Taxes - Inherited Several Investments

[MillerM]

Howdy folks,

My father passed away in April and my brother and I have been working through everything that comes with that.  He had several retirement accounts and whatnot with my brother and I specified as 50/50 beneficiaries so those do not have to go through probate.  We met with his financial advisor recently to start discussing how to handle each of these. He gave some suggestions and I wanted to share it with this community and see if can validate what he suggests or if there are alternatives. 

I am 46yo, married (wife 45), with 2 kids (10 and 12).  We do not need any of the money for anything in the short-term so our goals are to minimize taxes and let it grow for retirement.  I intend to retire, if possible, in the next 7 - 10 years.

There were 4 total accounts, two of them were pretty simple, but I'll list them in case they make a difference to any overall plans.

1) Individual Brokerage Account - $137,000 - Advisor says this gets a step-up in basis, so it shouldn't count as income right? I will basically just let this one change into my name and look at the actual investments later.

2) Lincoln Financial Annuity - $8,890 - This was a death benefit and is taxible.  I plan to deposit it into the brokerage account.

3) Nationwide Account - $77,000 - I'm not sure if this is another annuity or some form of life insurance.  It is "non-qualified" with a cost-basis of $19,500 so $57,000 is subject to income taxes.  The advisor 2 options. A) "1035 Exchange" retitle is to a beneficiary IRA and take distributions down over 4-5 years and drain into the brokerage account. Or B) Jackson National Life Annuity that tracks the S&P 500, provides 10% downside protection and I think still draws down the account into the brokerage over time.  He is sending information on this one.

4) IRA - $300,000 - The big one. This one has to be emptied out over 10 years max, and distributions are subject to income tax.  I gave him our taxes and income information and the suggestion is we look at filling up the 22% tax bracket with as much distributions each year as we can.  An alternative would be to look at something like 72T Periodic Equal Distributions.

Outside of this, there is an estate account that I will get about $20,000 from later this year as well.  That is part of the will/probate so the advisor wasn't looking at that yet.


For information, my wife and I make combined around $160,000 with our AGI after deductions and whatnot around $117,000.  I think that will be more like $120,000 this year.

I contribution just over $19,000 to my 401k and my wife does $5,000 to her 401k which is a Roth type.  The state also takes 6% of her salary for the general retirement fund for her pension.

So the advisor is looking at that $120,000 and thinking we have about 50 - 70k per year of "room" to drain the taxable distributions and not go over the 22% tax bracket.

Does this sound reasonable?  If me and my wife cranked up our 401k contributions to max, we'd need some income to live on.  Do we look at doing that and then selling from the brokerage?  We would use the 20k from the estate and the 9k from the Lincoln annuity for the first year.

Thoughts are welcome.

P.S. - I'd rather have my father. Screw cancer.

[MDM]

Condolences to you and your family.

1) Correct, no immediate income.  You will incur long term capital gain (or loss) when you sell the investments.  Your cost basis in those investments is their value the day your dad passed.  If you are happy with the current investments, just leave them alone.  If you would prefer different ones, just selling soon and using the proceeds to buy what you do want is a reasonable approach, because the tax consequences on the sale will likely be minimal.

2) OK, so be it.

3) Most annuities are good for the insurance company and the sales person, and not so good for the purchaser.  That one appears to have done well, but then we don't know all the history, e.g., when purchased, for how much, etc.  In any case, that's all water under the bridge.  The phrases "non-qualified" and "beneficiary IRA" don't fit together, so option A) may not be available, and see the first sentence in this paragraph regarding option B).

You might check with a brokerage, e.g., Retirement Annuities | Annuity Solutions to Consider | Fidelity, about exchanging the current annuity into one of their (probably less costly to you) options, and then withdrawing some gains annually until you can also withdraw the contributions without burdensome taxes.

If you don't get enough specific suggestions here or in other discussions, consider posting at Bogleheads.org and if your are fortunate you'll get a detailed response from user Stinky like that one.

4) Withdrawals from this can offset traditional 401k contributions dollar for dollar, and provide extra cash flow if needed.  Withdrawing about the same amount each year, if your other income remains constant, is likely to be best tax-wise.  If you expect a significant drop in other income (e.g., retirement) then you might lowball the withdrawals until then (if practical) so your total annual income stays about the same.

If you expect to use ACA insurance after retiring, Roth Conversion and Capital Gains On ACA Health Insurance could be useful.  The "Case Study Spreadsheet" tool covered there can also be used simply to look at marginal tax rate effects for various amounts of inherited IRA withdrawals.  Do you have access to Excel so you can use that?

[MustacheAndaHalf]

Cancer sucks, but it does give you time to spend with your father before he passes away.  I hope you experienced that silver lining.

Insurance companies love hidden expenses and complex contracts that lock up your money.  Compare that to buying the S&P 500: you pay $0 to buy or sell.  If you invest $100,000 you pay $30/year in expenses.  There is no chance an insurance company will only take $30/year of your $100,000 investment.  You can learn that the hard way, or avoid insurance companies when investing.  (Look at Schwab, Fidelity, and Vanguard - all allow $0/trade to invest in stocks or ETFs).

It's really better if you look at the contents of the individual brokerage account now.  I hope this guess is wrong, but often people have a high cost broker and dozens of investments.  The longer that sits, the more expenses can eat into it.

[EscapeVelocity2020]

4) IRA - $300,000 - The big one. This one has to be emptied out over 10 years max, and distributions are subject to income tax.  I gave him our taxes and income information and the suggestion is we look at filling up the 22% tax bracket with as much distributions each year as we can.  An alternative would be to look at something like 72T Periodic Equal Distributions.

Outside of this, there is an estate account that I will get about $20,000 from later this year as well.  That is part of the will/probate so the advisor wasn't looking at that yet.

Similar situation here, Dad passed away this year and left an IRA and real estate trust.  Don't need the money, so want to minimize tax impact.  At least for this first year, we can skip the first year of the 10 year distribution - https://www.forbes.com/sites/kristinmckenna/2023/07/19/beneficiaries-of-inherited-iras-get-more-rmd-relief---for-now/?sh=6731cea63266

Was not aware of the 72T option, but it sounds like formal guidance on all of this won't come until 2024.

Not sure if you know, but are there tax implications for the estate account you inherited?  Our advisors are pretty worthless but I like to do this stuff on my own anyways.  I also have a CPA on call if you or I have questions / questionable ideas :)

[MDM]

Similar situation here, Dad passed away this year and left an IRA and real estate trust.  Don't need the money, so want to minimize tax impact.  At least for this first year, we can skip the first year of the 10 year distribution...

...but if you want to minimize the tax impact, withdrawing similar amounts each year might do that better than waiting to withdraw larger amounts in later years.  Depends on your specific situation.

[EscapeVelocity2020]

Similar situation here, Dad passed away this year and left an IRA and real estate trust.  Don't need the money, so want to minimize tax impact.  At least for this first year, we can skip the first year of the 10 year distribution...

...but if you want to minimize the tax impact, withdrawing similar amounts each year might do that better than waiting to withdraw larger amounts in later years.  Depends on your specific situation.

The article I linked to is pretty solid on the general ideas this flexibility gets us -

But the good news is the delay offers more time to consider several planning strategies that may be available, for example:

Accelerating distributions during low-tax years
Converting an inherited 401(k) to an inherited Roth IRA
Planning distributions around college financial aid applications or Medicare premiums
State tax considerations and residency changes

etc....

[MDM]

Similar situation here, Dad passed away this year and left an IRA and real estate trust.  Don't need the money, so want to minimize tax impact.  At least for this first year, we can skip the first year of the 10 year distribution...

...but if you want to minimize the tax impact, withdrawing similar amounts each year might do that better than waiting to withdraw larger amounts in later years.  Depends on your specific situation.

The article I linked to is pretty solid on the general ideas this flexibility gets us -

But the good news is the delay offers more time to consider several planning strategies that may be available, for example:

Accelerating distributions during low-tax years
Converting an inherited 401(k) to an inherited Roth IRA
Planning distributions around college financial aid applications or Medicare premiums
State tax considerations and residency changes

Sure, if you expect your income to decrease (or move to a no-tax state) in the years to come, waiting to withdraw (you can't convert to Roth) from the inherited IRA could make sense. 

[EscapeVelocity2020]

Similar situation here, Dad passed away this year and left an IRA and real estate trust.  Don't need the money, so want to minimize tax impact.  At least for this first year, we can skip the first year of the 10 year distribution...

...but if you want to minimize the tax impact, withdrawing similar amounts each year might do that better than waiting to withdraw larger amounts in later years.  Depends on your specific situation.

The article I linked to is pretty solid on the general ideas this flexibility gets us -

But the good news is the delay offers more time to consider several planning strategies that may be available, for example:

Accelerating distributions during low-tax years
Converting an inherited 401(k) to an inherited Roth IRA
Planning distributions around college financial aid applications or Medicare premiums
State tax considerations and residency changes

Sure, if you expect your income to decrease (or move to a no-tax state) in the years to come, waiting to withdraw (you can't convert to Roth) from the inherited IRA could make sense.

Well, if you look at my age, having lower income years some time in the next 10 years is pretty likely :)

[MDM]

Similar situation here, Dad passed away this year and left an IRA and real estate trust.  Don't need the money, so want to minimize tax impact.  At least for this first year, we can skip the first year of the 10 year distribution...

...but if you want to minimize the tax impact, withdrawing similar amounts each year might do that better than waiting to withdraw larger amounts in later years.  Depends on your specific situation.

The article I linked to is pretty solid on the general ideas this flexibility gets us -

But the good news is the delay offers more time to consider several planning strategies that may be available, for example:

Accelerating distributions during low-tax years
Converting an inherited 401(k) to an inherited Roth IRA
Planning distributions around college financial aid applications or Medicare premiums
State tax considerations and residency changes

Sure, if you expect your income to decrease (or move to a no-tax state) in the years to come, waiting to withdraw (you can't convert to Roth) from the inherited IRA could make sense.

Well, if you look at my age, having lower income years some time in the next 10 years is pretty likely :)

As always, "it depends...".  Best wishes for your upcoming retirement! :)

[EscapeVelocity2020]

Similar situation here, Dad passed away this year and left an IRA and real estate trust.  Don't need the money, so want to minimize tax impact.  At least for this first year, we can skip the first year of the 10 year distribution...

...but if you want to minimize the tax impact, withdrawing similar amounts each year might do that better than waiting to withdraw larger amounts in later years.  Depends on your specific situation.

The article I linked to is pretty solid on the general ideas this flexibility gets us -

But the good news is the delay offers more time to consider several planning strategies that may be available, for example:

Accelerating distributions during low-tax years
Converting an inherited 401(k) to an inherited Roth IRA
Planning distributions around college financial aid applications or Medicare premiums
State tax considerations and residency changes

Sure, if you expect your income to decrease (or move to a no-tax state) in the years to come, waiting to withdraw (you can't convert to Roth) from the inherited IRA could make sense.

Well, if you look at my age, having lower income years some time in the next 10 years is pretty likely :)

As always, "it depends...".  Best wishes for your upcoming retirement! :)

I'm thinking 55 is my max limit (the no 401k penalty maneuver), so not quite upcoming, but I'll take a severance package before that if one is offered!

[elysianfields]

4) Withdrawals from this can offset traditional 401k contributions dollar for dollar

@MDM would you mind elaborating on what you mean here, and any advantages or disadvantages?  Or are you simply referring to the fungibility of money?

[MDM]

4) Withdrawals from this can offset traditional 401k contributions dollar for dollar

@MDM would you mind elaborating on what you mean here, and any advantages or disadvantages?  Or are you simply referring to the fungibility of money?

It was in reference to the following from the OP:

...look at filling up the 22% tax bracket with as much distributions each year as we can.  ...my wife does $5,000 to her 401k which is a Roth type.

Switching those Roth contributions to traditional and contributing the maximum amount would increase "as much distributions [from the inherited IRA] as we can [while remaining in the 22% bracket]."

[Catbert]

4) Withdrawals from this can offset traditional 401k contributions dollar for dollar

@MDM would you mind elaborating on what you mean here, and any advantages or disadvantages?  Or are you simply referring to the fungibility of money?

I believe that MDM is saying that if you aren't already maxing your 401k (or similar) you could withdraw and pay taxes on money from inherited 401k and simultaneously up your pre-tax contributions to your own retirement account so neutral tax implications.  Yeah, fungibility of money.