Non-Spousal Traditional IRA Beneficiary

Submitted by Robert Santucci on Sat, 2021-05-01 20:12

I have read that under the Secure Act for non-spousal beneficiaries of a traditional IRA, the beneficiary is better off taking around a 10-12% withdrawal per year during each of the 10 years following the death of the original owner. The logic being that total taxes are lower as opposed to waiting til the 10th year and withdraw everything in the final year (10th). I have run some spreadsheets on inherited traditional IRA’s and the result is favoring just the opposite and leans toward not touching the inheritance until the last year. The spreadsheet conditions were: average 6% market gain in each of 10 years. Marginal tax bracket is 18% for 10-11% annual withdrawals annually and a 37% marginal rate if you withdraw everything at the end of 10 years. I realize that with an inherited Roth account, you are better off waiting until the end of the 10 year to withdraw everything. Can you recommend the best way to maximize a non-spousal traditional IRA withdrawal? Thanks.
R.Santucci



Submitted by Alan - IRA critic on Sat, 2021-05-01 20:58

Your spreadsheet must not have factored in the 6% ROR on the amounts distributed annually, and if those taxable brokerage investments were sold at the year of the inherited IRA period, many of the gains would be qualified dividends and LT cap gains. Paying 19% more on a lump sum distribution at the end would probably not be beneficial if you factored in the gains on the amounts distributed annually. 
That said, there will be people whose individual situation in some of the 10 year period varies such that they might distribute more in low tax years, rather than attempting to equalize the taxable amount of the distributions from the IRA. 
Some people use annual distributions to subsidize contributions to their own workplace plans. Pre tax 401k contributions for those who are not maxed out already will offset the tax impact of the inherited IRA distributions, and these amounts in an owned plan will not be subject to RMDs except for a modest annual requirement starting at 72. 

Submitted by BruceM on Sun, 2021-05-02 16:37

There are 4 assumptions on variables that must be taken into account when trying to decide at what rate to remove funds from an inherited IRA under the new 10-year rule (11 year if a withdrawal is taken in the year of death)Assumptions:1. The withdrawals are not needed for current household income but will be accrued and consumed at a later date2. The average annual rate of return for both the inherited IRA and taxable account3. Tax on ordinary income withdrawals. This assumes no sudden change in marginal tax rate over 10 year period4. Tax rate on taxable account, assuming taxes will be paid from the accountIf the inheritance is modest….say under $100k….my SS shows that holding it as long as possible and paying tax on the full withdrawal at the end of the 10th year would leave a larger balance than equal annual withdrawals. But make the inheritance, say, $400,000 and the tax bite gets so big at the end of the 10th year, to include such surtaxes as the NIIT, IRMAA and potential phase-outs of other benefits/deductions, that equal annual withrawals makes more sense. 

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