Hi Mike
Sorry for your loss
I wrote a post about the tradeoffs on an inherited IRA awhile back
https://www.gocurrycracker.com/the-secure-act-compression-of-the-stretch-ira/The balancing act between withdrawing the IRA funds in 1 year or 10 years is going to be guided by the marginal tax rates you pay, including ACA subsidies.
Background:
The Inflation Reduction Act extended the enhanced ACA subsidies (up to 600% FPL) through 2025. After that subsidies halt at 400% FPL unless new legislation is passed.
There is a chart of ACA "tax rates" in this post.
https://www.gocurrycracker.com/american-rescue-plan-act-of-2021/This means through 2025 we have a wide 8.5% ACA tax bracket, which could be taken advantage of from 400% to 600% FPL (if beneficial)
For household size = 2
$45k = 258% FPL
$69,680 = 400% FPL
$104,520 = 600% FPL
Numbers from
https://www.gocurrycracker.com/aca-premium-calculator/Similarly we have Federal income tax
0% - $25900
10% - $46450
12% - $109,450
22% - $204,050
24% - above $204k
Numbers from
https://www.gocurrycracker.com/federal-income-tax-calculator/Tradeoffs:
You have income of $45k, ~260% FPL. At most you pay ~$2k/year for an ACA silver plan ($1944)
You are nearly at the top of the 10% federal tax bracket, plus whatever you pay in State taxes (IL(?), flat 4.95%)
You pay 0% tax on qualified dividends at the federal level, so total tax is probably 0
State tax
With a flat state tax you pay the same rate whether you withdraw $1 or $250k, so I will ignore this.
If in a state like California with a big progressive tax system, this would need to be factored in.
Now, let's add inherited IRA withdrawals
Starting with the extreme
$250k withdrawal
Income now $295k
Will pay full fare on ACA insurance - let's swag $8.8k (fill in your own number if you have it - this is the max allowed at 600% FPL and assumes no subsidy cliff.
($8800 actually seems high for 2 people, we would pay $12k for 4.)
In 24% federal bracket, total federal tax assuming all ordinary income - ~$50,5k
State tax - $x
Effective tax rate on IRA withdrawal = ~$7k (extra ACA) + $50.5k (extra Federal) / $250k = 23%
Top of 600% FPL bracket
Income: $45k
IRA withdrawal: $59,520 (~5 years to deplete IRA +/-, but only guaranteed 600% FPL for 3 more years)
ACA - $8.8k
IRS - ~$6.6k
Effective tax rate on IRA withdrawal = ~$7k (extra ACA) + $6.6k (extra Federal) / $59,520 = 22.8%
By extending the withdrawals out over a longer period (5 years) we save 0.2% in tax
Making a very large withdrawal above the ACA subsidy cliff means a large portion of the withdrawal is not "ACA taxed" at all, so loss of ACA subsidies only contributes 2.8% tax rate
We can continue downward
Top of 400% bracket
Income: $45k
IRA withdrawal: ~$25k
ACA - ~6k
IRS - $2.5k
marginal rate: $4k (extra ACA) + 2.5k (extra Federal) / $25000 = ~$26%
This actually
costs more because most of the withdrawal is ACA taxed at the highest point in the ACA tax curve (~15% vs 8.5%)
Some other things to consider:
Presently at $45k income you MIGHT get some CSR subsidies (they stop at 250% FPL and you may be over or under depending on which side of "roughly $45k" you are.)
If you do get them (meaning lower deductibles and co-pays) that can be worth $1000s of dollars if you need medical attention.
This is not factored into the above math.
It can be WORTH MAKING A SMALL IRA CONTRIBUTION to pull yourself under 250% FPL
You have the option of using a HDHP bronze plan, possibly with HSA option - this would make the 400% FPL scenario look mildly better with lower premiums.
Caveats:
My math could be wrong, I just cranked this out in 10 minutes so
please triple checkHere is my spreadsheet:
https://www.dropbox.com/scl/fi/c32m3i9yfax0g67qq7zlp/upperwestmike_inheritedIRA.xlsx?dl=0&rlkey=7leunluekkeeq85jd8dnbplvuIf my ACA premium assumptions are off, the numbers shift. Perhaps substantially (a few percent)
This is critical.Conclusions:
Were it me, I might go for the giant lump sum in 1 year and pay the extra ~0% tax for simplicity.
Then I would work to ensure I get CSR subsidies in the remaining years (<250% FPL.)
Doing this in a 20% down market has a silver lining (maybe withdrawing $200k instead of $250k?) AND we shift the future gains from a down market from ordinary income (IRA withdrawals) to long-term capital gains.