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My 31 y.o. single son asked for advice about distributions from an inherited (trad) IRA & I think the master has surpassed the student. He received information about the IRA with an amount to be sent to him. (I think it is the first RMD). I suggested he get more information because he didn't really get all the info he needs to make a good decision - like the total that will be his.

However, he will be getting a 20% raise this month and pretty much has his retirement savings already well in hand. He pointed out that his tax rate will only go up from here on out and he's right. Depending on the total amount he has inherited from the IRA, it may be a smarter move to take bigger distributions sooner than later.

No debt, paid off car and likely to soon buy a house(he owned one before but hasn't since changing locations a few years ago) and already pretty much enjoying his life.

He is also likely to inherit more outside the IRA but no idea how much.

Suggestions ?
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Sorry for your/his loss. And props to you for being such a good teacher.

He pointed out that his tax rate will only go up from here on out and he's right. Depending on the total amount he has inherited from the IRA, it may be a smarter move to take bigger distributions sooner than later.

Especially with the tax rates due to increase back to the previous rates after 2025 (unless Congress passes a new law), he may want to consider emptying the entire account in or before 2025. It would probably only make sense to do so if he doesn't bump himself into the next bracket.

No debt, paid off car and likely to soon buy a house(he owned one before but hasn't since changing locations a few years ago) and already pretty much enjoying his life.

I'm sure he/you have already thought of this, but the IRA might be good extra money for a down payment, or to do renovations.

AJ
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He pointed out that his tax rate will only go up from here on out and he's right. Depending on the total amount he has inherited from the IRA, it may be a smarter move to take bigger distributions sooner than later.

Yes, this. I'm sure you also pointed out to him that taking a distribution doesn't necessarily mean he has to spend the money. If paying lower taxes now rather than higher taxes later is the goal, he could reserve however much he needs to cover the tax bill and invest the rest in the plain vanilla investment account of his choice.

The best investment/savings vehicle depends on his total financial picture, but it sounds like he's smart enough to figure the details out on his own.
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The only question I would add were this my son would be whether he anticipates his filing status to change in the next five years or so. If he thinks it possible/likely that he might be married, and if his significant other makes significantly less than he does (or they plan to start a family quickly), he might find himself in a lower bracket at that time.
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I'm sure you also pointed out to him that taking a distribution doesn't necessarily mean he has to spend the money.

I didn't. He was asking how to evaluate the distribution choices. He's 31 with his finances well in hand and unless asked, I wouldn't comment on how he spends his money.
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The only question I would add were this my son would be whether he anticipates his filing status to change in the next five years or so

Again, outside the bounds of the conversation. He does his own taxes and know how the filing status impacts the outcome.
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i have told my kid to take the smallest distribution for the longest time as possible...

he has a job and doesn't need the money...invest the rmd after taxes and let that grow...

i am a firm believer in the more legs of the stool the better...this also puts him in the position

to retire from the workforce much earlier than most.
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He pointed out that his tax rate will only go up from here on out and he's right. Depending on the total amount he has inherited from the IRA, it may be a smarter move to take bigger distributions sooner than later.

Especially with the tax rates due to increase back to the previous rates after 2025 (unless Congress passes a new law), he may want to consider emptying the entire account in or before 2025. It would probably only make sense to do so if he doesn't bump himself into the next bracket.


the problem with cleaning out the money is he pays taxes when he dumps it...and either spends it and gives up the opportunity to invest it or he invests it and pays taxes on his investment returns... take the minimum...let the money continue to grow tax free...then if he thinks he needs to spend the rmd so be it...he has an opportunity to do as he pleases at a much younger age...i hope he doesn't blow it!
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he has an opportunity to do as he pleases at a much younger age...i hope he doesn't blow it!

Why always assume the worst about someone you don't know ? He does't want to retire early at all. He has talked about getting to a pension at this job and moving to begin one somewhere else. He really likes his job (& this is about 7 years in after making a considered decision to change location). 20% raise this month.

He IS doing as he pleases. Loves his job. Since the beginning of year, he skied in Japan and is just back from hiking to Machu Picchu. It's too bad more people don't like the life they live.
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the problem with cleaning out the money is he pays taxes when he dumps it

If he will end up paying less in taxes by taking it out earlier, then it can be a benefit to take it out now. Given that he is early in his career, in combination with the current tax law, it is likely that the marginal rate he pays on the withdrawals will rise from here. Depending on when he retires, he still likely has 20+ years to pay those higher marginal rates while he's working.

i hope he doesn't blow it!

Given that at 31, he has no debt (compared to the average ~$30k for his age, after excluding mortgage debt http://money.com/money/5233033/average-debt-every-age/ ) has a paid off car, has already bought and sold one house, and will likely be buying another soon, I kind of doubt he's the type to 'blow it' - but if he wants to spend the money on something that he values, then that's his choice.

AJ
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let the money continue to grow tax free

Actually, the money is only growing tax deferred, not tax-free. And all of that growth will be taxed at ordinary income rates, even if it is capital gains or qualified dividends, which are taxed at lower rates. So, depending on the investments chosen, there may actually be a tax disadvantage to keeping the money in an inherited IRA.

AJ
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Perhaps but there are no taxes on dividends or other gains within the IRA. Those would all be taxed if he invested the same money into a taxable account and made occasional investment changes, different stocks or funds or what have you. And if he had a job / income loss at some point he could tap into it as an emergency fund and pay less in taxes, perhaps.
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Perhaps but there are no taxes on dividends or other gains within the IRA.

Sure there are, but they are deferred until you take the money out. And worse yet, gains are taxed as ordinary income so you lose the potential benefit of the lower LT cap gains tax rate, and you lose the ability to manipulate tax loss harvesting. The question is will your taxes be lower now or down the road when you take distributions? RMDs start small, but they add up quickly. Run one of the RMD calculators to see how large those RMDs get as you age. The OP is wondering if it's best to pull the funds out now while their taxes are low.

It's a smart question. If it goes into a taxable account just look for low taxable income producing investments. Think ETFs or individual stock rather than mutual funds.

IP
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Is he fully funding his own TIRA/ROTH IRA? Taking the distribution and converting it to a ROTH would allow it to grow tax free and the contribution can be withdrawn at any time without taxes or penalties.
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Yes, the taxes are deferred, but the gains are compounded if reinvested within the IRA. And another poster notes the possibility of rolling it over into a Roth, though I believe there would be taxes owed at that point, though you can create a ladder and, as you note, time these moves for the best tax advantage. A lot of work for a kid, maybe, but he can also wait until he seems a tax bracket change looming.
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In other words, if I have a $1 dividend or gain to re-invest and the government takes a bite out of it upfront, then I only have 70 cents to invest in the taxable account. Multiply that by 100,000 and 70 years, and you're talking real money. In the tax shelter, I can continue to fully invest in the IRA and choose when to pay the tax, hope for a change in the law, manipulate my income in a given year when I withdraw, etc. And if I am so lucky as to have so many tax-sheltered accounts that I have no choice but to pay some taxes in old age, well, I guess that makes me lucky.
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And another poster notes the possibility of rolling it over into a Roth, ...

To my knowledge you can't convert or roll over an inherited IRA into a Roth. He could take the proceeds net of taxes and use those to pay taxes on Roth conversions of any existing traditional IRAs, IF he has them.

IP
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To my knowledge you can't convert or roll over an inherited IRA into a Roth.

It was my post. I should have used the term contribute instead of convert. My suggestion was if he isn't funding his own TIRA/ROTH an option is to take the distribution from the inherited IRA and contribute to his own TIRA or ROTH.
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right, essentially the same as a conversion -- you pay taxes when you do that with a regular IRA as well
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right, essentially the same as a conversion

No, it's not essentially the same thing as a conversion. You must withdraw the money and it CANNOT be directly converted to a Roth IRA. You may put it into your checking account, along with all of the money from your paycheck, and then take out a sum to make a Roth IRA contribution. Since money is fungible, so who's to say if it's money from your paycheck or money from the IRA withdrawal?

There are specific limits on Roth IRA contributions for both your income and the amount that can be contributed each year to Roth IRAs. For conversions, there are no income limits and the only upper limit on what can be converted is how much you have in the Traditional IRA and how much you want to pay taxes on. So, conversions are very different from contributions, and not 'essentially alike' at all, other than they both are a means to put money into a Roth account, and you have to have paid income taxes on the amount put in.

you pay taxes when you do that with a regular IRA as well

You pay taxes based on the required withdrawal from an inherited IRA. For a conversion, there's no amount required to be converted. The similarity is that you will pay taxes on the amount converted, but there's no requirement to do a conversion.

AJ
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