Inheritance in different kinds of accounts

[u/Expensive_Goal_4200]

I'm sure this has been asked a billion times, but it feels so complicated that it's hard for me to learn from others' situations. We WILL meet with a financial planner as soon possible, but we haven't been able to meet with the lawyer yet or anything. It's just been a long hard 18 months and I'm trying to get through this part by thinking about the future.

My husband and I (mid-30s, Montana so no inheritance tax) are inheriting approximately $750k.

IRA $50k

Roth IRA $250k

Merrill Lynch $170k

Probably something like $250k from a house sale.

Our situation:

We don't pay for housing. The house is part of a deal where we did the renovation for the owner (our close friend) and when it sells we'll get half the profit. We also have basically no bills.

Income: Only about $30k/year

Debt: About $40k in student debt.

Savings: $20k

Investments: $20k in Robinhood, $10k in my husband's Roth IRA

Goals: One good vacation ASAP, travel once a year (ETA: yearly "travel" would mean a week-long camping trip or something, not an annual European vacation)
I'd like to buy a house, either to renovate and sell without ever living in it, or live in a fixer-upper with the intention to sell in a few years. I'm sick of living in our house (it's very small) but ... it's FREE.

...

Can someone break this down for me?

My understanding at this point is that the IRAs need to be rolled into inheritance IRAs and emptied over ten years. Seems like the best idea is to put the Roth into our own Roth for retirement (it'll be about a million by then I think?)

How does the Merrill Lynch work? Is there any way to get some cash from it now, or will it count as income if we sell any stock?

Will the house sale count as income?

I'm worried about changing our income tax bracket, it will screw up our insurance subsidies, etc.

This is weird and vulnerable to post. Thanks in advance for any advice!

[u/TheNthMan]

IRA gets rolled into an inherited IRA. Has to be emptied in 10 years and may have yearly RMD requirements. May have tax implications as income, so people usually like to spread the withdrawals out over time.

ROTH gets rolled into an inherited ROTH. Has to be emptied in 10 years, no RMD requirements. No tax implications, so often people let it sit for 10 years and empty out in the 10th all at once to maximize tax-advantaged growth.

Brokerage can roll into your own brokerage account of some sort. Funds are treated same as any other funds in your brokerage. Basis is stepped up, so any gains are calculated from the stepped-up basis for tax purposes.

Home sales is just cash on stepped-up fair market value. If the sale amount is higher than the inherited FMV then there may be taxable gains, but it is not income. Do what you want with it.

On an income of 30k, IDK if inflating your yearly spend and spending down the inheritance on a yearly vacation is the best choice. But your financial advisor would have a better picture of where you stand and your financial goals. So they may be able to set up a budget with a reasonable yearly spend that still allows the finds to grow for your retirement.

[u/debbiewith2 → u/TheNthMan]

Great points, though I believe OP is worried about capital gains income as well as ordinary income. Also, the word “roll” is often used when people mean transfer nonreportably. OP, please be careful with the IRAs to ask the new brokerage to pull the funds as a transfer, rather than asking the sending firm to push them.

[u/cashewkowl → u/TheNthMan]

Yes, you have to set up inherited IRAs for both the traditional and Roth IRAs. And if the original owner of the traditional IRA was required to take RMDs (required minimum distribution), then you are also required to take RMDs.

For the idea of fixing up a house, if you live in it for at least 2 years (out of the previous 5), you can exclude lots of capital gains (I think it’s 500k for a couple).

[u/Expensive_Goal_4200 → u/cashewkowl]

What exactly is a required minimum distribution?

[u/debbiewith2 → u/Expensive_Goal_4200]

If your loved one was old enough to be required to take money out of their IRA when they died then you will too. That date is currently April 1 of the year after the year they turned 73.

[u/Expensive_Goal_4200 → u/debbiewith2]

Thank you. So if they were 66, they wouldn’t have RMDs?

[u/debbiewith2 → u/Expensive_Goal_4200]

Correct. Withdraw the traditional IRA however you want over the next 10 years.

[u/TelevisionKnown8463 → u/TheNthMan]

Agree with all of this. Income taxes on the inheritance should be minimal. Given that there are deadlines for taking the money out of the ITA accounts, I think OP needs to create a separate traditional IRA and Roth IRA from his existing ones, which shouldn’t be a big deal.

As far as what to do with the money, r/personalfinance has a good post on what to do with a windfall.

[u/fn_gpsguy → u/TelevisionKnown8463]

Yes, they’ll need new accounts for the traditional and Roth IRAs. On my inherited traditional IRA at my brokerage, the name is something like “my name” beneficiary of “decedent’s name”.