Inherited ira

[fanfare]

If you wait until JANUARY to take your large distribution, the tax brackets are moving up.

Based on your original post the tax you cited looks correct with my tax program  but that is with current tax brackets.

If you are required to take a 2022 RMD, which depends on when the owner died and the proposed regulation, take as small as possible.

@Notch352 

[dmertz]

It's likely that the increase in your AGI caused by the IRA distribution is reducing your child tax credit and explains most of the difference between the tax bracket rate and the marginal tax rate, increasing your marginal tax rate above the tax-bracket rate.  The effect is most pronounced with lower distribution amounts.  A reduction in some tax credit is one of the things I suggested in my original post.

It's side effects like this that make it necessary to simulate your entire tax return.  Because the there is less marginal reduction in the child tax credit as AGI goes up, you might find that it makes sense to take larger distributions over fewer years, but it depends on the ages of your children which affects how many more years you will receive this tax credit.

Note that there are changes to (reductions in) the child tax credit for 2022.  Given that 2022 TurboTax does not yet support the entry of Forms 1099-R in step-by-step mode, I suspect that you are simulating a 2022 tax return with 2021 TurboTax.  To get accurate results, you would need to simulate your tax return using forms mode of 2022 TurboTax.  I think that these changes in the child tax credit for 2022 will cause a reduction in  the calculated marginal tax rates compared to doing the same simulation in 2021 TurboTax.

Having only 22% withheld for federal tax is unlikely to be sufficient to avoid a significant balance due when you file.

[Opus 17]

@Notch352 

The top of the federal 22% tax bracket for 2022 for married filing jointly is $178,150 of taxable income.  Taxable income is your gross income minus your standard deduction or your itemized deduction.  The standard deduction for married filing jointly for 2022 is $25,900.  That means that as long as your total federal taxable income is less than $204,000, it will not be taxed any higher than 22%.

Of course, it is important to realize that only income above the tax bracket threshold is taxed at a higher rate.  That means that if you had $210,000 in federal taxable income, only the top $6000 would be taxed at the next higher rate, which is 24%. All of the income under the threshold is still only taxed at 22% or less. Crossing a tax bracket does not subject all your income to the new higher rate, just the amount over the threshold.

although I have not analyzed your situation independently, I tend to agree with the other experts that the jumps in taxation may be due to something more than just income tax. If you withdraw the entire IRA amount, you may be reaching a situation where your high income results in a phase out of some other credit that you have been benefitting from.  The only way to get a clear picture is to sit down with a tax expert and review your situation personally.

I also agree that you will pay lower taxes over the life of the IRA if you are able to withdraw smaller amounts over several years instead of a lump sum this year. I also agree that due to the uncertainty in the tax rates, you may want to withdraw all of the money by the end of 2025. That gives you the opportunity to spread the withdrawal out over 4 tax years.

[Notch352]

Yes I used taxact for my reference I couldn't do it on here although this is what I use for my normal taxes. If I had some financial stability I would just leave in there and take out small amounts but when I have 100k in debt I need to get off my shoulders I can't. Wanted to just take 150k pay that debt of and have some money in the bank and was gonna leave the rest in. But for me to actually pocket 150k I'd have to take out over 200k to cover thes taxes. I don't want to have to pay out of my pocket at the end of the year because if I actually have the money in my bank and get a bill for 100k I probably wouldn't pay it lol. So should I just put 25% in federal for withholding and 7% for state that way i shouldn't owe any thing at end of year? Will that cover 150k withdrawal or does it need to be more? Thanks for all the help and if anyone of you is a actual professional or knows his stuff well email me at [email address removed] and I can pay you to go over my situation and advise me better. You all have helped a great deal already and I thank you for you time.

[stepnej]

Besides spreading out the distributions, you can use the distribution to max out your 401(k) contributions. Incr your contributions to (Maximum contribution less current contribution) and use the actual distr to live off of.Note: you can contribute 92% of your paycheck and still have the correct FICA taxes withheld resulting in $0 paycheck. Same with Trad IRA and Spouse Trad IRA - combined, it may get your MAGI down to where you can deduct 100% of Trad IRA contributions.

[NCperson]

@Notch352 - to be conservative, withhold 25% for federal, I can't really speak to State, but 7% is healthy for most states.

just so everyone is on the same wave length, if you take your expected 2022 income PLUS the amount you are going to take out of the IRA LESS the standard deduction, as long as the result is less than $178,150, you will not exceed the 22% tax bracket, so 25% should be a good number.  If the result exceeds $178,150, the REMAINDER will be taxed at 28%, so you'll have to do the math and see where you land.  Using TAXACT for 2021 to estimate is going to get you close.  

Also, as pointed out by others, there is a minimum that you must take every year.  There is a lot of confusion about that as the law changed in 2020 and the IRS has not created the final rules.  what we do know is that there is a requirement for the beneficiary to distribute a minimum about, based on the IRS table, but due to all the confusion, the IRS will not penalize anyone who fails to do so in 2021 and 2022, so ineffect if you take out zero, you are fine for these years - no harm no foul.

Here is a link to the 'plain English' explaination and the article includes a link to the "IRS hard to understand" version 

https://smartasset.com/retirement/penalties-waived-on-some-missed-rmds

[Notch352]

Ya I wish i could do that but I'm 38 have 2 kids 12 and 16 and a wife who dosent work and live in a **bleep**hole nys where my taxes are 4k a year on a 100k house with no land. I have almost 200k in my 401k only money I could ever save just because u don't have access to it. My grandmother was very wealthy and Has a big estate that needs to be settled but probably will take years. this ira was separate but need to make money last untill estate is settled then I should be able to retire in 15 years if I make it that long. 

[stepnej]

Never pay off simple interest debt (mortgage, car loan) when % is lower than longer mkt rates (Ramsey is a fool). You still make the difference btwn rates, all appreciation in any asset used as collateral, potentially get a tax deduction. Home mortgage 3%, mkt 10% -you still get 7% return. Putting the inheritance in 401(k) gets you the match (potentially) and a 22% tax deduction (same as 22% return for one year). This is a great time to invest with a 15yr time horizon, take advantage of it.

[Notch352]

Yes but I cannot put in Into anything without taking it out first I thought? because it was inherited. I can only leave it in there or take it all out. And idk think it was making any money being in there because it was at 1.3 million in March and now is at 1.296.  

[fanfare]

"due to all the confusion, the IRS will not penalize anyone who fails to do so in 2021 and 2022, so ineffect if you take out zero, you are fine for these years"

@NCperson 

Not quite.

If the owner died in 2022 before taking the 2022 RMD then the beneficiary has to take that RMD for the owner.

If the owner died in 2021 and was taking RMD, then the beneficiary's RMD in 2022 is based on their life expectancy, not the owner's life expectancy, because their life expectancy is the longer one.

@Notch352 

[fanfare]

" I can only leave it in there or take it all out."

Once you are titled as beneficiary, you can invest the money any way you see fit, in a self-directed Inherited IRA account.

@Notch352 

You have to be titled as beneficiary to take any distribution.

[Notch352]

I played with some of the numbers again and idk how this is possible but if I was to take 10k I'd get a 8740 federal refund and 521 state. 15k 7370 25k 5170 35k 2970 fed refund and owe 1663 to state. I can go up to 39k and get a refund at 50k I'd owe 6729 and owe 2704 to state. This makes absolutely no sense because I'm adding money to my income and before I put any ira info in I owed federal 1200 can anyone make sense of this? This is also using 21 tax brackets as reference since 22 isn't available yet. 

[stepnej]

i'd bet you've got some withholding incorrectly entered - zeros matter

[Opus 17]

@fanfare 

@Notch352 

I think some lack of clarity is creeping in.  The beneficiary IRA must always be a beneficiary IRA and is subject to the requirement to withdraw all of the money within 10 years.  The beneficiary may open as many IRA accounts as they want with as many different broker accounts as they want, and they may invest in any investment they prefer, but every account must be labeled as a beneficiary account and must be closed within 10 years.

to put the money into an investment outside of the IRA, it must be first withdrawn from the IRA and the taxes paid. After withdrawing the money, it could be contributed to a new IRA (subject to the $6000 per year limit) or it could be invested in stocks or bonds or mutual funds or any other desirable investment and you would pay annual taxes on dividends and capital gains because it would no longer be in a tax deferred account.

in short, you can roll over the money to a different beneficiary IRA if you prefer to work with a different broker or to pick different investments, but it must always remain in a beneficiary IRA until you withdraw it and pay the taxes.

[NCperson]

@Notch352 - can you go back and state what the AGI is (Line 11 of Form 1040 prior to adding in the IRA distributrions.  Also what is on Line 24 and Line 33? This is the scenario where the federal tax owned is $1200.

Now, go in and add $10,000 for the IRA distribution.  What is on Lines 11, 24 and 33 now?