Tax Question: Beneficiary IRA (funds, pay, taxes, account)

[EricJL]

If anyone is able to help me with this I'd be truly grateful.

I have a beneficiary IRA, from a non-spouse in the amount of $70,000.

It was created 8/10/2010, from what I understand the IRA must be fully distributed within five (5) years.

My question ultimately is what is the best strategy to distribute the funds to myself without getting killed on taxes.

I am married, 23, no children, filing jointly.

My income will be roughly $83k, my spouses $38k

The first $60k of my pay will be excluded from taxes this year.

So our final taxable income for 2012 $60k.

Our final taxable income for 2013 will jump to $82.

Given these numbers it sounds like it would be wise:

Pull out $8k this year to stay in the 15% bracket this year
Pull out $55k in 2013 to say in the 25% bracket
Pull out the the rest in 2014.

Feedback is appreciated.

[Thepreacherswife]

Well, you could max out both of your 401k contributions (17k each for 2012) to try and reduce your taxable income as you get the required distributions from the IRA. Also consider getting a high deductible health plan and open a health savings account and sock another 6k away, taking a deduction.

[Gandalara]

Originally Posted by EricJL

from what I understand the IRA must be fully distributed within five (5) years.

Not always. The way I read it, you have a choice about the 5 year rule..

Found this:
**Quote**
Inherited IRA: Non-Spouse Beneficiary

When you inherit an IRA as a non-spouse beneficiary, the account works much like a typical IRA, with three important exceptions.

No 10% Penalty
Distributions from the account are not subject to the 10% penalty, regardless of your age. (This is the same as for a spouse beneficiary.)

Withdrawals from Inherited Roth IRA
If the inherited account was a Roth IRA, any withdrawals of earnings taken prior to the point at which the original owner would have satisfied the 5-year rule will be subject to income tax, though not the 10% penalty. (This is also the same as for a spouse beneficiary.)

Non-Spouse Beneficiary RMDs
Each year, beginning in the year after the death of the account owner, you’ll have to take a Required Minimum Distribution from the account. The idea is to distribute the balance of the account over your remaining life expectancy. The actual calculations are best explained with an example.

Imagine that your grandfather passes away in 2010, leaving you his entire IRA. If he was required to take an RMD in 2010 but he had not yet taken one, you’ll be required to take his RMD for him — calculated in the same way it would be if he were still alive.

Beginning in 2011, however, RMDs from the account will be based on your life expectancy. On your birthday in 2011, you turn 30 years old. According to the IRS Life Expectancy Tables, your remaining life expectancy at age 30 is 53.3 years. As a result, your RMD for 2011 will be equal to the account balance as of 12/31/2010, divided by 53.3. For 2012, your RMD will be equal to the account balance at the end of 2011, divided by 52.3. In 2013, it’ll be the end of 2012 balance, divided by 51.3.

Important exception: If you want, you can elect to distribute the account over 5 years rather than over your remaining life expectancy. If you elect to do that, you can take the distributions however you’d like over those five years — for example, no distributions in years 1-3 and everything in year 4.

**Unquote**

Gods, could they make it any more difficult???