Modelling Inherited Non-spousal IRA

I anticipate inheriting both a Regular IRA and a Roth IRA sometime in the future. I will end up with more than enough to live on, and I want to return the favor to my descendants by ensuring that I don't spend all of my retirement accounts before death, so that I also leave a bequest of IRAs to them.

I am modelling the Inherited Regular IRA as an Employer Contribution in the year I anticipate the inheritance. I did that to ensure that RMDs were calculated but my AGI not impacted. The Roth IRA is modeled as a Roth Contribution, even though the rules for Inherited Roth IRAs are enough different to make that problematic - I don't see a better way.

The challenge I'm facing is ensuring that I don't spend all of the Retirement Accounts using the "Specify percent of non-annuitized assets to be spent" on the Smooth Withdrawals tab. This seems to work just fine when I don't have a lump of money coming in late in life; I can see the program holding back withdrawals. But when I add the inheritance as mentioned above, the program seems bent on spending every bit of it, regardless of what I enter in the "Percent of assets to spend" box. Am I doing something wrong?

A related question: When I enter "Percent of assets", what's the percent based on? If I say 50%, I can't see that it's half of anything.


dan royer's picture

The 50%, I believe, is half of the available assets unless RMDs kick in, then they are honored even if they are more than half. But I assume if RMD is less than half, you'd see half of the normal smooth withdraw. So I think if you said 100% you'd see the normal smooth withdraw, then 50% would be half of that. I didn't double check that, but this sounds right to me.

I'm not sure why the lump sum would be a problem.

I'd have to build a model and test it I guess.

If there are tax issues you are dealing with perhaps special receipts would be a way to first deal with a tax issue before you make the deposit?

I'll see if I can replicate the issue. We might need a support ticket.

n0dyjeff's picture

OK, so I think you're saying that at 50%, each year would withdraw 50% of what the normal smooth withdraw (which would take the account to 0 at end of life). I can understand that. So if I wanted to end up with a certain amount, I'd just play with the percentages until it came out right. Thanks!

Here's a few more details to build a model against. Husband 57, wife 50. Both work and have 401(k)s and IRAs. Both retire at 65. Assume an inheritance about 10 years out from today, valued in today's dollars at about the half the value of the couple's Retirement Accounts as of today. Put it into the husband's Employer account. (Forget about the Roth, it doesn't make any difference either way to what I'm seeing.) If you set the parameter to spend say, 80% of husbands and 80% of wife's, you'll see that it spends all of the husbands account (passing nothing to wife on his earlier demise), but it does hold back some of wife's.

If you remove the inheritance contribution, it holds back husband's spending and passes the remnant on to wife, who also holds back and passes remnant onto remaining heirs upon her demise.

I can enter a support ticket if that's warranted.

dan royer's picture

I don't know the rules about inherited IRA or ROTHs and I don't know that the program would know if a ROTH contribution was inherited. I don't see how it would know that. But I read the following: The distribution payout period over which funds must be emptied from that (inherited) IRA is determined by YOUR life expectancy as the original “designated beneficiary.” Even if you die and leave it to someone else, the number of years of remaining payout has already been determined – it does not “reset” because someone else inherits the account. The total payout period is fixed by the life expectancy of the original designated beneficiary.

It could be that ESPLanner is spending all the ROTH by design. I'd have to ask Larry, or you could give him a call. 617 834 2148

n0dyjeff's picture

I'm pretty sure the program presently has no way of knowing the Roth IRA is inherited. My point is just that an Inherited Roth has RMDs, which makes it need to be treated differently than a normal Roth. If you chose to take it in a lump sum, it could easily be modeled at a tax free Special Receipt.

I'm probably way too far into the weeds on this. :-) Thanks

Try using what I call a "safety factor" approach. This is the cleanest method I've found after sensitivity testing each variable and going through every forum comment.

Spending less than ESPlanner’s recommendations can be easily modeled using a “safety factor” approach based on the “Standard of Living” (SOL) index in the Assumptions tab. To do this, create a copy of your profile and set your last few years to a high SOL. This forces the program to reduce consumption in earlier years and preserves assets for late in life. Essentially, you are shifting potential consumption to the end of your life (or the life of your spouse). This can be used to create a margin of safety, gifts or bequest, as a resource for late in life healthcare and/or long-term care or other reasons.

The beauty of this approach is that it preserves all of the year by year taxes, spending, asset levels, etc. that are part of ESPlanner’s calculations and reports so you do not have to guesstimate them with side calculations. This can also be used to create different safety factors ($ or %) at different points in time.

The approach is very flexible and only takes a few minutes to fine tune. For example, say you want to spend 10% less than ESPlanner’s “ceiling” for the next 2 years, then 5% less until end of life. To do this, keep the Standard of Living at 100 for 2 years, then raise it slightly to say 110 for several years, then raise the SOL again to 200 or higher during the last few years of life. The exact numbers will vary depending on your specific profile, but this should get you in the right neighborhood. Each year, you can adjust the safety factor again as you wish.


n0dyjeff's picture

Thank you, Brian. This seems like a logical approach. I'll give it a try.


dan royer's picture

Yeah, Brian taught me that approach and I use it a lot.

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