We have a lot of cash in our Inherited Ira. If we take out cash as an RMD, how is that taxed?? As the whole amount? Thanks.
As you are considering conversions,think about how you would fund assisted living/nursing home fees. Generally tax deductible,so I am leaving at least four years of nursing home costs in a traditional IRA. I will not convert all to a roth.
My asset positioning now is 20% taxable/35% tira/45% roth. Our withdrawals will be from our traditional ira’s until we are at 20/20/60.We will maintain that ratio for the balance,hopefully optimizing less tax discoverable lifetime and less tax liability for our heirs.
Jk
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I can’t speak for churches, but I would imagine just about anyone would prefer to receive full payment up front. The danger with recurring payments is that the donor might stop at some point if they feel the monthly obligations become too much.
I have two automatic charitable payments each month set up with my bank’s bill pay service. The first one began when my wife suggested we support the food bank that is run in a room off the local church. I was agreeable. When she died, and expenses dropped, I doubled the amount, then increased it a bit more later. When COVID hit I doubled it. It isn’t a fortune, but it is substantial enough that I doubt they have anyone else close to what I send them. I fear it may be almost all they have to work with, and the idea of making it an annual lump sum concerns me. I have no way to guess how well they manage money, much less deal with it over a year. That was in a small town, with mostly working folks and few McMansions.
Since then I moved out of that town to somewhere far more prosperous. I’ve kept up the contributions where I used to live, but now a modest amount also goes to the food bank where I live now. This one isn’t part of a church, and I get an acknowledgement letter every month. I suspect they could handle a lump sum better, but the lump would be relatively small.
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We have a lot of cash in our Inherited Ira. If we take out cash as an RMD, how is that taxed?? As the whole amount? Thanks.
If there was no after tax contributions, then all of the RMD is taxed as regular income.
It doesn’t matter how the distribution is taken, the value on the day of distribution is taxed as regular income.
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Webspired,
Good luck to you in figuring this all out. We are in similar situations but I am a bit older. Have burned through some taxable positions in the past few years… But it was all for better planning. Paid off Mortgage and debt free. I am also fortunate enough that I also have a pension. The retirement account money we dip into occasionally for large purchases and have been building up 529’s for grandkids. So RMDs will go to items like that . Can live on Pension and SSA Benefits for the most part. Was in the last groups hired with full pensions from corporations. Most of those vanished in late 90’s and early 2000’s as we started changing to 401K’s.
Just plan on what you will do to keep the Taxes and RMD’s under control when you start Medicare.
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- After both of you die, if you will be leaving your remaining Traditional accounts to a beneficiary other than a charity, that beneficiary will only have 10 years to empty out the accounts, with all of the withdrawals taxed at ordinary income rates. If the accounts contain a substantial amount, that could boost your beneficiary’s tax rate to a higher rate than you would have paid if you had withdrawn the money yourself. So if you want to have the lowest possible taxes paid on your Traditional accounts, it may be useful for you to make withdrawals yourself, especially if your beneficiaries are already in the 24%/28% bracket without income from your retirement accounts.
Or, if not a withdrawal, do a conversion from regular IRA to Roth IRA. Future growth is tax free.
Or, if not a withdrawal, do a conversion from regular IRA to Roth IRA.
Unless, for instance, the withdrawals are used to pay for long-term care, in which case, they would probably be mostly tax-free, as pointed out in one of my other things to consider:
- If you are self-funding for any long-term care, the medical costs over 7.5% of your income that are generated by the long-term care will be deductible on Schedule A. It’s more beneficial to have ordinary income (like from taxable SS and Traditional IRA withdrawals)
It’s all dependent on each individual’s specific circumstances, so each individual needs to determine their own balance. That said, because it still is useful to have ordinary income to fill up the standard deduction, it’s probably not a good goal to completely convert Traditional accounts to Roth accounts, if you want to minimize total taxes paid.
AJ
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Absent any other legislation, the current 22% and 24% tax brackets are scheduled to increase to 25% and 28% as of 1/1/26. So 2023 - 2025 will be a great time to do conversions, into the 24% bracket …
At first I thought likewise. But then, if the new law (with higher rates) comes into effect on 1/1/26, any income tax that is due that year will be based on what happened in 2025. And that seems to argue that 2025 is not a good year for a conversion. 2023 and 2024 seem safe though. (Or am I still confused?)
culcha
But then, if the new law (with higher rates) comes into effect on 1/1/26, any income tax that is due that year will be based on what happened in 2025. And that seems to argue that 2025 is not a good year for a conversion. 2023 and 2024 seem safe though. (Or am I still confused?)
Effective on income after 2025. Not taxes due for 2025 in 2026. There is still time for changes in the tax laws for 2023 and after.
(Or am I still confused?)
Yes, you’re confused. You are mixing up when the tax return is due vs. when the conversion is executed.
Taxes on conversions are based on the tax laws in effect at the time they are executed. (Note: This is different than the rules for original contributions, which generally can be made until April 15 of the following year.) So, a conversion executed on Wednesday, 12/31/25 would be taxed based on the rates in effect on 12/31/25. If current law doesn’t change, that will be the 10%/12%/22%/24% brackets. A conversion executed on 1/2/26 (since Thursday, 1/1/26 is a banking holiday, the first opportunity to execute a conversion would be on Friday, 1/2/26) would be taxed at the rates then in effect, which would be the 10%/15%/25%/28% brackets.
Since most taxpayers are calendar year based, absent requesting an extension, a taxpayer doing a conversion on 12/31/25 would need to file their tax return reporting that conversion by April 15, 2026, while the taxpayer doing a conversion on 1/2/26 wouldn’t have to file their tax return documenting that conversion until April 15, 2027.
AJ
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Thank you, vkg.