Hello Bogleheads! I have some questions about optimizing tax strategy and distributions from my inherited IRA.
Background
In 2017, at 27 years old, I inherited a 650k traditional IRA balance when one of my parents passed away. Since it was pre-SECURE Act and the deceased was not old enough to be taking RMDs yet, this gives me almost my entire lifetime to withdraw them. Since inception, the inherited IRA has almost doubled, even after RMDs. Originally I was going to just take the RMDs forever and let that sort itself out, since at some point the calculation results in my having a life expectancy <1yr. However, I did some very rough projections with a flat % increase/year, and estimating a consistent return of any kind results in the RMDs really ballooning in my mid-80s, which seems like it'll be pretty bad for me since that's right about when all our traditional 401k balances will also probably have big RMDs, and IRMAA. For example, assuming a 5% real return every year, I'd have an RMD of almost 400k in my 80s just from the inherited IRA. Even as low as 4% would be almost 200k. A more market-historical 7% has me having an RMD of up to 900k in 2074!
The life expectancy table for an inherited IRA isn't quite the same as that of a regular 401k/IRA, so it is offset a bit, but it seems like I'd see some benefit from at least reducing these IRA balances earlier in my life, and/or doing Roth conversions of our 401k balances. I've read a lot of discussions about optimizing for RMDs but the inherited IRA aspect rarely comes up and when it does I've never seen an in-depth treatment of it. Obviously these are good problems to have, but the tax bills involved here seem a little daunting to me and I was wondering if there's some way I can/should get ahead of this while I'm still relatively young. I see people here dealing with IRMAA cliffs + RMDs who are kicking themselves about not doing Roth conversions when they were younger and it seems like I've got a lot of time to get ahead of something that's potentially even worse.
Personal
I'm 34, married, and my wife is also 34. We don't have kids yet but we're actively planning for them and if all goes well hope to have a couple children within the next couple years.
Income
My W2 gross income: 400k/yr. I think it's unlikely I'll continue to earn this in the future. I expect that after this job I'll drop down to the 200-250 range again at most, and I don't imagine this job will last all that much longer, maybe a year or two. My hiring was a sort of unique circumstance with perfect timing that I imagine the company regrets a little cost-wise as they're certainly not getting 1.5x-2x value out of me compared to alternative hires.
Her W2 gross income: 133k/yr, probably more future earning potential here.
Rental property that has cash flow of 3-4k/year pre-tax.
We make about 50k/year pre-tax from other non-w2 sources (dividends & interest, some small side family business interests).
And I have to take the RMDs, of course (19k last year, 23k this year)
Spending
Primary residence mortgage on home @2%, <300k remaining - We're looking into upgrading our house from one with a value of ~1.2m to ~2m, which would probably increase costs due to higher mortgage rate and/or eat into the brokerage balances by a good amount.
Rental mortgage on condo @3.5%, <200k remaining. We talk about selling this from time to time, and probably we would with the house upgrade, since neither of us really likes being a landlord and it's not like it provides amazing income. For now it's very easy as we have a good long term renter, but it seems like we could do better investing it.
We each max out our 401ks+Backdoor IRAs+HSA each year. No mega-backdoors available.
We'll have ~125k in income taxes. A question for my accountant, but that was my rough calculation
We spend about 130-150k/year currently, not counting rental expenses (separate budget), income taxes, or 401k/HSA/IRA contributions. That spending includes charitable contributions.
There's definitely a bit of lifestyle creep going on (mostly taking more & nicer vacations), but I have a hard time imagining us spending much more than 200k/year inflation-adjusted in the future.
Assets
Inherited IRA balance: 1.25M
Traditional 401k balances: 550K
Roth 401k+IRA balances: 350K
HSA balances: 30K
Taxable Brokerage balances: 2.1M
Treasury Direct balances: 150K
Stock & options in non-public companies I work for/worked for: $0-$2M - This is pretty speculative, but at least one of the companies I have shares could definitely have a successful exit in the next few years. I imagine I'd want to avoid doing large taxable inherited IRA withdrawals until the end of the year when I'm sure I won't have a taxable event, but maybe it's not important if they're all long-term capital gains?
Current asset allocation
47% US stock (VTI/ITOT/FZROX)
15% US bond (FXNAX/SCHP/treasury direct holdings)
30% ex-US Stock (VXUS/IXUS/FZILX)
4% ex-US Bond (BNDX)
4% Gold (GLDM)
I'm not really looking for feedback on my AA unless there's some amazing tax opportunities I'm missing out on with it. I'm aware gold isn't always popular, but having a small amount of it helps me feel better about volatility. I'm fully aware I'm missing out on some extra upside with that and BNDX. Also having >20% bonds at my age seems to be a lot more than is recommended sometimes, but I'm trying to be a bit more conservative now that we've "won" to some degree. I am open to feedback on re-balancing across locations.
Current asset locations:
Most of our US bond holdings that aren't treasury direct are in the inherited IRA or the 401ks, and all the GLDM is in the inherited IRA, which I figured would shift the growth areas a little (+ help with taxes, since I think GLDM gains would be taxed at the collectibles rate). The brokerage accounts are tilted a little more ex-US stock-wise and the tax-deferred/tax-free accounts that aren't bond/gold are tilted a little more US stock-wise, but it's definitely not 100% optimized in that sense. I used to be more rigid about trying to optimize foreign taxes, but the foreign tax credit comes out to something like hundreds of dollars as it is. I don't know if even fully shifting all ex-US to non-taxable would put the foreign tax credit over $1,000, but if it did, it wouldn't be by very much and I can't see it moving the needle.
Questions/Ideas
1) In our current 35% federal tax bracket it doesn't make sense to take more than the RMDs, but I'm curious about the future moves here. At what bracket should I start withdrawing over the RMD amount? It seems like going as far up as the 24% bracket could make a lot of long-term sense, especially if I can do it early. Maybe even 32%?
2) I don't particularly like working, even the easy/fun jobs I've had, so taking a long break or downshifting to work part time has always been very attractive. I wonder if the long term tax savings of reducing salary and doing Roth conversions or inherited IRA withdrawals could push it over the edge of being "worthwhile". My wife mostly likes working, so it's possible she'd continue to work in that situation, though I imagine seeing me not working would quickly change her tune on the matter. I probably need to keep working if we're going to spend this much & upgrade the house, though maybe not all that long.
3) Will child tax credits make a significant difference here? Would I be best off combining them with decreasing my income and doing larger inherited IRA withdrawals?
4) How should I prioritize Roth conversions vs inherited IRA withdrawals? Are Roth conversions always better, or is the different RMD clock a factor here? I have a hard time analyzing the tradeoffs.
5) Do any of the popular paid-for (or free) tools handle my case particularly well? I've created some pretty serious spreadsheets about all this, but I think I'm at the limit of what I can accomplish with these tools.
Background
In 2017, at 27 years old, I inherited a 650k traditional IRA balance when one of my parents passed away. Since it was pre-SECURE Act and the deceased was not old enough to be taking RMDs yet, this gives me almost my entire lifetime to withdraw them. Since inception, the inherited IRA has almost doubled, even after RMDs. Originally I was going to just take the RMDs forever and let that sort itself out, since at some point the calculation results in my having a life expectancy <1yr. However, I did some very rough projections with a flat % increase/year, and estimating a consistent return of any kind results in the RMDs really ballooning in my mid-80s, which seems like it'll be pretty bad for me since that's right about when all our traditional 401k balances will also probably have big RMDs, and IRMAA. For example, assuming a 5% real return every year, I'd have an RMD of almost 400k in my 80s just from the inherited IRA. Even as low as 4% would be almost 200k. A more market-historical 7% has me having an RMD of up to 900k in 2074!
The life expectancy table for an inherited IRA isn't quite the same as that of a regular 401k/IRA, so it is offset a bit, but it seems like I'd see some benefit from at least reducing these IRA balances earlier in my life, and/or doing Roth conversions of our 401k balances. I've read a lot of discussions about optimizing for RMDs but the inherited IRA aspect rarely comes up and when it does I've never seen an in-depth treatment of it. Obviously these are good problems to have, but the tax bills involved here seem a little daunting to me and I was wondering if there's some way I can/should get ahead of this while I'm still relatively young. I see people here dealing with IRMAA cliffs + RMDs who are kicking themselves about not doing Roth conversions when they were younger and it seems like I've got a lot of time to get ahead of something that's potentially even worse.
Personal
I'm 34, married, and my wife is also 34. We don't have kids yet but we're actively planning for them and if all goes well hope to have a couple children within the next couple years.
Income
My W2 gross income: 400k/yr. I think it's unlikely I'll continue to earn this in the future. I expect that after this job I'll drop down to the 200-250 range again at most, and I don't imagine this job will last all that much longer, maybe a year or two. My hiring was a sort of unique circumstance with perfect timing that I imagine the company regrets a little cost-wise as they're certainly not getting 1.5x-2x value out of me compared to alternative hires.
Her W2 gross income: 133k/yr, probably more future earning potential here.
Rental property that has cash flow of 3-4k/year pre-tax.
We make about 50k/year pre-tax from other non-w2 sources (dividends & interest, some small side family business interests).
And I have to take the RMDs, of course (19k last year, 23k this year)
Spending
Primary residence mortgage on home @2%, <300k remaining - We're looking into upgrading our house from one with a value of ~1.2m to ~2m, which would probably increase costs due to higher mortgage rate and/or eat into the brokerage balances by a good amount.
Rental mortgage on condo @3.5%, <200k remaining. We talk about selling this from time to time, and probably we would with the house upgrade, since neither of us really likes being a landlord and it's not like it provides amazing income. For now it's very easy as we have a good long term renter, but it seems like we could do better investing it.
We each max out our 401ks+Backdoor IRAs+HSA each year. No mega-backdoors available.
We'll have ~125k in income taxes. A question for my accountant, but that was my rough calculation
We spend about 130-150k/year currently, not counting rental expenses (separate budget), income taxes, or 401k/HSA/IRA contributions. That spending includes charitable contributions.
There's definitely a bit of lifestyle creep going on (mostly taking more & nicer vacations), but I have a hard time imagining us spending much more than 200k/year inflation-adjusted in the future.
Assets
Inherited IRA balance: 1.25M
Traditional 401k balances: 550K
Roth 401k+IRA balances: 350K
HSA balances: 30K
Taxable Brokerage balances: 2.1M
Treasury Direct balances: 150K
Stock & options in non-public companies I work for/worked for: $0-$2M - This is pretty speculative, but at least one of the companies I have shares could definitely have a successful exit in the next few years. I imagine I'd want to avoid doing large taxable inherited IRA withdrawals until the end of the year when I'm sure I won't have a taxable event, but maybe it's not important if they're all long-term capital gains?
Current asset allocation
47% US stock (VTI/ITOT/FZROX)
15% US bond (FXNAX/SCHP/treasury direct holdings)
30% ex-US Stock (VXUS/IXUS/FZILX)
4% ex-US Bond (BNDX)
4% Gold (GLDM)
I'm not really looking for feedback on my AA unless there's some amazing tax opportunities I'm missing out on with it. I'm aware gold isn't always popular, but having a small amount of it helps me feel better about volatility. I'm fully aware I'm missing out on some extra upside with that and BNDX. Also having >20% bonds at my age seems to be a lot more than is recommended sometimes, but I'm trying to be a bit more conservative now that we've "won" to some degree. I am open to feedback on re-balancing across locations.
Current asset locations:
Most of our US bond holdings that aren't treasury direct are in the inherited IRA or the 401ks, and all the GLDM is in the inherited IRA, which I figured would shift the growth areas a little (+ help with taxes, since I think GLDM gains would be taxed at the collectibles rate). The brokerage accounts are tilted a little more ex-US stock-wise and the tax-deferred/tax-free accounts that aren't bond/gold are tilted a little more US stock-wise, but it's definitely not 100% optimized in that sense. I used to be more rigid about trying to optimize foreign taxes, but the foreign tax credit comes out to something like hundreds of dollars as it is. I don't know if even fully shifting all ex-US to non-taxable would put the foreign tax credit over $1,000, but if it did, it wouldn't be by very much and I can't see it moving the needle.
Questions/Ideas
1) In our current 35% federal tax bracket it doesn't make sense to take more than the RMDs, but I'm curious about the future moves here. At what bracket should I start withdrawing over the RMD amount? It seems like going as far up as the 24% bracket could make a lot of long-term sense, especially if I can do it early. Maybe even 32%?
2) I don't particularly like working, even the easy/fun jobs I've had, so taking a long break or downshifting to work part time has always been very attractive. I wonder if the long term tax savings of reducing salary and doing Roth conversions or inherited IRA withdrawals could push it over the edge of being "worthwhile". My wife mostly likes working, so it's possible she'd continue to work in that situation, though I imagine seeing me not working would quickly change her tune on the matter. I probably need to keep working if we're going to spend this much & upgrade the house, though maybe not all that long.
3) Will child tax credits make a significant difference here? Would I be best off combining them with decreasing my income and doing larger inherited IRA withdrawals?
4) How should I prioritize Roth conversions vs inherited IRA withdrawals? Are Roth conversions always better, or is the different RMD clock a factor here? I have a hard time analyzing the tradeoffs.
5) Do any of the popular paid-for (or free) tools handle my case particularly well? I've created some pretty serious spreadsheets about all this, but I think I'm at the limit of what I can accomplish with these tools.
Statistics: Posted by jebco — Mon Mar 11, 2024 11:32 pm — Replies 1 — Views 375