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I was recently informed that I will be a non-spousal beneficiary of an Inherited Roth IRA. My understanding is that I will have no required RMDs, but will be required to empty the account by the end of a ten-year period. I will have no need for these funds for that period so I will let them remain untouched until I’m required to take a total withdrawal. But how should they best be invested over that ten-year certain period? The conventional investing wisdom directs me to be in stocks if I have that length of time. Though with each passing year that investing horizon shortens…. eventually to the point where I would like to be reasonably assured that I have significantly more money to withdraw than what I inherited.
Not withstanding the variable 10-year glidepath philosophies offered by financial firms, is investing in a 10-year target date fund an appropriate strategy for reaching my goal? This 10-year withdrawal requirement is a more recent update to the Secure Act, so no one has yet reached the 10-year time limit. How are you investing your Inherited Roth IRA? Or, if you were to inherit one, what investment strategy would you employ?
i am sorry there was a typo in my poasting. I typed “Bio” instead of Bil’,
Bio: It is always nice to inherit a roth ira. At the end of the 10 year period if the market is down at the time you should transfer the roth ira investment to a non ira fund of the to non ira fund of the same kind.
Also consider if you plan for the inheritance to remain invested after the tax-free 10 year growth period. At 10 years, you could do a full or partial in-kind (non-cash) distribution, allowing you to transfer assets into a taxable account. I too would keep the Roth for the 10 years, but I would begin thinking how to structure the investments for longer term if I didn’t need to sell.
Thanks for this suggestion. If I understand you correctly, if I see holding these funds for a longer timeframe (say a total of 20 years), I might keep fully invested in stocks for the initial 10-year period. Then there is a financially-legal mechanism that would allow me to keep my stock assets and move them into a taxable account. This would eliminate the need to cash out my stocks in the Roth IRA and then purchase stocks in a taxable account.
I don’t think it makes much difference whether you transfer in kind or sell and repurchase. Maybe just transaction costs.
Just less time and mental energy.
Bill – what a blessing to inherit a Roth account. I believe a Roth (inherited or otherwise) is the tax bucket that should be the most aggressively invested, and the after-tax and tax-deferred buckets can be adjusted to achieve desired overall risk.
My Roth is 100% stocks split roughly 65% tech index funds and 35% S&P 500. I plan to keep my Roth at 100% stocks regardless of remaining life expectancy which is currently 14.4 years.
I concur, John. The challenge is that I lose my Roth status with this inherited account after ten years. I don’t want to risk cashing out at year 10 when the sequence-of-returns monster showed up for the previous few years. It seems, with Jo Bo’s suggestion, that I could at least ride out the effects of a down market by doing an in-kind (non-cash) distribution, allowing me to transfer my stock into a taxable account and giving them more time to recover.
Bill – If most concerned about SORR, you can always start shifting investments or withdrawing some tranches in the final years 5-10. Since the market goes up 2/3 of the time, it is still most likely best to maintain tax-free Roths in stock for the full 10 years and make adjustments elsewhere.
For example, last year my aggressive Roth portfolio increased 31% while my after-tax portfolio increased 20%, my main IRA increased 22% and my smaller IRA increased 12%. I clearly would have been far better off if my whole portfolio were invested like the Roth or just 100% in the S&P (up 25%), but my non-Roth IRAs are set up with some de-risking particularly in the smaller IRA.
Another consideration. If I remember correctly, the withdrawal requirement will be passed to your heir(s) if you die before the 10 year point. So if you inherit in 2025, then the account must be empty by 2035 regardless of who is the beneficiary.
Thanks, Jeff. I will duly note that for my spouse on the financial affairs crib sheet I have set up for her.
Tax wise is waiting for ten years and then taking it all a good strategy?
I’d bet taxes are going to be higher in ten years-at least.
We’re talking about a Roth, so withdrawals are tax-free.
Right, sorry I missed that. Interesting law that it can be inherited and remain tax free.
Interesting question. I think the answer is going to be different by life situation and how you see the purpose of the money.
If I had a reason to spend the money I might go ahead and take a total withdrawal. I’d have the money so I don’t need to draw from elsewhere, possibly incurring taxes, and I wouldn’t clutter my finances with another account.
If it’s just going to be part of my retirement portfolio, I’d allocate 100% percent to stocks like my other Roth accounts. If the account is big enough that this meaningfully changes my overall allocation, I’d adjust it in a Traditional IRA. When the time comes to take it out, I’d again adjust accordingly in a Traditional IRA so my overall allocation stays the same.
Now, if I have a particular purpose for the money in ten years, then I might consider a glide path as you suggest or even go ahead and put it mostly in bonds, again adjusting in my Traditional IRA so my overall allocation stays what I want it to be.
Thanks for your IRA-specific response, Michael1. I don’t expect to have any specific need for those funds post-withdrawal (and at least 10 years after) so, considering some of your IRA strategies is helpful.
I think your plans are excellent.
One other suggestion which might seem counter intuitive is if it makes sense for Bill to do a Roth conversion of his own traditional IRA would be to use these funds to pay the taxes owed for the conversion rather than using funds in his own taxable account if he would be forced to pay capital gains tax on appreciated assets. This would allow his own additional traditional to Roth conversion dollars from the inheritance to appreciate tax free without the ten year limited timeframe.
The net effect would be the same as using money from a savings account to pay the taxes on the conversion. If he were to be utilizing these funds to pay the taxes on the conversion how he would invest the money would depend on how quickly he would drain these funds. Bill could set up 100% of the inherited Roth withdrawals to be sent to the IRS thus not having to pay estimated quarterly taxes. After all the taxes to be paid on the additional conversions has to be paid out of Bill’s funds from one account or another.
Good insight, David. Though I am currently active in my Roth conversion sweet spot (two more years before taking SS at 70), I realize I might have some conversion opportunities after that. And what you suggested makes sense when looking at the bigger sphere of the financial account triad. Sounds like you view the world like Mike Piper!
“Sounds like you view the world like Mike Piper!”
I listen/read ANYTHING Mike Piper is involved in.