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My father passed away and I have a sizable amount of money in an inherited IRA (about 2 times my yearly salary). I don't have any debt to pay off as I already own my home, auto, no credit card debt, and an existing well funded 401k.

This year I am required to start taking distributions. I really don't need any of the RMD money at this point, so I need to put it somewhere for long term growth. I wish I could just leave it alone.

I was initially thinking of putting this money in to a Roth IRA. However, I learned that there is a $5K limit per year for contributions to this. I would prefer to get out of the situation where I take yearly distributions as soon as possible, since I just want to let the money sit and grow in a low maintenance cost Vanguard fund, but I'm worried about losing a lot of this to taxes.

I'm not sure how to move the money from my Inherited IRA to another type of retirement account or index fund. Any suggestions? Should I try and do this over the course of a couple years or stretch it out longer?

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Fyi, I am far from retirement. I'm about 30 years old. –  user5043 Nov 5 '11 at 16:21
I'm also already maxing out my 401k as well. –  user5043 Nov 5 '11 at 16:26
yes, all money in the inherited ira was pre-tax, so I am taxed on the money when I take a distribution. –  user5043 Nov 5 '11 at 19:17
It looks like what I'm going to do is take the RMD this year and defer detailed planning till next year. Next Year, I'll just go ahead and open up a ROTH IRA and deposit my RMD in to this new account, possibly along with some additional personal contributions. I'll leave as much of the existing balance in the current Inherited IRA as possible each year. –  user5043 Dec 29 '11 at 17:20

3 Answers 3

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Unless I'm misunderstanding something, you don't need to move your assets into a new type of account to accomplish your goal of letting your money grow in a low cost vanguard index fund.

Simply reallocate your assets within the Inherited IRA. If the brokerage you're in doesn't meet your needs (high transaction fees, no access to the Vanguard funds you're interested in) you can always move to a low cost brokerage. The new brokerage can help you transfer your assets so that the Inherited IRA remains intact.

You will not have a tax burden if you do this reallocation and you'll be able to feel good about your diversification with a low cost index fund. You will, however, have to pay taxes on your RMD. Since you're young I can't imagine that your RMD will be greater than the $5k you can invest in a Roth IRA. If it is, you can open a personal account and keep letting the the money grow.

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RMDs, by definition are required. Normally at age 70-1/2, but for inherited IRAs, commencing with the year after death. Taxes are due on the amount withdrawn each year. The amount doesn't have to be sold, just distributed, i.e. it can be taken as stock out of the IRA, but tax is due. Your answer is confusing to me, obviously. –  JoeTaxpayer Nov 11 '11 at 23:03
Hi Joe, Sorry for the confusion. I was responding to Benzo saying, "I would prefer to get out of the situation where I take yearly distributions as soon as possible, since I just want to let the money sit and grow". An Inherited IRA is a fine place to let money sit and grow. It seemed to me that he didn't realize that he could just re-allocate within the account he has. If he does this, he will not have a tax burden. Does this make sense? –  Julia Nov 15 '11 at 19:27
Sure, Julia. For what you quote, he has little choice, right? RMDs are forced. He can change investments within the Inherited IRA, as you suggest, but to stop RMDs requires a complete distribution of the assets. –  JoeTaxpayer Nov 15 '11 at 19:34
This answer and the OP's idea of putting the RMD into a Roth IRA (effectively rolling it over after paying taxes) is suggesting actions that are not permitted. A RMD cannot be rolled over into another IRA, whether Traditional or Roth. Since money is fungible, you can contribute cash that you received as a RMD to your IRA (instead of making your annual contributions from your take-home pay or savings account) but the total amount that you can contribute and/or deduct is subject to the annual contribution limit of $5500 etc. –  Dilip Sarwate Apr 17 at 20:20

Does your company offer a 401(k) and are you taking maximum advantage of it? 2011 limit was $16,500, an extra $5,500 if you are 50 or older. The RMD shouldn't be too large, it depends on your age, of course. You're in no worse shape than anyone hitting age 70-1/2 and having to start taking their RMDs. If you are younger, your RMDs start pretty low. If I look at Pub 590, I find a 50 year old starts with a 34.2 divisor, less than 3% each year. At 60, it's 25.2, just under 4%.

Edit - someone around 30 will have a divisor around 53.3 the first year. Just under 2%. I don't know what you consider "sizable," but much above $300K in that IRA and you'll have more come out than you can fund into a Roth. Regardless of the amount, the RMD is taxable. You just need to pay the tax from other funds if you wish to keep the money invested as it was.

You will pay the tax at your marginal rate, and that's it. This is the one downside of the inherited IRA, unlike regular money, it doesn't escape taxes. But, your dad put it in pre-tax (right?) so the amount you got is larger for that fact.

I'm sorry for your loss.

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One of the things to consider is that most Vanguard funds are very tax efficient, that is they don't throw off much in the way of cap gains or taxable dividends while they grow.

So if you do it right you won't have to pay much in the way of taxes on your investments even if they are in taxable accounts until retirement when at the very least you will have a lot more flexibility in managing your money and very likely be in a lower tax bracket.

Roth is better if you are planning other types of investments, but if you are planning to hold an efficient Vanguard fund the difference isn't that bit.

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