Converting an IRA

In the ongoing resolution of my late father’s estate, my sister (the successor trustee of our parents’ no-longer-revocable trust) found among his assets two IRAs totaling about $200K, and with each of their offspring naamed as share-and-share-alike beneficiaries. When the will was discussed with his (now my sister’s) lawyer, he advised us that rather than ljquidate those IRAs, pay applicable taxes, and distribute the money among the ten of us, it would be to our advantage for each of us to open an IRA account with the firm managing the IRAs, and split the IRAs into the ten accounts, allowing each sibling to decide when and how to liquidate his or her own share.

We have all now submitted our completed account applications, which means that soon, I will have my very first IRA. I know nothing about having an IRA, largely because I’ve never expected to have one. I do have a Thrift Savings Plan account, and am vested in the Federal Employees Retirement System through my employment with the USPS. Ive also been given to understand that I am eligible to make “catch-up” contributions to FERS so I can add my years of military service to the calculation of my eventual retirement benefit.

It’s my understanding that once I start drawing money from the IRA, I will owe taxes on it. But Ive also been given to understand that there are uses to which I can put the funds that will allow me to defer the taxes even longer.

Is rolling the money over into my FERS catch-up contribution and/or adding it to my TSP balance among the options available to me?

In the event that these do not permit me to defer taxes, and I decide to just take the cash, how big a tax bite should I expect to see?

You will end up with an IRA and your TSP. Following your retirement from Fed service, you can and should roll your TSP into your IRA (or into a second IRA). There is no tax obligation for a direct roll-over to an IRA.

I’m unfamiliar with catch-up contributions adding military service years (I was a civilian only). Can’t help you there. TSP catch-up usually refers to additional contributions you can make to your TSP after the age of 50. In my case (old CSRS), I could send a maximum of 10% plus a catch-up amount each year. Google TSP catch-up for more information.

You have a tax obligation for regular IRA withdrawals. There is also a mandatory withdraw amount after age 70.5 based on your balance and life expectancy.

Another option is to take your estate IRA payments, pay the income tax, and reinvest the remainder in a Roth IRA. A Roth IRA accumulates interest/dividends/capital gains tax free and the distribution upon retirement is also tax free (certain conditions apply - always something for the tax lawyers).

Your lawyer or tax accountant can advise based on your specific situation and desires.

“Is rolling the money over into my FERS catch-up contribution and/or adding it to my TSP balance among the options available to me?”

That’s a no.

“In the event that these do not permit me to defer taxes, and I decide to just take the cash, how big a tax bite should I expect to see?”

Depends on your current income tax rates.

Assuming you are younger than 59.5 years old, there will be a 10% penalty, on top of the tax rate for your yearly income, including the money disbursed from the IRA. So if you took out $1000, and your tax rate was 25%, you would owe an additional $350 when you pay your taxes.

It’s too before my first cup of coffee for me to get into detail, but the OP should be aware that beneficiary IRAs follow slightly different rules than IRAs you start yourself. You are much more restricted on how you use them, and you are going to have to start taking required minimum distributions much much younger than you would have expected. Best to leave them seperate from your other money in most cases.

A lot depends on how old your father was when he died. If he was older than 70.5 and had to take required minimum distributions you will have to continue to take the RMD annually and pay tax on it, but no penalty. The RMD will be based on your calendar age, not his, so will be less than his RMD.

If you want to shelter the distributions from taxes probably the easiest way is to put the distribution into a different traditional IRA. That will take up to the statutory maximum off your income.

Hey, I’m more awake. So, kaylasdad99, ignore what anyone said about penalties. They don’t apply to you in this situation. Taxes do however. You have 2 option with this thing. You can start taking RMDs (depending on how old your dad was with let you know how much time you have to do this, but you don’t have much time in any event). This let’s you keep the ira indefinitely using it as a second source of income for however long it lasts. Or you can liquidate the account with the next 5 years and take the tax hit. Talk to a cpa about the tax consequences of each option. If you liquidate the funds you can use them however you like. If you take RMDs, you have a second income. Depends on what is more important to you and how the taxes are going to lay down for you. You can’t really avoid the taxes though. As Bill Door said you can potentially delay them with a distribution into another IRA.

Thanks for the good information, all. FTR, Dad died in April at age 85. I turned 60 in May.

Good to know. Rmds need to continue on schedule (annually) but at your rate if you want to not liquidate the fund. This is a good time to talk to a CPA and figure out if RMDs or full liquidation is better for you for tax purposes.

If you go with RMDs and are eligible for catch up payments to your tsp like you mentioned earlier, you could use the rmd to offset the catch up payments. This might be worth your while.

Note that is called a “Beneficiary IRA” and the whole account can be transferred to a investment company like ETrade. Then you can invest that money. You would not need to pay taxes on the income until you choose to withdraw it. And you are required to withdraw a minimum amount each year.

Best for now to get the account established at the same place where your dad had his IRA. Then after about a month and the “dust settles”, consider moving it to where you could get a better return on your investment.

So far as determining how much you must withdraw each year, they want birth dates, death dates, maybe your dads SSN. So DO keep a copy of your dad’s death certificate handy from now until every cent is withdrawn from that account.

Since the OP is looking for financial and legal advice, let’s move this to IMHO.

General Questions Moderator

Thanks. Li’l Sis probably has his SSN. AND the copy of the death certificate. I’ll initiate an email exchange with her.

P.S. Sorry about the wrong forum, Colibri, and thank you for the move.

Whether you want to take out more than the minimum depends on your income - because it is taxable you are trying to take out the money at the lowest possible tax rate, which usually means when your income is the lowest. If you are still working then usually that will mean after retirement.

The other big win is to make sure you aren’t paying fees. Generally the whole account should be in a self-directed brokerage with access to Vanguard or similar low fee ETFs. The easiest places there are either Vanguard directly or TD Ameritrade which sells the applicable ETFs commission free. If you currently are at a brokerage with an advisor you could very well be paying 1-2% in fees to him, in addition to being invested in crappy high fee funds that add an additional 1-2%, so could be $400/yr on your 20k. In a vanguard etf you are going to pay nothing to an advisor and if say, you put 100% in VTI (total stock market), you pay .05%, or $10/yr.
Edit to add: which is why the TSP is considered one of the very best places to save money- their fees are even lower than vanguard.

The low fees were great in the TSP but one thing always bothered me - the claim was the dividends were reinvested - but I never saw an entry. Perhaps it was automatic in the background. the “C” fund was an S&P 500 tracker. I checked over significant time frames when the fund was flat and never saw an increase in my share count or value. Even at only a 2% dividend (typical of the S&P), there should have measurable increases on a $300,000.00 account.