FIRE’d with inherited and traditional IRA, strategy to convert ?

[superd]

I fire’d in 2019 without knowing everything I should have in advance, I didn’t know solo 401k was possible so I maxed out traditional IRA contribution when I had 1099 jobs and maxed out 401k in years I had W2 job without ever starting a roth.

So what I have today is 300,000 in traditional  and 50,000 in inherited IRA with 11,000 dividends and 1000 interest on my taxable stache at age 47.

If I follow what seems to be the standard practice to keep MAGI just below 200% that would give 12-13k to convert to stay below 200%.

With normal market appreciation the iras would grow more than I convert them, is that something I should be worried about today that once RMDs start it will be more than I want?  If the 350k grows at say 3.5% until age 72 I would end up with 827,000 with RMD of 32,000 if I was 72 today.

For strategy of converting inherited vs traditional since I can access the inherited without penalty at anytime I’m thinking I take the min RMD on inherited and then the rest of the 12-13k from traditional . (Although if I need to use these funds I would have a significantly bigger problem to deal with)

Or given those ira balances should I go above 200% on magi calculation ? I’m also likely to get part time job maybe earning 5-10k/year as well.

Thanks for any input!

[MDM]

Doing a full "Case Study" Topic might help folks give more specific advice.  Gathering all the information for the case study may help you, whether you then publish it or not.

[superd]

Doing a full "Case Study" Topic might help folks give more specific advice.  Gathering all the information for the case study may help you, whether you then publish it or not.

Given my annual spend is less than 4% of my after tax funds and less than firecalc 95% success rate when I don’t include my retirement accounts or home equity in the calculation I thought that info wasn’t needed. I’m just thinking about a piece I haven’t thought of before reading this board, everything else is fine. But I understand if what I posted isn’t enough for any input.

[secondcor521]

I'm fairly certain that you may not convert an inherited IRA.

You do have to withdraw from the inherited IRA; since it sounds like you inherited it pre-2020, you are likely withdrawing based on an RMD schedule on your life time.

You can turn around and contribute to your Roth IRA if you want to (and have income to qualify), and the RMDs from the inherited IRA can give you the cash flow to do so, but you can't directly do inherited IRA -> Roth IRA conversions.

The general calculus, and there are a zillion caveats, but generally if you figure what your marginal tax bracket would be when you're in your early 70's and have RMDs and SS (and whatever else), then converting enough now to get to approximately that same bracket is usually the recommendation.  It depends on a lot of factors though.

200% FPL for a single person is still in the 12% bracket, right?  You might see what your marginal rate would be (including loss of ACA subsidy, if applicable) at the top of the 12% bracket.  Above that is 22%, and with the ACA subsidy loss it becomes a tax hump that's big and wide, thus hard to get motivated to swallow.

[MDM]

Doing a full "Case Study" Topic might help folks give more specific advice.  Gathering all the information for the case study may help you, whether you then publish it or not.

Given my annual spend is less than 4% of my after tax funds and less than firecalc 95% success rate when I don’t include my retirement accounts or home equity in the calculation I thought that info wasn’t needed. I’m just thinking about a piece I haven’t thought of before reading this board, everything else is fine. But I understand if what I posted isn’t enough for any input.

Yes, you probably don't need a full case study.  But you might want to do the part secondcor521 suggests, which is to calculate your current marginal tax for conversion amounts of interest and compare that with your estimated age 72 rates.  See Roth IRA conversion - Bogleheads for more.

[terran]

I'm fairly certain that you may not convert an inherited IRA.

You're definitely right.

An IRA you inherited from someone other than your spouse either had RMDs that start right away and that you must withdraw every year until the account is depleted if inherited before 2020, or it needs to be withdrawn within 10 years, but can be withdrawn at any point in those 10 years if inherited in or after 2020.

I kind of doubt you're going to have a huge RMD problem with "only" $300k in an IRA, but regardless your goal should be to keep your taxable income pretty even throughout retirement, so it probably makes sense to do some conversions along with your withdrawals from the inherited IRA.

[Daisy]

I have been learning about this this year. I inherited an IRA in 2020 and learned that I have 10 years to withdraw it, right? It took me a while to find this information, and my siblings and I are confused. I can wait until year 10 to withdraw it seems. Please verify if this is correct.

In the previous years, I tried to maximize the 10-12% tax space and do traditional to Roth IRA conversions as I don't want to hit large RMDs after age 70. After seeing what the dividends were for the year, I'd transfer just enough to get just under the 10-12% tax bracket maximum income. But now that I have the inherited IRA, I am going to prioritize transferring stuff out of there first as I only have 10 years to do it. So I won't be doing Roth conversions for a while until I deplete the inherited IRA.

I guess it's a good problem to have!

[secondcor521]

I have been learning about this this year. I inherited an IRA in 2020 and learned that I have 10 years to withdraw it, right? It took me a while to find this information, and my siblings and I are confused. I can wait until year 10 to withdraw it seems. Please verify if this is correct.

If the person from whom you inherited the IRA died 1/1/2020 or after, then you have until 12/31 of the year which contains the 10th anniversary of the date of death.  So for example if they died 1/15/2020, you have until 12/31/2020 to empty the account.  You're not required to make any sort of RMD within that 10+ year period, just have to empty it by the end of the period.

In the previous years, I tried to maximize the 10-12% tax space and do traditional to Roth IRA conversions as I don't want to hit large RMDs after age 70. After seeing what the dividends were for the year, I'd transfer just enough to get just under the 10-12% tax bracket maximum income. But now that I have the inherited IRA, I am going to prioritize transferring stuff out of there first as I only have 10 years to do it. So I won't be doing Roth conversions for a while until I deplete the inherited IRA.

I guess it's a good problem to have!

With the extra income from the inherited traditional IRA, you may be pushed into the 22% tax bracket later, which might mean both inherited withdrawals *and* conversions.  You just have to model it out.  I model it out until age 85 or so, and find that I sort of need to do Roth conversions now-ish to stay out of the higher brackets later-ish.

Also consider ACA, Medicare age, IRMAA surcharges, RMD ages, and if you're married give some thought to the tax predicament of the surviving widow/widower.

[Dee18]

Secondcor touched on this, but you can only contribute to a Roth if you have earned income in that year.  Getting money from an IRA or interest from CDs, etc, is not earned income for this purpose.  So unless you are working you cannot now contribute to a Roth. 

[superd]

Thanks for the replies everyone, gave me all the variables I need to consider.

Yes, on the inherited ira Ive been doing RMDs for ten years (forgot to mention first post) I didn’t realize about the earned income part on new Roth contributions so  I’ll continue taking the minimum out and then I will do Roth conversion of the traditional up to whatever magi I decide to do. Given I’m not working my effective federal tax rate is zero if I keep my other than qualified dividend income less than the 12,000 standard deduction..so I should take full advantage of that.

I would think that min age for Medicare will at least be down to 60 or 55 by the time I get to there which will give more years to convert a higher amount, and in the case that the stock market does historical average or better I guess I really shouldn’t care about a higher than it should’ve been tax bill as my portfolio will be double or triple what it is now and I’ll have nothing to worry about financially.