For parents, it's a natural desire to leave something to the next generation -- but passing down some prosperity is not without its complexities. Case in point: The rules around how heirs have to treat retirement accounts they receive as bequests can put them in less than the ideal position from a tax perspective.
In this segment from Motley Fool Answers, host Alison Southwick is joined by senior analyst Jason Moser and Motley Fool Wealth Management's Ross Anderson to discuss strategies for a listener looking for advice about how to handle the IRA his father left him.
A full transcript follows the video.
This video was recorded on Nov. 27, 2018.
Alison Southwick: The next question comes from Keith. "About six years I inherited my father's IRA. So far I've only taken the required minimum distributions each year. This year due to an extended job search, my wife and my income will be considerably less than it has been in the past year. Given that temporary drop in income and the fewer tax brackets, now, should I take a larger distribution this year in an attempt to take advantage of this low tax year of ours? I'd only take enough to keep it in the same tax bracket and would either move the investments into a post-tax brokerage account for our retirement, or alternatively cash the distribution out and pay down a variable interest HELOC whose rates have been climbing up. Thanks, Keith."
Ross Anderson: I am sorry to hear that the job search is taking longer than anticipated, but I love the question. This is a perfect question, because you're doing some tax planning, right now, and that is perfect.
In low tax years -- and in the situation he outlined -- this is a perfect example of one. Another one would be somebody that retires, maybe, before they're ready to take Social Security and has a few years of low or no taxes. No income coming in. That is a perfect time to look at some tax planning. So yes, I would consider accelerating some distributions.
Now, if you're going to use the money to pay off some debt or some current cash needs, that's totally fine. If you're going to invest the dollars, I would encourage you to look at a Roth conversion, instead, because you're going to pay the exact same taxes except you can move that money into a Roth IRA where it's going to grow tax-free and come out tax-free later on and that would be even better to supercharge your low tax year.
Ross Anderson is an employee of Motley Fool Wealth Management, a separate, sister company of The Motley Fool, LLC. The information provided is intended to be educational only, and should not be construed as individualized advice. The Motley Fool has a disclosure policy.