Author Topic: T-IRA or inherited IRA for inheritance?  (Read 639 times)

MichelleD1977

  • 5 O'Clock Shadow
  • *
  • Posts: 42
T-IRA or inherited IRA for inheritance?
« on: June 26, 2019, 01:50:49 PM »
Hi All,
First of all, want to toot my horn as I recently paid off student loan debt (on the order of $100,000) a few months ago! Starting reading the MMM blog gave me the inspiration to pay it down fast. Thanks for that!

I have a small matter at hand but would like some advice.  I recently inherited $6,000 from my aunt.  I am debating whether to roll it over into the inherited IRA or take the full sum minus 20% tax and then put it into our Traditional IRA we have with Vanguard. Currently our investment strategy is to max out my husband's retirement account via work and I'm not sure that we will also max out the $11,000 we can contribute to our traditional IRAs that we have set up. I am thinking if I can get the tax deduction through the government it will lessen or eliminate the pain of the 20% that the company takes out before they disperse the funds.  From my research it seems that it will grow more in the T-IRA than if we place it in the inherited IRA and need to take out the yearly disbursements. Am I wrong about this?

thanks for your thoughts!

MDM

  • Walrus Stache
  • *******
  • Posts: 9679
Re: T-IRA or inherited IRA for inheritance?
« Reply #1 on: June 26, 2019, 03:13:44 PM »
See Retirement Topics Beneficiary | Internal Revenue Service:
Quote
If the inherited traditional IRA is from anyone other than a deceased spouse, the beneficiary cannot treat it as his or her own. This means that the beneficiary cannot make any contributions to the IRA or roll over any amounts into or out of the inherited IRA.

walkwalkwalk

  • Stubble
  • **
  • Posts: 235
Re: T-IRA or inherited IRA for inheritance?
« Reply #2 on: June 26, 2019, 03:17:09 PM »
Do you mean you would distribute the $6k and then contribute it to your own IRA? Because as MDM says, you can't do the second option you mentioned.

MichelleD1977

  • 5 O'Clock Shadow
  • *
  • Posts: 42
Re: T-IRA or inherited IRA for inheritance?
« Reply #3 on: June 26, 2019, 06:13:11 PM »
If I just take it as cash I assume I can do whatever I want with it. I just can't do it without having taxes taken out of it first.

secondcor521

  • Handlebar Stache
  • *****
  • Posts: 2409
  • Age: 50
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: T-IRA or inherited IRA for inheritance?
« Reply #4 on: June 26, 2019, 06:43:37 PM »
If I just take it as cash I assume I can do whatever I want with it. I just can't do it without having taxes taken out of it first.

Yes, if you take the cash out, then you can do whatever you want with it.

Note that the 20% figure is just an estimated withholding amount.  You will in fact end up owing taxes at your marginal rate on any withdrawals; if you turn around and contribute that money to a traditional IRA and qualify for the deduction, then I believe it would be an exact wash tax-wise (at least as far as federal income taxes are concerned; state income taxes might be different).

Growth-wise, if you have it in the same investments, the money will grow at exactly the same rate in either your inherited IRA or your traditional IRA.  And the taxation will be the same.  The only difference, as you note, is that you'll be required to make withdrawals from your inherited IRA (either RMDs or within 5 years, depending).  And how that turns out depends entirely on what you do with that withdrawn money - put it back into your traditional IRA as noted and it will be a wash; spend it on a vacation and, well, you'll have vacation memories.

MDM

  • Walrus Stache
  • *******
  • Posts: 9679
Re: T-IRA or inherited IRA for inheritance?
« Reply #5 on: June 26, 2019, 07:25:04 PM »
If I just take it as cash I assume I can do whatever I want with it. I just can't do it without having taxes taken out of it first.
Depends on the definition of "whatever."  Some things you can't do with it:
- claim it as earned income to justify an IRA contribution
- use it to add to a 2019 traditional IRA if you have already contributed the maximum for this year
- convert it to a Roth IRA

But if you want to withdraw and spend it, or withdraw and use the extra cash to make an IRA contribution you otherwise could not afford, then yes you can do those.


Roadrunner53

  • Handlebar Stache
  • *****
  • Posts: 2476
Re: T-IRA or inherited IRA for inheritance?
« Reply #6 on: October 15, 2019, 11:50:26 AM »
I inherited my Mother's IRA. Does anyone know if I should croak before my hub, would he inherit the IRA from me? Is there some limit of how many times the IRA can be inherited?

Would he be able to leave it alone and just take the Required Minimum Distribution each year or would he have withdraw the whole amount and pay taxes on it?

terran

  • Handlebar Stache
  • *****
  • Posts: 2258
Re: T-IRA or inherited IRA for inheritance?
« Reply #7 on: October 15, 2019, 12:14:40 PM »
I inherited my Mother's IRA. Does anyone know if I should croak before my hub, would he inherit the IRA from me? Is there some limit of how many times the IRA can be inherited?

Would he be able to leave it alone and just take the Required Minimum Distribution each year or would he have withdraw the whole amount and pay taxes on it?

Interesting question. https://www.irahelp.com/slottreport/inheriting-inherited-ira should answer all your questions.

The short version seems to be that your husband can inherit your inherited IRA, but the RMDs will continue to be based on your age and life expectancy, not recalculated to be based on his.

Roadrunner53

  • Handlebar Stache
  • *****
  • Posts: 2476
Re: T-IRA or inherited IRA for inheritance?
« Reply #8 on: October 15, 2019, 12:40:20 PM »
Thank you!

BicycleB

  • Handlebar Stache
  • *****
  • Posts: 1720
  • Location: Live Music Capital of the World
  • Older than the internet, but not wiser... yet
Re: T-IRA or inherited IRA for inheritance?
« Reply #9 on: October 16, 2019, 12:28:05 PM »
@MichelleD1977, my suggestion would be to keep the money in the inherited IRA because it has advantages that other accounts don't have. At least, that's what I perceived from using a similar inherited IRA.

Outside of the Required Minimum Withdrawal, you are able to withdraw from the account any time, without penalty. In a regular IRA, you can't withdraw until you're 59 1/2, unless you pay a 10% penalty. This penalty is on top of any income taxes. So the inherited IRA provides liquidity that your own IRA cannot.

You're aware that when you withdraw from the inherited IRA, you pay income tax on the withdrawal. For me that has been an advantage now that I'm FIREd. I need income to qualify for ACA (Obamacare) health insurance. The withdrawals from the inherited IRA help me to have enough income to qualify. This provides extra value, and saves me thousands of dollars compared to what other insurance options would cost even if I had them. Keeping the inherited IRA gives you an extra tool to use if you FIRE before turning 59 1/2 years old.

@Roadrunner53, the same might apply to you too. Best wishes to both of you.