Options on an Inherited IRA | Ed Slott and Company, LLC

Options on an Inherited IRA

My friend's mother died at age 80. She has an IRA and the beneficiary is the estate. My friend is the only heir to the estate. She is currently trying to get the custodian to allow her to withdraw via Single life expectancy RMD. But today her accountant told her it would be better to do lump sum withdrawal and pay taxes at 25%. He said based upon her income tax rate, that if she withdrew over time based upon the RMD schedule or if she took a lump sum, she will pay approx. same amount of taxes. Which is better? My friend does not need the money and does not plan to retire for another 5 years. Your help in advance is most appreciate.

This probably depends on the amount left in the IRA. At the compressed income tax rates of an estate, the total estate income including the full IRA must be nominal to fall into the 25% bracket. I guess that could be the case, and her individual bracket could be higher. Or the prospect of getting the IRA assigned to her when the estate terminates is a procedure they are trying to avoid. Your friend (or the estate) could use her mother's remaining single life expectancy to distribute the IRA over 10 years, 5 of which she would be retired and perhaps in a lower bracket. Would have to know her present tax bracket and retiree tax bracket plus amount of the IRA to know for sure, but if the accountant is correct, the IRA would have to be quite modest. She should also determine if her Mother had any basis in the IRA so that some of the distribution would be tax free. To do that, her post 1987 tax returns would have to be reviewed for Form 8606 reporting non deductible contributions.

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