Transcript
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Ralph: So here's our question for today.
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Have you recently
inherited an IRA account?
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Unsure what to do with it or how it works.
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We'll stay tuned as we break it
all down for you today on the show.
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We'll come back to the show
on this financial Friday.
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Today we're diving into the
world of inherited IRAs.
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Now, before we get started,
don't forget to subscribe to
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the show in join our email list.
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You can do that at askralphpodcast.com.
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You don't want to miss a thing.
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And in fact, you don't want
to miss tomorrow's episode.
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we're going to be talking
about the new employee versus
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independent contractor rule.
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It takes effect on March 11th.
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You don't want to miss this a big change.
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inheriting an IRA can seem
complex and confusing initially.
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you just went through a difficult time.
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You know, someone that you loved
or cared about has passed away.
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And there are many rules and
regulations around these accounts
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that differ from traditional IRAs.
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However, if you have
the right information.
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Inherited IRAs can be managed properly
to continue tax deferred growth.
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So on today's episode, we'll
explore what an inherited IRA is.
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The basics of how it works.
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Distribution options.
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That's when you take money out of it, the
tax implication and steps you can take.
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If you've recently inherited
one of these accounts.
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My goal today is pretty simple.
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I want to provide you clarity and
actionable advice to guide you
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through this process smoothly.
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So whether you're a spouse child, Or
any other beneficiary, that's a person
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who is the receiver of these funds.
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Navigating.
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This is new territory, so
let's break it down together.
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Let's start off by saying
what is an inherited IRA?
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First things first.
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It's simply an IRA account that is
in passed on to a beneficiary after
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the original account owner's death.
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So for example, Let's say that
your mother has passed away.
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I lost my mother almost a year ago.
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It's a tough time.
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And then you compound that
with these financial decisions.
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The beneficiary, inherits the assets
and gains control of the account.
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Now, while I'm here, I want to
make sure you take note of this.
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If you have any IRA accounts
or any accounts in general.
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Make sure you're
designating a beneficiary.
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I've seen this become a huge problem.
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In absence of a beneficiary.
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Those IRA accounts can go
into an estate and that can
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trigger a huge tax consequence.
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So here are some key factors to
consider when you inherit an IRA.
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The original IRA account must have
designated beneficiaries on the account.
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So in the case of my mother, for
example, If she had an IRA account.
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She won't say, okay, on the date
of my death, this IRA count goes
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to X, Y, or Z, in my case, it's my
sister and I, so let's just use as
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an example, my IRA account has to be
split between my son and my daughter.
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If, like I said, if no beneficiaries
are named assets go to the estate,
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you want to try and avoid that.
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Now here's the important part.
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Inherited IRAs maintained
their tax deferred status.
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Well, that's a good thing because
that means the beneficiary can
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continue growing the account.
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Tax-free until withdrawal.
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But that's when it gets
a little complicated.
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Withdrawal requirements differ
from original IRA owner rules.
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We'll talk about that in a few moments.
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So we said assets can remain in the
inherited IRA and grow based on how the
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new beneficiary investor manage them.
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That's your choice.
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So in essence, And inherited
IRAs, is a tax advantaged account,
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transferred to a beneficiary to
maintain deferred growth potential.
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It basically remains the same as it was.
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When the person who set it up.
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set it up in the first place.
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But then it gets a little complicated.
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So let's talk about the distribution
rules, how do you get money from that IRA?
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This is where it gets complex.
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Folks.
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I gotta be honest with you.
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And it really comes down
to a first decision point.
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The withdrawal rules vary
depending on upon your relationship
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to the original count owner.
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What does that mean, Ralph?
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Well, basically it means this.
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Your options differ, whether you're a
spouse, child, or another beneficiary.
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So let's talk about spousal
beneficiaries first.
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So husband and wife.
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Husband passes away.
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Wife inherits the IRA.
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So if you inherit an IRA from your
spouse, You have more flexibility,
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they built into the tax code,
some more flexibility because.
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It's your spouse.
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Here are your options.
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First thing you can do.
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You can treat it as your own IRA.
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You can transfer that inherited
IRA into your existing IRA
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or roll it into another IRA.
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Basically.
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you change the name of it from
your husband's name to your name.
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This allows you to delay taking
money out of it until you reach your
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requirement of distribution age, which
could be as high as 73 at this point.
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So that's option one.
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Option two, you can
remain the beneficiary.
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If you choose to remain a beneficiary,
you can delay distributions until your
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deceased spouse would have reached age 73.
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So you just don't change anything.
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You just sit on the money.
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And you wait till you have to
take your distributions and
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then you start taking them.
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Another option you have
is a lump sum withdrawal.
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You can cash out the entire
account immediately and pay
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ordinary income tax on it.
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It's not ideal from a tax perspective.
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Let's talk about why.
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So let's say, for example, in
this case, husband passes away.
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And he has a hundred
thousand dollar IRA account.
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And the wife decides, you know, what.
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I'm going to make it simple.
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I'm just going to take the money out.
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Well, the problem with that is now you've
just injected a hundred thousand dollars
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of income in the current tax year.
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That could very well put you, it probably
will put you in a higher tax bracket.
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Not an ideal situation.
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So there are other options.
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one of those options
is a five-year payout.
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You have the option to empty
the inherited within five years.
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And pay taxes accordingly.
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Also not ideal for maximizing tax
deferral, because you're still going
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to take that income over five years.
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So in our example, you had that
hundred thousand dollar IRA.
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But you're going to take 20,000 a year.
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Still going to put you
into a higher tax bracket.
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So as you can see, spousal beneficiaries
have more options to continue deferred
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growth compared to non spouses.
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So then you ask Ralph, well, what
does non-spouse beneficiaries do?
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For all other beneficiaries like children,
the example we talked about here.
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It was when my mom passed away.
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If she had an IRA.
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And she left them to my
sister and I her children.
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The rules are a bit less flexible.
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So, what are those rules?
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Ralph?
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Well, let's talk about it.
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You can elect what's
called a 10-year payout.
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Any non spousal beneficiary must empty
the inherited IRA within 10 years
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following the original owner's death.
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So it's basically pretty simple.
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Let's go back to our example.
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A hundred thousand dollar IRA.
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Inherited by two children.
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So each of them will
be entitled to $50,000.
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And they can take that
over a 10-year period.
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So instead of taking 50,000 all in
one year, They could basically take
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$5,000 a year, which isn't going
to have a huge tax hit on them.
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It's not going to unnecessarily
put them into a higher bracket.
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The other option you have.
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You can do.
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What's called the annual
requirement of distribution.
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So you have 10 years
total to fully withdraw.
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You must take annual RMDs
based on your life expectancy.
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This prevents the account
from growing indefinitely.
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So if.
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You are getting close to that RMD date.
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You may have to start taking
these withdrawals anyway.
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Now here's a big issue.
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There is no rollover benefit.
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You cannot roll over an
inherited IRA into your own IRA.
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we talked about that spousal IRA
where husband passed away and
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wife decided she would just roll
that IRA money into her own IRA.
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Well, you can't do that
if you're not a spouse.
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So if you're the child,
unfortunately, Best case scenario.
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You're going to have to take
that money over 10 years.
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There's no way of rolling it into your
own account and then, waiting until
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your own retirement date to take.
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So the goal of these rules is
to limit tax deferral advantages
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for non spousal beneficiaries.
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I mean, Bottom line is that this money
has remained untaxed and the IRS wants
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to get their hands on it and tax it.
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So you kind of make sure you
understand the requirements before
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managing your distributions.
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So let's talk about
taxes on inherited IRAs.
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This is a crucial part.
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He needed to understand the tax
implications of these inherited IRAs.
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While they do maintain tax deferred
status, until you take money from them,
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all the earnings in that are tax deferred.
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But once withdrawals begin
taxes have to be paid.
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So how are taxes paid?
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Well, Let me talk about that now.
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So it draws are taxes, ordinary
income based on your tax bracket,
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just like traditional IRA withdrawals.
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So for example, Let's
say you had a W2 job.
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You make $50,000 a year.
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And let's say you have some interest
in dividends, that sort of thing.
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Well, this inherited IRA money is just
going to add to what we get to what's
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called your adjusted gross income.
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So in our example, With the two children,
they're going to take $5,000 a year.
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So they've got that $50,000 W2.
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Let's say they have a thousand dollars
in interest in dividends, and they're
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gonna have this $5,000 IRA withdrawal.
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Well, the thing it's complicated
as maybe that $5,000 ends up being
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taxed at the top rate for that
particular individual, because it
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pushed them into that tax bracket.
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So you have to just be aware of that.
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Now.
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If it's a Roth IRA.
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Withdrawals are tax-free since
the contributions were post-tax.
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So if you happen to inherit
a Roth IRA, There are really
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no tax consequences to that.
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Now, how do you handle those taxes?
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this is the big surprise.
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Surprise.
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I talked about this in another episode.
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When you go to take that distribution.
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Most financial brokerage houses are
going to ask if you want to withhold tax.
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And they're generally going to
suggest you withhold 20% again.
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This depends on your
personal tax situation.
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That's why I'm going to tell
you to speak to a professional.
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If you want to talk to me,
you can go to my website.
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That's at askralphpodcast.com/store.
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There you can schedule
an appointment with me.
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Because you don't want to spend all
this money because there is going to
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be a tax consequence, but it's going
to depend on your particular situation.
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Now, one of the things
that's very good about this.
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Is there is no penalty.
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There's no 10% early withdrawal penalty.
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Where am I getting that from?
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So here's the deal.
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If it was your own IRA.
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And you took that money out
before you reached 59 and a half.
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The IRS charges, a 10% penalty for
what they call premature distribution.
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But you don't have to worry about
that when you inherit an IRA.
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Any withdrawals you take.
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Have to be reported on
your personal tax return.
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It's also generally
income at the state level.
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So don't forget about
those state obligations.
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The bottom line is that
inherited IRAs function.
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Very similar to traditional
IRAs from a tax perspective.
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It's really not much of a difference.
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But you need to talk with a tax
advisor, a tax professional, determine
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the specifics for your situation.
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So Ralph.
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What are the action steps?
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you always try to give us action steps.
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Well, I'm going to give
them to you right now.
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If you're navigating this process,
currently here are some steps to take
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number one.
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Notify the custodian inform the
bank or the firm holding the IRAs
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that original owner has passed away.
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They're probably going to ask you
for a copy of the death certificate.
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Get in touch with those people
and get that process going.
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Step number two, you need to
understand your distribution options.
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we talked about those.
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Review the rules we discussed
based on your relationship.
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if you're a spouse, there
are certain set of rules.
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If you're a non-spouse there's other
rules and you got to consider the
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tax implications while you're there.
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Now here's a step that a lot of people
forget about and that's step number three.
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I designate new beneficiaries.
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So if you choose to maintain
it as an inherited IRA, and I
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see this step, skip sometimes.
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Be sure to name a new beneficiary in
case you pass away before you distribute
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all the money out, we don't want to end
up having this money go into an estate.
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Number four.
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I can't stress this enough.
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Consult a tax advisor, connect with
a financial professional to discuss
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your specific situation because
everybody's situation is different.
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And help them.
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Put together a strategy for
managing this inherited IRA.
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Once you do that, you're going to go on to
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step number five, which is
create a withdrawal plan.
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Based on the distribution rules decide
when and how much do you want to withdraw?
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factor in the tax consequences of that.
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That's the key part of why you
want to develop a withdrawal plan.
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The worst case scenario is you just
say, I'll just give me the money.
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It might be the best situation
depending upon your particular
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individual tax situation, but it
could really trigger a big tax issue.
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Number six, seek guidance on investing.
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So if you want to assets to continue to
grow tax deferred, you've got to work with
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an investment advisor to give you a good
option of what to do with those assets.
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And this one is very important.
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This is step number seven.
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Maintain proper documentation, keep
records on all IRA transactions, taxes
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paid on distributions in any other
supporting document information, because
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at the end of the year, You're going
to come and see your tax advisor.
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I see these routinely in my practice.
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You got to bring all the documents,
you're going to get a 1099R at
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the end of the year, which shows
how much money you took out.
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On that 1099R it's going to show
the taxes that were withheld.
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The truth is folks.
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The more you're informed, the
easier this process will be.
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it's a tough time to begin with.
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Right.
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You just lost a loved one.
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But you've got to seek
guidance from financial and tax
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professionals when you need them.
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00:13:50,810 --> 00:13:54,320
So before we wrap up today, I want remind
all of our listeners do visit our podcast
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page, I mentioned at a time or two.
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That's at askralphpodcast.com.
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00:13:59,180 --> 00:14:01,520
There you can leave a review,
share your thoughts and even send
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00:14:01,520 --> 00:14:04,700
us a message with questions for
future episodes is our microphone.
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00:14:04,700 --> 00:14:06,740
The bottom right corner click
on that record a message.
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00:14:06,740 --> 00:14:07,910
You can send us an email.
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00:14:08,210 --> 00:14:09,320
And while you're there.
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00:14:09,950 --> 00:14:13,850
Join our email list to enter into our
weekly $25 Amazon gift card drawing.
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00:14:13,880 --> 00:14:15,500
You don't want to miss that folks.
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00:14:16,070 --> 00:14:19,070
We're giving away weekly, a $25 gift card.
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00:14:19,070 --> 00:14:19,760
Well, why are you doing that?
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00:14:19,760 --> 00:14:20,010
Ralph?
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00:14:20,090 --> 00:14:21,620
I'm trying to build listenership.
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00:14:22,040 --> 00:14:24,560
I'm trying to connect with the
listener so that I can let them know
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when things are going on this show.
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00:14:26,330 --> 00:14:27,140
And as I mentioned.
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If you have a situation that you need.
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00:14:30,260 --> 00:14:31,970
Expert professional advice.
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00:14:31,970 --> 00:14:33,770
You can book an appointment
with me right there.
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00:14:33,800 --> 00:14:36,250
That's at askralphpodcast.com/store.
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00:14:36,740 --> 00:14:38,000
And I can sit down with you.
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00:14:38,390 --> 00:14:41,420
If it doesn't matter where you live with
zoom, we can do it from wherever you are.
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00:14:41,720 --> 00:14:44,000
And I can give you some specific advice.
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Suited towards your particular situation.
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00:14:47,840 --> 00:14:48,800
So let's recap.
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00:14:49,370 --> 00:14:52,130
Inherited IRAs can seem
daunting at first glance.
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00:14:52,670 --> 00:14:55,760
But now you have a much deeper picture
of what they are and how they work.
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00:14:56,360 --> 00:14:58,760
The key is understanding
the distribution options.
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00:14:59,180 --> 00:15:02,330
The tax implications and
steps take if inheriting one.
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00:15:03,069 --> 00:15:06,099
Use this knowledge to manage
your inherited IRA intelligently.
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00:15:06,999 --> 00:15:09,699
So in closing as always
visit our podcast page.
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00:15:10,209 --> 00:15:14,259
For more resources about this topic, feel
free to reach out with any questions.
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00:15:14,679 --> 00:15:16,929
These IRAs don't have to be confusing.
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00:15:17,019 --> 00:15:18,309
Well, thank you for joining me today.
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00:15:18,699 --> 00:15:21,629
Let's continue our journey
Grounded in faith, stay financially
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savvy, and God bless you.
