Author Topic: Inherited IRA - how to invest on my terms  (Read 820 times)

MoustacheKnittah

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Inherited IRA - how to invest on my terms
« on: August 30, 2018, 12:48:20 PM »
Didn't find any recent posts about inherited IRAs so I'm creating a new one. I have about $250k in inherited Trad and Roth IRAs. (Mostly Trad.) I will have to start taking RMDs on this before the end of next year (I see how to set this up in Vanguard). All of the money has been moved from parent brokerage to Vanguard into an "inherited IRA" account which has the special RMD rules. Parent had a lot of fixed income securities with very high fees (0.6-1.5%) (yes, really).

1. I'm quite young (mid-30's) but have to start taking age-based RMDs on these accounts starting next year
2. Should I invest this money more conservatively than the rest of my investments since I have to touch it in the near future
3. Or do I just go with ~80% stocks (mix of VTSAX/VTIAX) + ~20% VBMFX/VWITX/VWIUX

I'm already maxing out my 401k, Roth, etc. I know I'll have to pay taxes on the distributions. I'm not FIRE yet.

ILikeDividends

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Re: Inherited IRA - how to invest on my terms
« Reply #1 on: August 30, 2018, 02:38:28 PM »
1. I'm quite young (mid-30's) but have to start taking age-based RMDs on these accounts starting next year

Was your parent younger than 70-1/2 when deceased?  If so, you have some flexibility on how long you can stretch out your RMD years:

https://www.schwab.com/resource-center/insights/content/you-ve-inherited-an-ira-now-what

Personally, I would stretch it out for as long as possible to minimize the annual tax impact of the RMDs, and to maximize the tax advantaged compounding effect on the undistributed assets.  This would be the only option if your parent was over 70-1/2.

2. Should I invest this money more conservatively than the rest of my investments since I have to touch it in the near future

I don't see any reason to treat it any more conservatively than any of your other investment accounts.  It is now your asset, and it should be reconfigured to fit in to your own risk tolerance and asset allocation.

Touching it in the near future shouldn't really be a concern, since you presumably don't plan on spending it when you touch it.  I.e., whether the market is up or down when you have to do an RMD, you are presumably just going to buy back in once you get it into your own (non-inherited) account at approximately the same price (+/- a few days worth of market movement).

Think of it as a transfer with unavoidable tax ramifications, rather than a touch.

3. Or do I just go with ~80% stocks (mix of VTSAX/VTIAX) + ~20% VBMFX/VWITX/VWIUX

If that is your AA, then yes.  I would do that.
« Last Edit: August 30, 2018, 03:08:55 PM by ILikeDividends »

secondcor521

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Re: Inherited IRA - how to invest on my terms
« Reply #2 on: August 30, 2018, 03:11:31 PM »
I have about $250k in inherited Trad and Roth IRAs. (Mostly Trad.)  [...]  I know I'll have to pay taxes on the distributions.

You will not have to pay taxes on the RMDs from the Roth IRA.  It is tax free income to you.

ILikeDividends

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Re: Inherited IRA - how to invest on my terms
« Reply #3 on: August 30, 2018, 03:22:06 PM »
I have about $250k in inherited Trad and Roth IRAs. (Mostly Trad.)  [...]  I know I'll have to pay taxes on the distributions.

You will not have to pay taxes on the RMDs from the Roth IRA.  It is tax free income to you.

That comes with a caveat regarding the taxability of earnings if the Roth wasn't held for at least 5 years:

https://www.rothira.com/roth-ira-5-year-rule

See rule #3.

But again, if the OP stretches the RMD years out as long as possible, this becomes a moot point, since the earnings of a Roth are distributed last.
« Last Edit: August 30, 2018, 03:28:42 PM by ILikeDividends »

MoustacheKnittah

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Re: Inherited IRA - how to invest on my terms
« Reply #4 on: August 30, 2018, 03:27:28 PM »
I have about $250k in inherited Trad and Roth IRAs. (Mostly Trad.)  [...]  I know I'll have to pay taxes on the distributions.

You will not have to pay taxes on the RMDs from the Roth IRA.  It is tax free income to you.

Yes I think the Roth was held more than 5 years and the RMDs from it will be much smaller since it's a smaller amount of money.

Quote
Was your parent younger than 70-1/2 when deceased?  If so, you have some flexibility on how long you can stretch out your RMD years:

Yes my parent was younger than 70. I plan on taking the minimum and stretching as long as possible for both accounts.

Frankies Girl

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Re: Inherited IRA - how to invest on my terms
« Reply #5 on: August 30, 2018, 05:52:57 PM »
TL/DR: invest it to match up with your chosen AA. ESPECIALLY if you've got a decade or two before you really need to tap into it. Use it to hold any bonds if you don't already have you allocation to hold (if you have bonds in your AA). If you're planning real early retirement (like less than 10 years?) I'd get that stuff figured out and set the iIRAs up so they are easy to rebalance from there and leave your taxable alone if possible to minimize the buy/sell stuff in those (tax avoidance is a beautiful thing).

And so sorry for your loss of your loved one. It is a wonderful gift they left you, but it won't make up for losing them... do take whatever time you need to grieve and help your family and friends. A few months or a year isn't going to hurt much, and it is a good thing to tackle this stuff with a clear head and purpose.


Long and boring story you probably wished you hadn't read after:

I inherited a traditional IRA from my dad in my late 30s. I am now in my early 40s, and FIREd about 3 years ago, so I'm actually living 100% off my entire portfolio.

I set it up to work with my chosen asset allocation. I use a 3 fund lazy index fund portfolio - I hold a total stock market, total bond market and a broad REIT index fund.

As soon as I'd figured this stuff out (took me about 7ish months - big pink puffy heart to Jim Collins), I sold off all the old stuff that was set up for my father (I'd left it alone until I got my ducks rowed). I have all of my bond index fund in there just because it needed to go into a tax deferred account anyway. The remainder is my entire REIT percentage (REITs throw off dividends too, so good to keep in a deferred acct) and a nice chunk of the total stock index.

I use the RMDs, along with my LTCG/dividends as my living expenses.

I pay zero tax as I'm married filing jointly and live in a tax free state and we don't take much extra out other than what we need, and it turns out that's not much. I do have the RMD withhold 10% federal tax to cover any possible wobble. I may remove that in a year or two as I'm getting damn good at estimating the overall year's dividend/cap gain distributions and have continued to owe nothing on our ACA and most of the time they pay us a few extra bucks at tax time because we came in under our income estimate.

An iIRA is a pretty amazing hybrid account. Tax deferred, and yet you can pull ANY TIME from it with no penalties (10% penalty on any other IRA withdraw unless special circumstances before 59.5). All distributions count as taxable income, but at a lesser rate than normal earned income or pensions (can't confirm the pensions part, but have come across that in my readings). I take my RMD early in the year, then get a small dividend thrown out by my taxable (which is not reinvesting) and a larger div/cap gain chunk in December (also taxable account). I figured I have them counting in my income anyway so I take the money generated. Then I may tap the iIRA again late summer/early fall, or wait to see the end of year cap gain/dividend chunk thrown out by the taxable and may take a second distribution from the iIRA at that point to fill up my proposed taxable income bucket if I'd not reached my income estimate by then. Works quite nicely for me.

Some points to ponder:

And as long as you stay under the 15% taxable bracket (married folk get like ~70K cap) you get zero taxes on cap gains/dividends! I'm able to control the amount of money that is seen as taxable income much easier with an iIRA.

And rebalancing is super easy if you have a substantial sized iIRA; I can sell/buy without triggering any cap gains assessments piling on to possibly push my taxable bracket too high, and holding my entire portion of my bonds in there means they're chugging along without throwing off lots of taxable dividends that also could knock me into a higher taxable bracket.

When I was still working, I used the RMD to partially fund mine/spouse Roth IRAs too, so that was nice. You have to have earned income to pay into an IRA, but as long as you made at least the amount you're putting in, they don't care if you fund it from your paycheck or a distribution.

I don't think holding off on tapping the iIRAs is a totally bad idea, but do keep in mind the long term ramifications of only taking the minimum and having that account growing over the next 20-30-50 + years and you only taking the minimums... If you're still working, then be aware that investing that iIRA into decent stock index will cause the RMDs to rise each year and pile into your taxable income the bigger they get. But if you aren't working, it is a really good idea to start tapping it since the sooner you spend it down, the better to avoid having to take RMDs from a huge iIRA that just kept growing, and then hitting 70 and taking your own 401k/IRA distributions... but if that's what happens, this is a great problem to have. Having so much money that you have to pay more taxes eventually? ;)

In my case we do keep our taxable income reasonable low to qualify for that sweet, sweet ACA spot of getting maximum subsidy and cost sharing. I have platinum plated "silver" coverage I pay less than $100/month (per person) for.

In the time I've had my iIRA, I've pulled at least $50K out over 6 years(?) and it's higher than ever. It literally is like a well that keeps topping itself back up and rising a bit more over time.
« Last Edit: August 30, 2018, 10:56:27 PM by Frankies Girl »

MoustacheKnittah

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Re: Inherited IRA - how to invest on my terms
« Reply #6 on: August 31, 2018, 07:23:52 AM »
Quote
Long and boring story you probably wished you hadn't read after:

Actually, all of this is incredibly interesting and helpful. It's hard to talk frankly with anyone about this, because 1) it's a crapton of money to me and not something I necessarily want to discuss openly with my local friends and 2) it's one thing to read articles from the internet, but entirely another to hear how this works in reality.

My work retirement plan was offering free consultations with their investment people, so I signed up for an appointment. Don't know if it will be of value, but it's free and it's only an hour of my life and it might give me some other actionable items and things to think about.

And thanks for your condolences, Frankies Girl. It has been an awful year.