What are the taxes due on an Inherited IRA

[AnnuityGuy63]

I have a 47 year old client with an inherited IRA from the parent that just died in January, parent was 70... turning 71 this coming May, well not anymore.

The IRA DB received is $145K. The beneficiary wants to reinvest $50K with me into an annuity and use the other $95K to pay off student loans and the balance used for a down payment on a house. I'm trying to find out what the taxes are for her not reinvesting the inherited IRA...
Anyone anyone?

Bueler Bueler?

 

[Yagents]

If its an IRA, all money taken out is fully taxable as income for federal and state taxes.

 

[CALTCAgent]

The IRA DB received is $145K. The beneficiary wants to reinvest $50K with me into an annuity and use the other $95K to pay off student loans and the balance used for a down payment on a house.

Better tell them their math is wrong. They are going to need to hold out money for taxes. They may be in a high tax bracket now too.

 

[DHK]

They could spread it out over several years (not to exceed 10) to limit the tax liability, but I'm sure that's not in their plans.

 

[LostDollar]

I have a 47 year old client with an inherited IRA from the parent that just died in January, parent was 70... turning 71 this coming May, well not anymore.

The IRA DB received is $145K. The beneficiary wants to reinvest $50K with me into an annuity and use the other $95K to pay off student loans and the balance used for a down payment on a house. I'm trying to find out what the taxes are for her not reinvesting the inherited IRA...
Anyone anyone?

Bueler Bueler?

Does the wording of your question (reinvest, reinvesting) mean that she has already taken the money out of the inherited IRA?

 

[AnnuityGuy63]

The clients income last year was $36K. she's in the 12% tax bracket presently, but from what I thought all IRA funds from the inherited IRA ($145k) $90K not reinvested is taxed as ordinary income.
$36K + $90K= $126K puts her in a 24% tax bracket not including standard deduction and any other deductions she will owe about $30K from the 90... netting her about 60K.

I have tried explaining all of this to her but some people just don't care or don't want to listen... I think it's more they don't care because they see the money coming to them as a win fall. Shame.

 

[Tahoe Ray]

The clients income last year was $36K. she's in the 12% tax bracket presently, but from what I thought all IRA funds from the inherited IRA ($145k) $90K not reinvested is taxed as ordinary income.
$36K + $90K= $126K puts her in a 24% tax bracket not including standard deduction and any other deductions she will owe about $30K from the 90... netting her about 60K.

I have tried explaining all of this to her but some people just don't care or don't want to listen... I think it's more they don't care because they see the money coming to them as a win fall. Shame.

She wouldn't owe 24% on 90k (or 126k). That's not how tax brackets work. You would need to compute her blended tax rate.

I had a mentor tell me a long time ago:

"Don't give tax advice unless you are both paid and qualified to do so"

Not meant to be a slam on you, I don't do it either.

Just tell her on any withdrawal, it's all ordinary income tax. She should set aside a good chunk if she liquidates the IRA and if she can roll some into an annuity with you, that she can spread out that tax hit over 10 years.

My experience, people who make 36k/yr and inherit 100k+ liquidate the entire thing, spend most of it, lock the rest up, and then come yelling at you when tax time comes.

Friendly advice, be careful with this one.

 

[Allen Trent]

Slow this down.

Is this in an existing Annuity IRA thatay have an older guranteed interest rate for a payout annuity death claim? If so, she could elect to annuitize the contract for up to a max of 20 years. This would continue to pay interest & also spread the $145-160k taxable over 10 years, thus minimizing taxes most likely.

A lump sum is likely her worst choice as putting 145k on her tax return will cause higher taxes.

If she insists on paying off student loans in lump sum, don't take another $50k out merely to reinvest. Leave it inside the inherited IRA as she can take any or all at any time while sitting as a death claim account then, on 1/1 of next year you could look to take balance out to at least get that spread over 2 tax years.

Right now, $36k single will only have her owing a total of $2,600 in federal taxes after standard deductions. Throwing $145k on top of that in 1 year will make that federal tax bill $34k,meaning an extra $32k on $145k (22%) plus state taxes at whatever state she lives in. Won't owe 10% early distribution penalty as it will be coded as death on 1099R.

Now, compare that to receiving say $15-$16k each year over 10 yrs. That $16k a year will only trigger $2k more each year of federal taxes at current rates. That is $20k tax over 10 years compared to 32k if she empties in 1 lump sum. That is giving away $12k in federal taxes alone.

IRS & State Tax Calculator | 2005 -- 2022

PS. I think you are mixing terminology. There is no tax for her not reinvesting an inherited IRA. The money doesn't have to be reinvested. It can sit on deposit as a death claim for up to 10 yrs receiving whatever low interest death claim rate the carrier is paying currently (or higher if the contract has a contractually higher death claim interest rate). Also, the death claim of an Annuity IRA will also have a choice to annuitize/payout annuity/settlement option on the claim form. No taxes will be reported in these situations until checks are distributed to the beneficiary