from an IRA before the age of 59.5). It is actually a pretty nifty account since the money grows tax deferred, but you can access it any time and in most cases it won't cause you to pay extra in taxes unless it is VERY large or you are right on the cusp of the next higher tax bracket.

That being said, I am so sorry you're dealing with this since it does mean you've lost a family member - my condolences.
« Last Edit: May 12, 2017, 07:26:27 PM by Frankies Girl »

VanBrocklin

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #2 on: May 12, 2017, 07:31:56 PM »
Good Lord.
Thank you for all of this information, not easy to digest.

I'll hire you.
Just do all of this for me :-|

googily

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #3 on: May 13, 2017, 08:51:18 AM »
One thing I'll pass along on the RMDs, since I am dealing with this right now, having decided to take my late husband's 401k as an inherited IRA (so that I could have access to the money before 59 1/2 without the 10% penalty):

The RMDs won't start this year, because technically the balance of the inherited IRA on Dec. 31, 2016 was $0. For me, my first RMD (which I will stretch, not do in five years) will be in 2018.

Also, I intend to just take the RMDs and either use them for living expenses or then dump them into one of my taxable brokerage accounts to invest. I'm first doing this by having all dividends from the inherited IRA deposited to a savings account outside of Vanguard. Then I can decide whether to invest in a taxable account or use elsewhere, and then see after that how much is left to withdraw to meet the RMD.


« Last Edit: May 13, 2017, 08:56:28 AM by googily »

NoraLenderbee

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #4 on: May 15, 2017, 03:48:23 PM »
Frankies Girl's explanation is really good. Schwab has a pretty good step-by-step explanation of how it works.
http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/inherited_ira/withdrawal_rules
Click the tab that says Traditional--non-spouse.

PDF guide:
http://www.schwab.com/public/file/P-1625576/

I found this very helpful when I was dealing with an IRA inherited from my parents.

As F.G. says, the RMDs are just ordinary taxable income to you. Spend, save, invest it however you want.

The only thing you *must* do by a deadline (end of the year, I think) is take the RMD. Schwab can tell you the amount, so you don't  have to calculate it yourself. They can just cut you a check.
 Everything else can wait.

Treat the inherited IRA as another retirement account. You can change the investments to suit your allocation. You can move it all into whatever Total Market Index Schwab offers. If you prefer, you can move the entire Inherited IRA to a different broker (eg Fidelity, Vanguard) if you want to.   

My sympathy, and remember that you don't have to rush into any decisions.




Secretly Saving

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #5 on: May 15, 2017, 05:02:48 PM »
If it's a decent amount, you definitely want to take the stretch option. 

Also, I want to second what Frankie's Girl said about the title of the account.  It has to be very specific with all the details like:  Name of the deceased, date of death, for the benefit of (your name) etc.  Make sure it is titled correctly. You do not want it to be changed erroneously because then you lose the stretch option and all taxes become due.

Also, this is a link to Schwab's inherited IRA calculator.  It will project ow much money you will be required to withdraw each year based on the amount and your age.

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

« Last Edit: May 15, 2017, 06:07:59 PM by Secretly Saving »

Spork

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #6 on: May 15, 2017, 05:50:02 PM »
VanB.... Sorry you're going through this. 

Your plan sounds similar to mine.  I plan on taking MORE than the RMD each year (much like FrankiesGirl describes) and reinvesting it in taxable accounts.  My plan is to fill up my taxable income to right under the ACA 400% mark.  If ACA goes away... I'll aim for the top of the 15% tax bracket.  The formula *is* designed to deplete the account.  You'll be dividing by a number that gets smaller and smaller each year until it hits "1".   When I've projected those numbers out, with fairly conservative growth, then also projected my own IRA account out... the collision of the two RMDs would push me to tax brackets I've never seen before.... and that is not where I want to be.

As FrankiesGirl describes, Roth/Traditional are great places to put this cash --- IF you can.  If you are FIRE and don't have "earned" income, they won't be available.  You may be in the position where Roth is going to be the best place for your investment (over Traditional).  Project your RMDs out like I described... If it looks like your taxes will be going into higher tax brackets, you're likely better off to go Roth.

I'll also say this: Yes, you do want your Scwhab to compute this for you, but before you let them -- do it yourself.  The formula has lots of moving parts and is easy to muck up.  When Vanguard did it for me, they absolutely screwed it up.  My first RMD was something like TEN TIMES what I had calculated it to be.  It was going to deplete the account quickly and at very high tax expense.  Since I knew what it should be, when I told them what I calculated and how, they said "let me call you back."  They double checked their figures, found their error and said my number was correct.  In short: know before you talk to them!

Another Reader

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #7 on: May 15, 2017, 06:27:02 PM »
I would NEVER trust Vanguard to calculate the RMD's from an inherited IRA.  It's the sort of thing they can't get right.  Fidelity is much better at this.

Spork

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #8 on: May 15, 2017, 07:43:34 PM »
I would NEVER trust Vanguard to calculate the RMD's from an inherited IRA.  It's the sort of thing they can't get right.  Fidelity is much better at this.

Apparently you're correct.  I was glad I went in with them pre-calculated.  I suspect everyone SHOULD do it, just so you have an idea how it's done and so you have a few sets of eyes looking at it.  They were VERY apologetic.

VanBrocklin

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #9 on: May 16, 2017, 02:09:02 PM »
Frankies Girl's explanation is really good. Schwab has a pretty good step-by-step explanation of how it works.
http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/inherited_ira/withdrawal_rules
Click the tab that says Traditional--non-spouse.

PDF guide:
http://www.schwab.com/public/file/P-1625576/

I found this very helpful when I was dealing with an IRA inherited from my parents.

As F.G. says, the RMDs are just ordinary taxable income to you. Spend, save, invest it however you want.

The only thing you *must* do by a deadline (end of the year, I think) is take the RMD. Schwab can tell you the amount, so you don't  have to calculate it yourself. They can just cut you a check.
 Everything else can wait.

Treat the inherited IRA as another retirement account. You can change the investments to suit your allocation. You can move it all into whatever Total Market Index Schwab offers. If you prefer, you can move the entire Inherited IRA to a different broker (eg Fidelity, Vanguard) if you want to.   

My sympathy, and remember that you don't have to rush into any decisions.

I was under the impression that you actually could NOT move the entire Inherited IRA to a different broker?
At least not tax free?

If the money moves, the IRS wants a cut... no?
I don't believe it's possible to just transfer funds in one lump to your own personal account without the money being taxed, etc.

Thoughts?

Spork

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #10 on: May 16, 2017, 02:25:13 PM »
Frankies Girl's explanation is really good. Schwab has a pretty good step-by-step explanation of how it works.
http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/inherited_ira/withdrawal_rules
Click the tab that says Traditional--non-spouse.

PDF guide:
http://www.schwab.com/public/file/P-1625576/

I found this very helpful when I was dealing with an IRA inherited from my parents.

As F.G. says, the RMDs are just ordinary taxable income to you. Spend, save, invest it however you want.

The only thing you *must* do by a deadline (end of the year, I think) is take the RMD. Schwab can tell you the amount, so you don't  have to calculate it yourself. They can just cut you a check.
 Everything else can wait.

Treat the inherited IRA as another retirement account. You can change the investments to suit your allocation. You can move it all into whatever Total Market Index Schwab offers. If you prefer, you can move the entire Inherited IRA to a different broker (eg Fidelity, Vanguard) if you want to.   

My sympathy, and remember that you don't have to rush into any decisions.

I was under the impression that you actually could NOT move the entire Inherited IRA to a different broker?
At least not tax free?

If the money moves, the IRS wants a cut... no?
I don't believe it's possible to just transfer funds in one lump to your own personal account without the money being taxed, etc.

Thoughts?

You can move it.  I moved one.  Everyone has to understand what is going on.  They need to understand what it is and how the new account should be created.  In my case, I had to track down someone that would do a Medallion Signature Guarantee (which was bloody hard in my town).  I think I paid just under $100 to Merrill Lynch to get my money the hell out of there.  (Hint: It is worth every bit of the $100 to be rid of them.)

No taxes.  If they're some sort of standard security (openly traded stocks, etc) you can move them "in kind."  It's probably simpler to liquidate the funds to cash INSIDE THE IRA and move the cash.   It isn't an instantaneous move, so you have to be prepared to take the loss/gain if the market moves.

VanBrocklin

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #11 on: May 16, 2017, 06:00:33 PM »
Hmm.

It definitely doesn't sound simple.
I was advised by Schwab (an Inherited IRA expert) that I could NOT move an inherited IRA directly to a new firm.

That I COULD by taking either the RMD's (taxed) or lump sum (taxed) and then do as I choose.
It's all very confusing.

I just want to find the best possible solution to move all of my funds into VTSAX ASAP.
It's proving to be quite difficult in my situation.

Frankies Girl

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #12 on: May 16, 2017, 07:07:33 PM »
The rep is either misinformed or something more nefarious (likely just ignorant) and unfortunately passing bad information.

You should be able to move the account. Unless they are confused because the current investment holdings can't be moved "as is," so you can't transfer "in kind" and would have to sell off all the funds (I think I mentioned above that some places have propitiatory funds that can't be held outside their institution - this is normal).

For now, get the inherited IRA correctly setup, titled as such and get the RMD calculated and taken if necessary. That should be easy.

Then at some point, call up Vanguard, and tell them you have an inherited IRA with Schwab, and you want to move it to Vanguard and you need someone to walk you through the steps. They'll explain things, tell you what you need to do and then once they get the paperwork they'll take care of it. Once it's over, sell off the funds if it didn't transfer over as cash, buy VTAX, and then make sure to get them to set up automatic RMDs. You pretty much won't have to deal with it except when you really want to. You never have to deal with Schwab again after the first RMD is taken.

Schwab is being an ass if they seriously think you can't move your account. It is exactly like having a savings or checking account with someplace like Chase, and wanting to move your funds over to Ally. You are allowed to move your account - it is yours - and them telling you that is poor customer service at best. After it is all over, you might make sure to report that person to their headquarters because they are telling people bad information if they really, really give you grief about moving your account.




I had two inherited IRAs when my dad died. One was at Fidelity, one at a company called UBS. I knew NOTHING when I inherited. The Fido peeps were fantastic - clear, easy to understand, and anything I got confused about, they would go back over and explain without ever making me feel dumb for all the questions. UBS - the rep started pestering me literally the week after my dad died telling me he could handle ALL of my investments if I'd move them over to his control and how awesome he was (no "sorry for your loss" or anything - just "give me your money"). I would get calls and emails from him for the next 3 months almost weekly to the point where I had to firmly (almost rudely) tell him to back off as I was still processing and as long as the RMDs were satisfied for the year to leave me alone until I contacted him. When I finally did, he tried to tell me I was too stupid (strongly implied) when I mentioned index investing and wanting to manage my own accounts. He told me I was foolish and index investing was dangerous and it was like him being a doctor and hearing his patient was proposing to operate on themselves. I moved my account that week, and reported his aggressive, rude and demeaning actions to the main office.



Point being, there are crappy reps out there. Sounds like your Schwab person is either uninformed or deliberate being obstructionist to try to take advantage of your lack of investing knowledge.
« Last Edit: May 16, 2017, 08:03:10 PM by Frankies Girl »

Another Reader

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #13 on: May 16, 2017, 07:59:44 PM »
It might be a two step process where you have to move the money into an inherited IRA with proper account titling at Schwab and then move the properly titled inherited IRA account to another custodian.  There is no reason you cannot move an inherited IRA once it is in the properly titled account. 

My advice is not to get Vanguard involved until you have the IRA set up with you as the beneficiary at Schwab.  This is exactly the sort of thing they regularly screw up and their screw up could ruin your opportunity to stretch the RMD's over your IRS life.  Schwab is generally better with these processes.  You either have a rep that doesn't understand what you are doing or doesn't understand inherited IRA's at all.  Often, if you sit down with a more knowledgeable rep at your local Schwab office, they can handle a problem like this. 

Schwab also offers index funds with costs as low as Vanguard and no-commission index ETF's.  I have a taxable account at Schwab and have had good service from them.  Overall, I prefer Fidelity for the service, the website, and the array of low cost funds and no commission ETF's.  Vanguard is a distant third.  I do business with them because I own the Wellington Fund in an IRA and I cannot buy that fund at other institutions.  I also have a legacy taxable account comprised of ETF's bought when only they offered no commission ETF's.  In your shoes, I would look at the options before you move the account to Vanguard.

ETA:  The idiots at Vanguard lost a lot of money of mine that was being transferred over from an IRA at another fund company for over a month.  When I would call, they would tell me that Vanguard never received the money.  The other company assured me  the money had been sent.  By week 4 I was screaming on the phone at higher level people that had no explanation of the problem.  When the money suddenly showed up one day, I called again and was told that their system did not show any transfers from outside until they were completely processed and the processing system tracking was not available for viewing by the reps.  I vowed never to transfer another account to them after that debacle.
« Last Edit: May 16, 2017, 08:07:50 PM by Another Reader »

VanBrocklin

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #14 on: May 16, 2017, 11:36:26 PM »
Thanks to all for all of the lengthy information and help.
I really appreciate it and this has been my best resource by far.

I will try to get another rep and dig deeper still.
Hopefully get things figured out soon.

secondcor521

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #15 on: May 17, 2017, 12:10:47 AM »
Just wanted to add that one can have inherited Roth IRAs as well, and they behave in all respects like inherited traditional IRAs with the exception that the RMDs from inherited Roth IRAs are not taxable income.

Spork

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Re: Confused Finance Dummy (Re-Investing Inherited IRA)
« Reply #16 on: May 17, 2017, 08:59:22 AM »
FWIW: I know Another Reader has had a bad experience with Vanguard/IRAs....  I just want to say that's not everyone's experience.  Between myself and my wife, we've moved 5 IRAs (one inherited) to them with zero issues.  I found them very helpful.

+1 to Another Reader's (and I think Frankies Girl) idea that it needs to be properly set up at Schwab before you start the process.  You might as well tell them your intent from the start -- just so they're aware of the moving parts and so they can liquidate anything that is proprietary.

When I moved to Vanguard from Merrill Lynch, it required talking to inherited IRA specialists on both sides.  Vanguard required paper (not online forms) to move it ... several pages that were pretty confusing.  They had to hold my hand filling them out.

I believe you have until end of September the year after the decedent passes.  If there is more than 1 beneficiary, there are other deadlines (if I remember correctly) about getting things split up.  And I believe the RMD for the year the decedent passes can be taken by anyone: the decedent (before he passes) or the beneficiaries (in any ratio... I.e., one beneficiary can take 100% and satisfy the other beneficiaries).

You'll probably want to read the IRS info on inherited IRAs and work through it in your example:  https://www.irs.gov/publications/p590b/ch01.html

and here was my post from a year ago where I tried to work through an example (with forum help)
https://forum.mrmoneymustache.com/taxes/rmd%27s/