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Inheriting an IRA

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Replies to: Inheriting an IRA

  • HImomHImom Registered User Posts: 33,535 Senior Member
    edited February 12
    Yes, you could take funds out of mom’s IRA that she wants to distribute and keep in a regular account so any taxes will be vs her estate instead of vs your income. The assets would still be available for her care of needed or spending down to Medicaid.

    Agree that spending an hour or two with cpa now could be worth a lot of time and money saved after mom dies.
  • yourmommayourmomma Registered User Posts: 1,189 Senior Member
    Actually she'll be giving gifts from her inheritance. Not a lot of legal implications. It's on the honor system. If mom wants to guarantee the distributions then she needs to put them in an estate document. Doesn't sound like that's necessary. There are in fact some not greedy people out there.
  • Nrdsb4Nrdsb4 Registered User Posts: 16,441 Senior Member
    There are in fact some not greedy people out there.

    It's not always about greed. Some people are very hurt when they perceive an unfairness about the way funds are distributed-they see it as a personal rejection, or favoritism, etc. Sometimes the messenger receives the brunt of that hurt. I'm concerned that is going to happen to me, and it actually is all in writing.
  • CreeklandCreekland Registered User Posts: 5,091 Senior Member
    There's next to no chance mom will need medicare. She has awesome insurance left over from her job and isn't likely to outlive any changes to that plus she has plenty to go into an assisted facility for quite some time if she decides to. So far she hasn't wanted this, but she might in the future. She's hitting a rough patch now so that topic might come up again soon. Regardless, no money is being distributed until after she passes anyway - just in case.

    Otherwise, there really isn't anything complicated and NY is superb at letting folks know exactly what needs to be done with an estate on their website - as I've discovered with my dad. Gifts mom wants to give will come from "my" funds afterward and she's being really fair with that, so no resentment even if friends talk with each other afterward. In her family, the youngest sisters never got to go to college due to family income, so the older sisters have been assisting them occasionally even while alive due to the difference in jobs/income obtained. No one will object to mom continuing to do so. The grandkids are expecting nothing and will be appreciative of what they get - total fairness on that too. That leaves sis and I'll be ok with her, esp since mom will be leaving her something vs nothing. She's very rarely content/happy regardless of what happens. She could win the lottery and something would still be wrong/unfair. Nothing new there.

    Quite honestly the tax implication from the IRAs was the question - everything else has been worked out or is in the process of being worked out as mom settles on what she wants. Seems the "worst" is the state/feds might get more in tax $ than they could have. Since "my" tax dollars only go for "good" things (the rest of you pay for the cruddy things), that's not super horrid, though I'll see if she feels up to changing things later this month. If not, at least I know what I'm dealing with. I appreciate that. Anything more known in advance beats being surprised when actually dealing with it.

    I will have sis ask her lawyer about the house transfer. It appears she'll have her choice of mom's or dad's. Mom's is far better in condition, but she might like dad's location better. Both are (or will be) mine, so I'll need to sell her one of them for $1. I see plenty of these sales in our newspaper, so it should be able to be done, albeit I'm in PA and she's in NY (as are the houses). I'll just need to know if the taxes involved in the sale can be worked off that $1 or have to go by an appraised value.
  • yourmommayourmomma Registered User Posts: 1,189 Senior Member
    If your serious about giving sis the house, get mom to do it. She'll take it at the stepped up basis and shouldn't have tax issues. If you try to "sell" it you may create problems for yourself. Bottom line on all your questions is try to keep it clean as possible.
  • allyphoeallyphoe Registered User Posts: 2,120 Senior Member
    edited February 13
    Whoever inherits the house gets a stepped up basis. I agree that a transfer on death deed naming the sister is a much cleaner way to handle it - a sale for $1 is a part gift part sale transaction, with the most annoying parts of both. Just gift it if the TOD deed isn't practicable.
  • CreeklandCreekland Registered User Posts: 5,091 Senior Member
    Mom is supposed to be talking with sis about the house - but I honestly don't know if that's her top priority right now with the current health issues. Maybe. If not, I'll figure it out.
  • mikemacmikemac Registered User Posts: 10,180 Senior Member
    edited February 13
    you might want to call around and find a CFP that specializes in retirement issues. There is a forum with people that love financial questions at https://www.bogleheads.org/forum/viewforum.php?f=1 where you might want to post.

    One thing I haven't seen in the thread is whether your mom wants to donate anything to charity. If so then it can be done w/o owing taxes on the donation. See https://www.investopedia.com/taxes/can-i-use-money-my-ira-donate-charity/ She can make the donations now if she wishes

    Another question is whether its worth having her withdraw all the money now from the IRA, assuming it isn't too large. She can then put it into a safe investment such as a money market fund and leave it to you in a brokerage account set up as transfer-on-death so it doesn't go thru probate. I'm assuming she qualifies for penalty-free withdrawal. The sum will be taxable but the overall taxes may be lower depending on her current income and yours. If you inherit the IRA and take money out, even over time, the money coming out will be taxed at your marginal rate.

    It might also be worth investigating whether it makes sense for your mom to do a Roth conversion now. She will owe taxes just as if she had withdrawn all the money, but then you can inherit it and roll it into your own Roth. See https://www.rothira.com/blog/how-to-use-a-roth-ira-to-avoid-paying-estate-taxes
    It actually also has me also wondering if H and I want to sell some of our other investments when the time comes to keep our portion of hers (transferred to me) for the tax advantage.
    May not be an advantage. Right now any annual taxable returns from your investments can be kept small if in tax-efficient index funds, and qualified dividends are taxed at capital gains rates. In the future when you sell these investments the gains are taxed at capital gains rates. If you sell your investments and buy equivalents in the IRA then you've turned any gains past the time you do this from capital gains into ordinary income.

    Caution: i'm not a financial planner, CPA, etc. so these are just ideas to investigate and not financial advice ;-)
  • CreeklandCreekland Registered User Posts: 5,091 Senior Member
    @mikemac Thanks. So far donating hasn't been on mom's mind - just giving to friends. I can ask if she starts to feel better. It's entirely possible her doctor will admit her to the hospital tomorrow and it probably should have been run past the dr today (after fluids and meds yesterday didn't last long), but mom didn't want to. Sis is with her. I'm eight hours away, so trying to keep tabs and wondering if I should be dropping everything to battle the snow and ice heading north. As it stands, I'm still going to school tomorrow and will be waiting. All this to say I don't really want to press these issues with her right now... but if she improves, then I will in a day or two. If not, I'll deal with what I have to deal with and pay what we need to pay. Mom has a lot of physical and emotional stress ATM.

    Her IRAs are significant enough that if she pulled all her money out in one year her tax bracket would probably be higher than ours.

    The investment I'm contemplating liquidating instead is real estate that took a dip in the economic downturn but has since recovered. We haven't actually "earned" much on it though so "profit" wouldn't affect our taxes a lot, but selling would return our invested amount freeing it up for something else. Real estate did very well for us in the past. Right now other things could do better. When I have numbers I'll calculate them and we'll contemplate our options. The area is still growing, so it will depend on how much we expect more growth, etc.
  • yourmommayourmomma Registered User Posts: 1,189 Senior Member
    @Creekland I don't know the family dynamics and mom's condition, but it might be work considering becoming her agent and doing all the legwork with the advisers. Assuming you have a good idea what you mom wants, you can get everything laid out for her so she doesn't need to go thru all the what ifs and buts advisers like to through out. I know my mom would just shut down when it started to become too complicated (but our family dynamic was a mess). Once you have it set up, you can review it with her and fill out any papers which need completed.
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