switching RMD method for inherited non spouse IRA
I inherited my late Fathers IRA in 1988, at the age of 40. He died befor RBD, but, had taken distribution. The custodian advised me to take my RMD based on my “Single Life Expectancy” – 43.6 years in 1988, then reduce the life expectancy factor by one, each succeeding year. I have calculated my RMD using this method for the past 26 years. Am I locked into this RMD method of reducing by one each year, OR, can I swith to using the “Single Life Expectancy” table? This would give me a better stretch. THANKS!
Permalink Submitted by [email protected] on Wed, 2014-11-05 21:11
You are bound by IRC and are taking it correctly. His taking of distributions prior to dying has no impact. One thing you could consider would be to take your RMDs(or more) from your inherited IRA and use those funds to pay taxes on conversions of your own Traditional IRA to a Roth. There would be an optimal amount of conversion of Traditional to keep you in a comfortable tax position, but you would be exchanging inherited IRA money for TF Roth money for yourself and your heirs down the road. Your own IRA provides a better stretch to your beneficiaires than your inherited IRA.-M
Permalink Submitted by ellen dawmdellipizzi on Tue, 2014-11-11 17:43
How would I do this? How could I ascertain the optimal amount of traditional IRA funds to convert to Roth?
Permalink Submitted by Alan - IRA critic on Tue, 2014-11-11 17:52
This is complex, but basically you would only convert if the rate you pay for the conversion is not more than the rate you will pay in the future if you do not convert. The determination requires educated guesses about your future tax rates. Some people find it useful to do incremental small conversions between retirement and claiming SS benefits, and the small amounts prevent the tax rate paid for the conversions from increasing. The conversions are limited so they do not exceed the current marginal tax rate.
Permalink Submitted by [email protected] on Wed, 2014-11-12 03:13
I agree it is complex because it depends on a lot of factors. For example if you are receiving social security and are paying tax on less than 85% of it, any additional taxable income will cause more of your social security to be taxed, effectively taxing the additional income at a higher rate than the expecdted marginal rate. For example, you may think you are in the 15% marginal, but could be effectively taxed at 27.75% on any additional money due to more ss being taxed. There are other considerations such as AMT, tax credits, deduction elimination, etc. So, best to meet with competent advisor and/or CPA that is very familiar with this if you want to engage in optimization.
Permalink Submitted by Alan - IRA critic on Thu, 2014-11-06 01:02
In 2002 the IRS released revised RMD Regulations. Included was adoption of a new mortality table reflecting increased life expectancy. You started your RMDs under the prior 1987 single life table. Back in 2002 you were allowed to transition over to the new tables which reduces your RMDs by a small amount. You can still do this, but any increased amounts you distributed since 2002 cannot be changed. If you have not taken your 2014 RMD yet, you can enter the Single life Table using your age as of 12/31/1989. You still have to reduce the initial divisor by 1.0 each year, which totals to 25 for 2014. For example, if you were 41 on 12/31/1989, the revised initial divisor is 42.7. Subtracting 25 results in a 2014 RMD divisor of 17.7, which should be somewhat more (lower RMD) than what you would be taking without transition to the current table. If 41 is not correct, the above example would be one year off, but you could easily figure out the correct divisor for 2014 and into the future.
Permalink Submitted by ellen dawmdellipizzi on Thu, 2014-11-06 11:17
Thank you. One further question – On the custodian’s “Distribution Request Form by Beneficiary”, the “Election of payment” for “Non Spouse individual beneficiary” [participant died before RBD] there are 2 choices for a distribution request. #1. over my single life expectancy. #2. over__ years[not to exceed my single life expectancy] Which one should I select? And, if it is #2, how many years do I fill in the blank?
Permalink Submitted by Alan - IRA critic on Thu, 2014-11-06 16:30
Select #1.