21 Aug Investing Inherited IRA distributions

Q. I’m not sure the best way to invest my Inherited IRA? I have plenty of retirement funds that I saved on my own so I don’t really need the money. And what can I do with the required minimum distributions if I don’t spend them? I’m 65 and unmarried with two adults kids.

A. Congratulations on saving enough funds for your retirement so that you do not need the Required Minimum Distributions (RMD) from your Inherited IRA.

The best way to invest the money depends on your overall asset allocation and your risk profile. If you want help with that, consider participating in a free money makeover with NJMoneyHelp.com. Just send us an email to get started.

Once you determine the proper asset allocation, you need to decide what kind of account you want to use.

“If you don’t need your required minimum distribution for current living expenses, you can keep it working for you by immediately reinvesting,” said Kim Viscuso, a certified financial planner with Stonegate Wealth Management in Oakland.

She said if you qualify, the RMDs can actually be used to fund an IRA, otherwise, a taxable account may be your best option.

One choice is a Roth IRA, which has no required minimum distributions during the lifetime of the original owner, Viscuso said. This allows you to leave the assets in place for life while earning tax-free growth.

“You have the capability to bequest this asset to your heirs,” she said. “Your beneficiaries will have to withdraw a minimum required distribution each year after they inherit this account, but they generally won’t be taxed on those distributions, which potentially increases the value of their inheritance.”

You can fund a Roth IRA in 2015 as long as your income is below a certain level, at which time there are phase-outs.

Viscuso said if your filing status is single income, the range is $116,000 to $131,000. For those married filing jointly, the range is $183,000 to $193,000, and for those married filing separately, the range is $0 to $10,000.

If you don’t qualify for a Roth, you may qualify for a non-deductible IRA, Viscuso said.

“The only qualification for contributing to a non-deductible IRA is that you must have earned income greater than or equal to your contribution to the IRA,” she said.

The third option is be to invest in a taxable brokerage account. These accounts are funded with post-tax dollars and any earnings or gains are taxable, Viscuso said.

Unfortunately, all of the options mentioned require you paying taxes on the RMD before you invest it, Viscuso said.

“The only way to possibly avoid paying taxes would be to contribute the same amount that you would have owed as an RMD to a qualified charity,” she said. “As long as it’s $100,000 or less and directly rolled over to the qualified charity, this will satisfy your tax obligation.”

You won’t get a charitable deduction, so it may not lower your taxes as much as you had hoped, but it could keep you out of a higher tax bracket, she said.

“There are no qualified charitable distributions (QCDs) for 2015 yet. The extenders bill only renewed the QCD provision for 2014,” Viscuso said. “So it is not recommended that you rely on this method at the current time.”

Gifting money to your heirs during your lifetime is another option.

“You can gift up to $14,000 per child each year without any gift tax consequences,” said Gerry Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

If you exceed that amount and haven’t used all of your Federal Lifetime Gift Tax Exemption — which is currently $5.43 million no gift tax will be due, Papetti said.

“However, you will need to file a gift tax return and reduce the amount of your available Federal Lifetime Gift Exemption by the amount you gifted that exceeded the $14,000 annual gift tax exclusion,” he said.

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This story was first posted in August 2015.