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Inherited IRA strategy Secure Act

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Hi everyone,

 

 

I need some advice please. I inherited a traditional qualified IRA in March 2020 and I am trying to strategize an asset allocation and drawdown plan to maximize gains while preserving capital. A little about me:

 

-42 y/o, single, no kids, no heirs, no real estate property

-I am a Non-eligible designated beneficiary

- I will be in the 12% tax Income bracket over the next 10 years as I only plan on working PRN

-Currently in CA but will establish residency in no income tax state in 2021

 

The new Secure Act mandates that I empty the Inherited IRA within 10 years (no RMDs required). Once withdrawn, I plan to reinvest the money into my taxable 3 fund account and live off of the interest.

 

Here is what my portfolio looks like:

 

1)$850k Inherited IRA; in managed funds with high fees (was an annuity IRA) *rollover in progress

 

2)$250k Tax Deferred 50/30/20 asset allocation FSKAX/VXUS/FXNAX

 

3) $650k - cash (pending sale of inherited houses)

 

4) $25k Roth IRA Invested in REITs

 

5)$150k Taxable account 50/30/20

ITOT/VXUS/FXNAX

 

Total = $1,925,000

 

I plan to rebalance when all funds are finally transferred to a more holistic approach but not 100% sure what is the smartest way to handle this. Info/discussion is limited as the Secure Act just went into effect this year. I’m meeting with a FA next week and want to go in prepared. Any advice would be greatly appreciated!

 

Thanks,
R

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Re: Inherited IRA strategy Secure Act

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@RMG77 wrote:

Hi everyone,

-42 y/o, single, no kids, no heirs, no real estate property

-I am a Non-eligible designated beneficiary

-Contemplating retiring early and living abroad where cost of living is low. If I go this route(which is very likely) I will not have any income from employment over the next 10 years

-Currently in CA but will establish residency in no income tax state in 2021

That is a good plan. You don't mention your current tax rate, but with an income in the range of $58K -$295K, you'd be in the 9.3% bracket in CA. So I'd imagine TX, WY, WA, FL, AK might be on your shortlist.

The new Secure Act mandates that I empty the Inherited IRA within 10 years (no RMDs required). Once withdrawn, I plan to reinvest the money into my taxable 3 fund account and live off of the interest.

Actually 11 years if you take the first withdrawal in the year of death, which I assume to be this year. Here's a breakdown of the amount of withdrawal each year, assuming equal annual withdrawal amounts for 11 years as compared to what it would have been had you inherited the TIRA in 2019

Question in Morningstar.jpg

This assumes an average annual return of 7%

Here is what my portfolio looks like:

 

1)$850k Inherited IRA; in managed funds with high fees (was an annuity IRA) *rollover in progress

Wise. Be prepared for some foot dragging on the part of the current IRA custodian holding the inherited IRA, so you need to stay on top of it.

2)$250k Tax Deferred 50/30/20 asset allocation FSKAX/VXUS/FXNAX

Confused. Is this your own TIRA or an employer retirement plan?

3) $650k - cash (pending sale of inherited houses)

This will not be taxable assuming the sales price is equal to or less than fair value on day of death. You'll likely transfer this into your taxable brokerage account.

4) $25k Roth IRA Invested in REITs

 

5)$150k Taxable account 50/30/20

ITOT/VXUS/FXNAX

 

Total = $1,925,000

Looks like about $800K in taxable accts, rest in tax deferred + Roth.

I assume you'll be seeing a Fee-Only CFP for advice? If so, what he/she will likely do is combine all sources of investment income and build a single  portfolio allocation, based on years to retirement, cash flow needs and risk tolerance.

I have no idea what overseas related issues you face, so hopefully others will shed some light on that.

The other issue you need to consider is how to title your accounts, such as 'Payable on Death' and primary beneficiary on your retirement plans and successor on your inherited IRA, assuming you have living relatives, such as siblings or parents, and if not these, then charities.

As mentioned, your health insurance may be your major expense, depending on whether you work and the employer offers a group plan. Also, watch your liability insurance, as the $800K is available to creditors. The FA should be able to speak to these issues.

$1.9MM seems like a lot but it really isn't for an early 40-something retirement, depending on CF need. This is what the FA should be able to calculate for you, taking reasonable assumptions.

Post back with how your visit to the FA went

BruceM


 

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Re: Inherited IRA strategy Secure Act

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$2 million can be reasonably allocated to live in a low/moderate cost US State. 

At such young age, healthcare will be quite expensive.

With global tensions rising, consider the possibility that if you move out of the country, at some point, you may also be disconnected from your US portfolio due to possible restrictions on money transfers/withdrawals.

Unless, you move much of the money to the country you intend to live in, and that may have its own risks.

YBB
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Good luck with that thought.  Most banks overseas wont deal at all with Americans AT ALL,  due to FATCA.  If you wore a hat from another country you wouldnt be treated like a LEPER.  

Most US brokerages will lock you out when you try to sign in with an overseas IP address.  You would need to maintain a US address and a US phone number.  Very tricky at best.

You will have more difficulties than you imagined.  Easy to do if you are NOT an American.

Our liberties we prize and our rights we will maintain?  Nope.

Land of the free?  Not on my watch.

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Re: Inherited IRA strategy Secure Act

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2 posters here, @norbertc and @chang can give you some advice. They are both expatriates.


@RMG77 wrote:

Hi everyone,

 

 

I need some advice please. I inherited a traditional qualified IRA in March 2020 and I am trying to strategize an asset allocation and drawdown plan to maximize gains while preserving capital. A little about me:

 

-42 y/o, single, no kids, no heirs, no real estate property

-I am a Non-eligible designated beneficiary

-Contemplating retiring early and living abroad where cost of living is low. If I go this route(which is very likely) I will not have any income from employment over the next 10 years

-Currently in CA but will establish residency in no income tax state in 2021

 

The new Secure Act mandates that I empty the Inherited IRA within 10 years (no RMDs required). Once withdrawn, I plan to reinvest the money into my taxable 3 fund account and live off of the interest.

 

Here is what my portfolio looks like:

 

1)$850k Inherited IRA; in managed funds with high fees (was an annuity IRA) *rollover in progress

 

2)$250k Tax Deferred 50/30/20 asset allocation FSKAX/VXUS/FXNAX

 

3) $650k - cash (pending sale of inherited houses)

 

4) $25k Roth IRA Invested in REITs

 

5)$150k Taxable account 50/30/20

ITOT/VXUS/FXNAX

 

Total = $1,925,000

 

I plan to rebalance when all funds are finally transferred to a more holistic approach but not 100% sure what is the smartest way to handle this. Info/discussion is limited as the Secure Act just went into effect this year. I’m meeting with a FA next week and want to go in prepared. Any advice would be greatly appreciated!

 

Thanks,
R


 

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@chang follows precautions such as keeping US address, use online transactions but not call or mail from overseas, etc. If he sees this, he may reply with details.

YBB
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Re: Inherited IRA strategy Secure Act

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@RMG77 wrote:

Hi everyone,

-42 y/o, single, no kids, no heirs, no real estate property

-I am a Non-eligible designated beneficiary

-Contemplating retiring early and living abroad where cost of living is low. If I go this route(which is very likely) I will not have any income from employment over the next 10 years

-Currently in CA but will establish residency in no income tax state in 2021

That is a good plan. You don't mention your current tax rate, but with an income in the range of $58K -$295K, you'd be in the 9.3% bracket in CA. So I'd imagine TX, WY, WA, FL, AK might be on your shortlist.

The new Secure Act mandates that I empty the Inherited IRA within 10 years (no RMDs required). Once withdrawn, I plan to reinvest the money into my taxable 3 fund account and live off of the interest.

Actually 11 years if you take the first withdrawal in the year of death, which I assume to be this year. Here's a breakdown of the amount of withdrawal each year, assuming equal annual withdrawal amounts for 11 years as compared to what it would have been had you inherited the TIRA in 2019

Question in Morningstar.jpg

This assumes an average annual return of 7%

Here is what my portfolio looks like:

 

1)$850k Inherited IRA; in managed funds with high fees (was an annuity IRA) *rollover in progress

Wise. Be prepared for some foot dragging on the part of the current IRA custodian holding the inherited IRA, so you need to stay on top of it.

2)$250k Tax Deferred 50/30/20 asset allocation FSKAX/VXUS/FXNAX

Confused. Is this your own TIRA or an employer retirement plan?

3) $650k - cash (pending sale of inherited houses)

This will not be taxable assuming the sales price is equal to or less than fair value on day of death. You'll likely transfer this into your taxable brokerage account.

4) $25k Roth IRA Invested in REITs

 

5)$150k Taxable account 50/30/20

ITOT/VXUS/FXNAX

 

Total = $1,925,000

Looks like about $800K in taxable accts, rest in tax deferred + Roth.

I assume you'll be seeing a Fee-Only CFP for advice? If so, what he/she will likely do is combine all sources of investment income and build a single  portfolio allocation, based on years to retirement, cash flow needs and risk tolerance.

I have no idea what overseas related issues you face, so hopefully others will shed some light on that.

The other issue you need to consider is how to title your accounts, such as 'Payable on Death' and primary beneficiary on your retirement plans and successor on your inherited IRA, assuming you have living relatives, such as siblings or parents, and if not these, then charities.

As mentioned, your health insurance may be your major expense, depending on whether you work and the employer offers a group plan. Also, watch your liability insurance, as the $800K is available to creditors. The FA should be able to speak to these issues.

$1.9MM seems like a lot but it really isn't for an early 40-something retirement, depending on CF need. This is what the FA should be able to calculate for you, taking reasonable assumptions.

Post back with how your visit to the FA went

BruceM


 

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Re: Inherited IRA strategy Secure Act

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Bruce...thanks for table.

Question: How did you arrive at the $105,938 annual withdrawal figure, for the new rules IRA drawdown?

TIA

R48

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@retiredat48 wrote:

Bruce...thanks for table.

Question: How did you arrive at the $105,938 annual withdrawal figure, for the new rules IRA drawdown?

TIA

R48


7% return, 11 periods, withdrawals at beginning. Finance calculator verifies it.

YBB
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Yes, Yogi is right. My TI BA II Plus financial calculator comes up with the same $105,938 value. But what you see in the table I did in Excel.

If you send me an e-mail at incomeonly at comcast dot net, I'll reply back with the Excel SS so you can do some what ifs using various amounts at different years.

BruceM

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You can access your US brokerages and US banks from outside the country.  I have done that many times.  There are people who left the US because of our handling of Covid have not reported any problems accessing and transacting in their US financial accounts.  Chang lives in Thailand and has never complained about operating his US bank or brokerages.  You can use a local money center bank for local expenses and transfer money between a US money center bank and the local bank as needed.  If you have the same bank (e.g., Citi, BoA, etc.) on both sides that is even better. 

Edit: I see Yogi replied.

 

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@RMG77 ,

What do you plan to do overseas?  You are very young to be doing nothing all day. 

Too much cash and too much time are not a good combination - just saying.

Whatever country you plan to move to, I would make a couple of temporary moves of at least six months each (to get a good comprehension of suitability) before making a permanent move.   I would not make any investments in those countries for the first five years.

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Bruce,

What percentage of assets do you recommend one carry general liability insurance for?

I recently switched home insurance and the new company limited liability insurance to $500K.  The significant area of potential liability I always worry about is from people working on my house and how do you limit such a liability?   I recognize there are always curve balls or stuff from the left field in life.

Thanks.

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Thanks Bruce...already sent e-mail.

So the $105,938 is a starting value...because portfolio will not follow exact 7% return estimate.

One almost needs to divide actual portfolio value at years end, by the years remaining, to get a smoother annual withdrawal amount...no?  The IRA must be taken to zero after 10 years.  So for instance, if $300,000 IRA portfolio size remains with 2 years to go, the withdrawal would be 300000/2 = $150,000 in the second-last year.

R48

 

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Anitya

What we'd recommend for those with large taxable accounts (usually from inheritance or sale of a business), is to up their liability on auto and home to that required (usually $300K to $500K) to then stack on top of that a 1 or 2 $Million umbrella liability policy. That way, if they're sued for some loss others incurred due to say, a motor vehicle accident, then they'd be covered, whereas with a 'normal' auto liability of, say, $200K, the liability claim could easily exceed that and so the individual would have to draw from taxable savings. Retirement plans are exempt from such liability claims. And such umbrella policies are relatively inexpensive.

Talk to your insurance agent about adding an umbrella liability policy.

BruceM

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Bruce,

Good reminder on umbrella. 

I do not think non-qualified retirement assets (e.g., IRA assets) are protected from personal liabilities.  It is possible, state law controls.  One of the reasons not to rollover employer 401(k)s, but those plans have such poor investment choices that it is better to rollover and buy an umbrella.

P.S.: AAA home insurance allows upto $1.5M liability so  I had rolled my umbrella into the home insurance.

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@BruceM wrote:

Anitya

What we'd recommend for those with large taxable accounts (usually from inheritance or sale of a business), is to up their liability on auto and home to that required (usually $300L to $500K) to then stack on top of that a 1 or 2 $Million umbrella liability policy. That way, if they're sued for some loss others incurred due to say, a motor vehicle accident, then they'd be covered, whereas with a 'normal' auto liability of, say, $200K, the liability claim could easily exceed that and so the individual would have to draw from taxable savings. Retirement plans are exempt from such liability claims. And such umbrella policies are relatively inexpensive.

Talk to your insurance agent about adding an umbrella liability policy.

BruceM



I’ve traveled a lot over the past 20 years often staying in countries for more than 3 months at a time.  How long I would stay depended on visa requirements and how much time I could take off work.  I’ve always had an early retirement in mind, so during my travels I would try to live like a local and determine if I liked the country enough to move there permanently one day.  I‘ve never had problems accessing bank or investment accounts while overseas and also plan to keep

my US based cell phone number active to call in if I absolutely need to.  As far  as medical insurance, I was planning on purchasing catastrophic international health insurance and just paying out of pocket for minor medical issues.  With teledoc and other online medical services, you are able to call a US based doctor from anywhere in the world or you could just goto a doctor in the more wealthy areas of the foreign country that you are in and it will often be 10x less expensive than in the US.  I think some Americans can be ethnocentric in the fact that they think that doctors/medical care outside of the US aren’t comparable when the truth is they can be just as good, if not, even better.  

I had a planned to retire at 50 y/o but I recently lost my mother(hence the inheritance) and she worked until 70y/o, saved all of her money, barely started collecting social security, and then just passed away very abruptly.  Life is not promised and I do not want to die with a large bank account, what’s the point of that?  

While living abroad, I plan to take online courses, learn the local language, and do volunteer work.  Most likely I will still have a home base in the US but I’ve just decided that the rat race is not for me.  With my profession I can easily re enter the workforce and work as much or as little as I need to so Im not worried on that end. 

My main objective in posting on here was to determine how to allocate and withdraw an inherited IRA under the new secure act.  Since I have to take the entire balance out in 10-11years, would it still make sense to keep the funds invested in a 45/30/25 asset allocation like my other accounts? Or should I be more conservative and maybe do 50/50? Which type bond fund would you use? Etc. 

Thank you for all of your replies thus far btw. 

 

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@BruceM wrote:

Anitya

What we'd recommend for those with large taxable accounts (usually from inheritance or sale of a business), is to up their liability on auto and home to that required (usually $300K to $500K) to then stack on top of that a 1 or 2 $Million umbrella liability policy. That way, if they're sued for some loss others incurred due to say, a motor vehicle accident, then they'd be covered, whereas with a 'normal' auto liability of, say, $200K, the liability claim could easily exceed that and so the individual would have to draw from taxable savings.

Retirement plans are exempt from such liability claims.

This a  bit tricky. Qualified plans such as a 401(k) or 403(b) are but a TIRA follows state law. Some states have no protection.

 

And such umbrella policies are relatively inexpensive.

Talk to your insurance agent about adding an umbrella liability policy.

BruceM


 

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@RMG77 ,

You obviously have figured life out - very impressive at your age.   Completely agree with your assessment on foreign health care.  

Sorry about your mother passing.  

As to how much risk you should take with your money is really a personal choice.  Fortunately, only recently we had a massive market drop to give us a recent assessment of our risk tolerance.  I would adjust your risk (up or down) based on how you reacted to the recent market events.  The primary purpose of money is to buy convenience.

I shall send you an email and feel free to reply with any questions you might have. 

Thanks.

A

 

 

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"Retirement plans are exempt from such liability claims.

This a  bit tricky. Qualified plans such as a 401(k) or 403(b) are but a TIRA follows state law. Some states have no protection."

Well, yes....sort of. As said, qualified plans covered by ERISA are 100% exempt from creditors with two exceptions: former spouses through a Qualified Domestic Relations Order (QDRO) or, very rarely I understand, IRS liens for back taxes. Its referred to as 'antialienation'. Prior to 2005, IRAs protection from creditors was determined by the state, but in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act exempted TIRAs and RIRAs up to about $1.3MM in 2020 (inflation adjusted) from the bankruptcy estate while including SARSEP, SIMPLE and SEP IRAs in with qualified plans as unlimited protection except as I've noted. However, states vary on access to IRAs through court injunctions as well as other claims that are short of bankruptcy.

BruceM

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"Since I have to take the entire balance out in 10-11years, would it still make sense to keep the funds invested in a 45/30/25 asset allocation like my other accounts? Or should I be more conservative and maybe do 50/50? Which type bond fund would you use? Etc."

your asset allocation is irrelevant to RMDs. As I said earlier, a competent FP will combine all your investable accounts into one conceptual account and asset allocate it based on your required rate of return, risk tolerance, age and CF need and perhaps tax issues (a small consideration if considered at all). Whether that is in an IRA, 401(k), SARSEP, 457(b) or taxable account is irrelevant. When the RMD time comes, sufficient shares of some assets held in the IRA that equals the amount of the RMD will be transferred in-kind to the taxable account, thus maintaining your asset allocation....the RMD DOES NOT change this. CF planning will determine what, if anything, must be sold to generate the cash that will likely go into 'cash buckets' for household income need to include the taxes on the RMD.

You are trying to tie certain accounts to certain investment allocations. You need to think of all savings as a single account and manage it as one.

BruceM

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