How can I best calculate the fiscal impact of these two choices?

  1. Take a $50k distribution from a traditional IRA to offset an expense, thus saving taxes now.
  2. Leave the money in the IRA, allowing tax deferred growth to continue over 33.3 years.

The $50k deduction will be lost if not offset by income. The current tax savings would be 24% of half of it, or $6000.

If left in the IRA, the distribution schedule is over 33.3 years, with the same split (one beneficiary currently pays 22/24% tax, the other is indigent and does not pay tax). Meaning the first year there would be $50,000 more in the IRA, the second year $50,000 minus the $1500 RMD, and so on. So the first year the $50,000 might earn 6% or $3000 which would then be dribbled out over time as RMD and taxed. Over time the tax paying beneficiary might retire and drift down in tax bracket.

How can I best calculate the impact of each choice? Yes I can set up a spreadsheet, but there are so many assumptions....

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  • Use a spreadsheet. It's made for questions like this.
    – RonJohn
    Commented Dec 31, 2019 at 18:05
  • Why can't the $50K loss be carried forward?
    – TTT
    Commented Dec 31, 2019 at 18:14
  • It is legal fees in a trust account. Can't be part of a net operating loss, according to my tax adviser.
    – Bryce
    Commented Dec 31, 2019 at 20:05
  • OK. In that case my gut says, given the option to make a $50K tax free distribution from a traditional IRA, you take it. There may be a contrived situation that works out better if you don't (large decrease in future tax bracket), but there are probably a bunch of "ifs" required that you may not have full control over. (Still do the math though...)
    – TTT
    Commented Dec 31, 2019 at 22:06
  • Strictly speaking you are not "saving taxes now" by taking the distribution. The current taxes will be the same whether you take the distribution or not, right? The comparison is about future taxes.
    – nanoman
    Commented Jan 1, 2020 at 4:22

1 Answer 1


Yes, if it will enable the deduction and not incur any IRA penalty (per your tax adviser), you should take the distribution. If you leave the $50k in the IRA, the beneficiaries will eventually pay tax at ordinary income rates on the $50k and all earnings from it. If you invest the $50k outside the IRA, taxes will be owed only on the earnings, likely at favorable rates for qualified dividends and long-term capital gains; the latter (capital gains) will be deferred anyway until investments are sold (and this deferral can be even longer because there are no RMDs). Thus, whatever the beneficiaries' tax brackets over time, they will generally keep more of the money if it's outside the IRA -- barring something like a heavy bond allocation that incurs non-deferred ordinary-income taxation of interest.

EDIT: JTP points out that an even more favorable option is a Roth IRA conversion. In this case, the $50k and its earnings would be tax-free.

  • 2
    Instead of a withdrawal with potential 10% penalty, how about a Roth conversion? Commented Jan 1, 2020 at 4:30
  • As an inherited IRA, I don't think the 10% early penalty applies, right?
    – Bryce
    Commented Jan 1, 2020 at 9:42
  • The The SECURE Act effective January 1, 2020 modifies the stretch IRA in ways that make this even more complex to calculate. Yeah, that's the Setting Every Community Up for Retirement Enhancement Act.
    – Bryce
    Commented Jan 1, 2020 at 9:46
  • 2
    @JTP-ApologisetoMonica - if there's a way to convert the trad IRA to a Roth IRA, while using the $50K loss to offset the tax normally owed on the conversion, then this is the perfect solution.
    – TTT
    Commented Jan 1, 2020 at 23:31

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