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 check**Here 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.