Some kind of bucket strategy for Inherited IRA distributions? (inheritance, mutual funds, cash)

[akrausz]

My niece inherited a $250k IRA from her mother. Currently the entire amount is invested in PRUAX. The account has been transferred to an Inherited IRA in my niece's name. The law for Inherited IRA's requires that she must deplete it all over 10 years. For the sake of simplicity, let's assume she will be taking $25k taxable distributions each year.

One idea I had was to split it up into 10 $25k buckets. The first three buckets, representing distribution years 1 through 3, would be high-yield cash equivalents currently paying over 5%. Buckets 4 through 10 would include some percentage of stocks, with bucket 4 containing the least stocks and bucket 10 the most stocks. Each year the percentage stocks would be reduced for each bucket. This would be done using mutual funds.

That's a lot of buckets. Maybe something simpler would be better. Any thoughts?

[mathjak107]

a lot of work with no benefit .

buckets may seem like they are doing something mentally but they do nothing simply having a diversified portfolio and no buckets at all

simply rebalancing a regular 35-60% equity portfolio allows a simple cash flow .

in retirement one should never use rmds as a guide for what you are spending , it is very unsafe and unstable . i know it doesn’t apply in this case but in general bucketizing just complicates things and brings nothing to the party…

i would keep it all invested in an appropriate, simple portfolio and liquidate it as required

michael kitces is an acknowledged guru on retirement planning and buckets are more trouble then they are worth

https://www.kitces.com/blog/are-reti...cation-mirage/

https://www.kitces.com/blog/research...-market-timer/

[GWoodle]

Originally Posted by akrausz

My niece inherited a $250k IRA from her mother. Currently the entire amount is invested in PRUAX. The account has been transferred to an Inherited IRA in my niece's name. The law for Inherited IRA's requires that she must deplete it all over 10 years. For the sake of simplicity, let's assume she will be taking $25k taxable distributions each year.

One idea I had was to split it up into 10 $25k buckets. The first three buckets, representing distribution years 1 through 3, would be high-yield cash equivalents currently paying over 5%. Buckets 4 through 10 would include some percentage of stocks, with bucket 4 containing the least stocks and bucket 10 the most stocks. Each year the percentage stocks would be reduced for each bucket. This would be done using mutual funds.

That's a lot of buckets. Maybe something simpler would be better. Any thoughts?

For a niece the rules are different from a spouse. So the 10 year rule applies. Don't know nice age or potential ax brackets. Don't know what else she may already have. See no need to have 10 $25k buckets. All you need is a strategy to maybe take 10% each year.

PRUAX is a five star Morningstar fund mostly invested in utilities. Could leave the account alone & concentrate on the 10% withdrawal. Then determine what fund to move into. You seem to be overly concerned with stock risk. Utilities generally move in relation to interest rates & are more stable than most stocks. Over 10 years $10k could grow to $25k.

[TechGromit]

Originally Posted by akrausz

Currently the entire amount is invested in PRUAX.

The first thing I would do it diversify what the IRA is invested in, while PRUAX isn't a bad investment, but ideally you should never have more than 20% of your holding in any one investment type, even if they are mutual funds. They should be different types of mutual funds. In this case PRAUX is all utility stocks, while utilities are traditionally a stable investment, I still wouldn't want all my eggs in one basket. Just remember ENRON was an utility at one time.

25k isn't going to be enough, assuming even modest returns, the fund is going to earn 30 to 40k over 10 years. Also remember that depleting the fund doesn't mean she has to go on a shopping spree every time she get a check. She has to make a withdraw and my the taxes on the withdraw, she then free to deposit the balance into another investment type.

Withdraws are based on her income tax bracket. Assuming she single, so say her taxable income (after all the deductions she can take) is 40k a year, she should withdrawal $55,374 from the IRA, this will keep her in the 22% tax bracket.

If she makes 100k a year, same situation, she should limit the withdraw to $82,099, this keeps her in the 24% tax bracket, instead of jumping up to the 32% bracket.

[StealthRabbit]

How old is niece?
What % of the $250k inheritance is of her current existing portfolio?
How is total portfolio balanced?

Rebalance the entire portfolio as per desired allocation after annual distribution.

If she is young, and does not need the dough, has earned income, and can afford the taxes... stick the annual distribution in her Roth, (aggressive growth with tax free accumulation. If she doesn't have earned income, but has the above intent and flexibility, do an annual Roth roll of equivalent amount out of her existing tIRA, and use the $10k as regular income.

If she's loaded, and desires a positive tax deduction, drop the distribution into a DAF for gifting in the future, or in perpetuity (even in the name / memory of her donor). $210k (after taxes) could sustain (5%) or $10k annual gifting for many yrs, possibly forever. I gift 10% of my self directed DAF for over 20 years, and the aggregate balance has grown.

[leastprime]

I like laddering and bucketing. Keeps the alternatives open. Your OP is an alternative that she can change later.
YBMV