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Should my dad take more than the required minimum distribution from his IRA?

MARKETWATCH 9:11 AM ET 4/17/2017


Strategically taking additional distributions can be a good move

When members of a family are in different tax brackets, planning opportunities abound.

Q.:My single 90-year-old father has a traditional IRA in which he takes out only the RMD annually, about $2,000. It is worth about $100,000. My father only gets Social Security, no pension or other income sources.

Would it not be smarter for him to take a larger withdrawal? The IRA withdrawal would go into a regular savings account. Then upon his death, I would then receive the proceeds from the savings account & not have to pay any tax on the inheritance as a result. His net worth is below a half million. Thanks for considering my question.

-- George S.

A.: George, yes, if his goal is to preserve the funds for you, strategically taking additional distributions from his IRA can be a good move. Some money can come out tax-free due (http://www.marketwatch.com/story/how-much-can-i-take- from-my-ira-tax-free-2016-07-08)to deductions and his personal exemption but even if he takes a substantial amount out, as long as he pays taxes at a lower rate than you would pay when you take distributions after you inherit, you come out ahead.

Before I get into some options, you should double check his numbers. In order for the required minimum distribution (RMD) for a 90-year old to be $2,000, the Dec. 31, 2016 balance would need to have been $22,800. If it was $100,000, the factor from the IRS table is 11.4 so the RMD would be $100,000 divided by 11.4 or $8,771.93.

There are three actions I see most often in situations like this. The first is basically what you describe: Take the money and park it a non-retirement account like a savings or brokerage. There may be taxable income while the senior is alive from interest, dividends, or capital gains but the assets will usually pass tax-free upon his death even if the investments have gained.

The second is to convert IRA monies to a Roth IRA. He has to take his RMD first and can only convert additional amounts above the RMD to the Roth. He won't pay any taxes on the investments within the Roth. If it has been more than five years (http://www.marketwatch.com/story/your-inherited-roth-ira-may-not-be-tax-free-2016-11-11) since he opened his first Roth IRA when he passes away, the whole thing is tax-free. If it has been less than five years, some earnings could be taxable to you depending on when you take distributions.

The third popular option for the IRA withdrawal money is to give cash to you and other heirs that are eligible to fund your own Roth IRAs. When he dies, you do not have to take any distributions until you want to because no RMDs apply to your Roth IRA. If you inherit his Roth IRA, you must either distribute funds based on a RMD schedule or empty the account in five years or fewer. Therefore, having funds in your Roth IRA can mean many more years of tax-free growth. However, only a maximum of $6,500 can go in your Roth ($5,500 if you are under 50).

Dan Moisand's comments are for informational purposes only and are not a substitute for personalized advice. Consult your advisor about what is best for you. Some questions are edited for brevity.

-Dan Moisand; 415-439-6400; [e-mail]

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