SECURE Act with large IRA — Do not need RMD — Estate plan.

Submitted by Norman Cook on Sun, 2019-12-22 21:40

82-year-old single male with a traditional IRA valued at $1.2 million. Life expectancy 5 to 7 more years. Income from sources other than IRA adequate for day-to-day living expenses. Thus, RMD is being invested in taxable mutual funds. Adult children are the beneficiary of the taxable mutual funds.

Estate planning plan.
1. Withdraw most or all of the IRA, pay the income tax, and invest the remainder in taxable mutual funds.
2. During the life of the owner any capital gains would be taxed at the lower capital gain tax rate.
3. At the death of the owner the beneficiary children would attain a step-up value in the taxable mutual funds.
4. The beneficiary children could withdraw from the taxable mutual funds at a rate suitable to their needs without any consideration of the 10-year rule.
5. Withdrawals (after year one) from the taxable mutual funds would probably also be taxed at a capital gain rate or at the new stepped up cost value.

Your thoughts are welcome.



Submitted by Alan - IRA critic on Sun, 2019-12-22 22:03

You would have to consider his marginal tax rate and compare it with the rate the children will pay. The more children beneficiaries there are the lower amount they would inherit. Some may be in lower brackets, married, and or retired or will be by the time father passes.

Submitted by Bruce Steiner on Mon, 2019-12-23 03:45

  • A terrible plan.  A possible malpractice claim against the lawyer proposing it.
  • The IRA is part his (1minus the tax rate) and part (the tax rate) the government’s.  While the money is in the IRA, the income and gains on his share are tax-free.
  • If he’s in a low bracket and has other money with which to pay the tax on the conversion, consider some Roth conversions.
  • Consider leaving the IRA to a charitable remainder trust for the grandchildren to replicate the stretch.
  • Bruce Steiner

Submitted by Norman Cook on Mon, 2019-12-23 21:19

Since the parent will not be withdrawing from the new taxable mutual fund.With the children inhearting a taxable IRA the step-up  cost assuing a 8%  ROI and the parent lives for more 10 years  will be about $1Million tax free — that is no capital gains.

Submitted by David Mertz on Mon, 2019-12-23 22:49

Since the tax bill would be the same for a distribution from the traditional IRA that is not rolled over and for the same amount converted to a Roth IRA, it would be far better for the growth on that amount to be entirely tax free in a Roth IRA than to have the growth on the same money outside of a retirement be subject to tax on dividend and capital gains distributions, rely on the step-up in basis on the appreciated mutual funds and be subject to taxation on all growth after the mutual funds are inherited.  Converted to Roth, the money could stay in the Roth IRA until the 10th year following the year of death of the participant and at that time distributed and invested in taxable mutual funds.  Given all of the upside and no downside of a Roth conversion over simply distributing money, proposing distributing an amount beyond the amount of the RMD just to put it into a taxable mutual fund now would be irresponsible.

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