Inherited IRA - 10 yrs or lifetime?

[glerbnik84]

I'm 65, retired, and inherited a traditional IRA.  I'm an "eligible designated beneficiary," and so can take distributions within a 10-year period, or over my expected lifetime.  I am inclined to take the distributions over my expected lifetime, but possible future tax increases, which may begin in 2026, are complicating the decision making.  If I were smart, I could use a spreadsheet and game out various tax rate increases vs earnings on money kept in the account.  

Any thoughts?  Are there any online tools for this?

[dmertz · Accepted solution]

Since you did not mention being the spouse of the decedent, I'll assume that you are not an EDB for that reason.

As an EDB, you are permitted to opt into the 10-year rule (and thus avoid RMDs in years 1 through 9 but being required to distribute the entire remaining balance in year 10) only if the decedent died before their required beginning date for RMDs.

It seems unlikely that opting into the 10-year rule would be beneficial unless you expect your marginal tax rate will be lower in the future by year 10.  It would likely be beneficial to take annual RMDs plus additional amounts to top out your current tax bracket, allowing you to move the money to capital investments outside of the inherited IRA where they could enjoy gains being taxable at long-term capital gains rates instead of as ordinary income.  Of course if your intent would be to place the money outside the inherited IRA in investments that would not be potentially taxable at long-term capital gains rates, that would not be a factor.  If you will be taking out amounts sufficient to satisfy annual RMDs anyway, I see no reason to opt into the 10-year rule.

Remember that RMDs are the minimum required to be distributed in a given year.  There is no statutory maximum distribution.

[fanfare]

You can't know what tax rates will be 10 years from now.

When you are subject to the 10-year liquidation rule for newly inherited IRAs,
to spread the tax impact most evenly over the ten years, and regardless of the Year-End Value,
your divisor should be :10,9,8 . . . 2, 1
OR,    11 - N where N is the number of the distribution year. (Beneficiary RMDs start in the year after the year of death)

If the owner died in 2020, the beneficiary would have to fully distribute the plan by December 31, 2030. which is the tenth distribution year.
the portion to distribute is 1 / 1 or 100%.

In the eighth year you would take out one third of the IRA, there being three years to go.
If you are a young beneficiary, or even not so young, this rule would generate much larger distributions than the RMD based on Pub 590B formulas.

At a very high age, the Pub590B formula will overtake this calculation and require a larger RMD in the beginning.

OTHERWISE, if the owner had not reached age 73,
Take any amounts you wish at any time, that is your choice,
OR
take it all in a lump sum at the end of ten years. 

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If your inheritance is substantial, and you are on Social Security, the increase in AGI from distributions can subject you to IncomeRelatedMonthlyAdjustmentAmounts affecting your Part B and Part D premiums.

That's just the way it is, but it is another factor to take into consideration.

---

@glerbnik84 

[glerbnik84]

Yes, I am a sibling of the decedent, and he passed away prior to reaching his RBD.

I read an article that seemed to indicate that if you decide to do the stretch distribution you cannot later switch to the 10 year rule option.  If correct, I guess that means that for example if you take a stretch distribution in the 1st year after the decedent's passing you cannot later decide to defer further distributions until year 10. 

I see your point that this would not preclude a beneficiary from taking their distributions over a 10 year period, by taking more than the RMD each year.  And so, a beneficiary whose life expectancy was let's say 21 years, could instead complete the distributions in 10 years.

It seems like there is some benefit to doing the stretch and taking the RMD only (that is, not topping out to the current tax bracket).  Let's say money taken out of the IRA is placed in investments whose earnings would be taxed at the favorable LTCG or qualified dividend rate.  Earnings on that distribution would be taxed year after year.  If you hadn't taken additional money out of the IRA to top out to your current tax bracket, that principal would continue to grow tax free until taken from the IRA as a distribution.  I am probably missing something in my thinking on this. 

[dmertz]

"I read an article that seemed to indicate that if you decide to do the stretch distribution you cannot later switch to the 10 year rule option."

I think it would be the other way around, once you elect the 10-year rule you can't switch to life-expectancy RMDs to allow maintaining the inherited IRA beyond the 10th year.  The proposed regulations indicate that you have until the end of the 9th year to elect the 10-year rule.  If prior to that you have been taking annual RMDs based on your life expectancy, that would seem to imply that you have simply not yet made the election.  Intentionally taking less than the annual RMD based on your life expectancy would imply that you have elected the 10-year rule.

[glerbnik84]

I hadn't considered the IRMA factor in my planning.  Thank you for pointing that out.

[glerbnik84]

That makes sense.  The article didn't provide specific cases, it just started that "flipping around" wasn't allowed.

Thank you for your post.

[glerbnik84]

I hadn't considered that angle of reinvesting so that the income is subject to LTCG instead of ordinary income.  Good point!  Topping out within current tax bracket is another good point.

Thank you for taking the time to write a clear, well thought out answer!