How to Maximize Divends and Avoid Taxes
Hi Terry,
My mom died this year and left me her mutual fund of 23,000, 70% invested in a target account. I want to avoid the RMD at age 73 (I’m 70 this year), any taxes and maybe make some money. I’m thinking of putting $8000 in a Roth IRA for the next 3 years. Is this a good idea and what should I invest in?
Terry Says
I don’t know where you came up with that idea — but you clearly need some comprehensive financial advice!
First, all the money you take out of your inherited IRA will be taxed as ordinary income in the year of withdrawal. It doesn’t matter whether the money came from dividends, or profits inside the IRA. It all comes out as ordinary income.
Second, once you take money out, and pay the taxes, you can do almost anything you want with it — take a vacation, pay off debt, spend it. But the one thing you CANNOT do is put it into any kind of IRA — unless you have earned income to offset it. You say you’re 70, but don’t say if you’re still working. If you are, you can put up to $8500 — assuming you earn that much — into a Roth IRA where it will keep growing tax-free,with no RMD.
Third, you have 10 years to withdraw all the money from the inherited IRA. BUT, when you turn age 73, you MUST start taking at least the RMD from that inherited IRA.
Now, since you’ll soon be taking RMDs from both accounts, you should consult with a tax advisor who can let you know if a big withdrawal will impact your tax bracket. AND check on how close you are to paying a higher monthly Medicare Part B and D premium because of the added income. That might impact whether you want to withdraw more from the inherited IRA now — before your own IRA RMDs start.
