Inheriting an IRA can be very complicated. If you have inherited an IRA or plan to inherit an IRA in the near future, then this is an important video for you. With the passing of the Secure Act at the end of 2019, the rules for how you must distribute an inherited IRA changed.

There have been recent updates over the past few months that have changed the initial interpretation of the Secure Act rules. If you are inheriting an IRA from your spouse, things are still pretty simple. It is when you are a non-spousal beneficiary of the IRA that things can get complicated. It can become even more complex if the original owner of the IRA was taking Required Minimum Distributions (RMDs).

The Secure Act Established the 10-year rule for inherited IRAs and in this video, we look at the exceptions to that rule and the new guidance published by the IRS.

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There are some things in life that can be so confusing that you just want to pull your hair. Whether it’s trying to understand why your Wi-Fi doesn’t work even after you reset the router or in this case what to do when inheriting an IRA.

There are a lot of rules that apply to inherited IRAs. Your relationship to the original owner, the original owner's age, when they passed, whether or not they were taking rmds,  just to name a few. In this video I'm going to talk about what you need to know if you have inherited an IRA

Hey everybody I’m Johnathan Rankin, the founder and CEO of Theorem Wealth management and my firm and I have been helping clients plan and execute their retirement plans by focusing on 3 key areas in retirement, maximizing retirement income, optimizing investments and reducing taxes. If you are thinking about retiring or already retired, make sure you subscribe so you don’t miss any of our retirement videos or episodes of our retirement podcast called the retire once show.

For investors, the IRA has always been a great place to save, defer taxes and invest for retirement. For the IRS however, it’s a large bucket of untapped tax dollars. Remember any dollars in a traditional IRA, 401(k) or other tax deferred account, the money is not taxed until you take the money out of the account and at that point it is considered ordinary income. For years inheriting an IRA was pretty easy and then congress passed the Secure ACT and starting January 1 2020, things got a lot more complicated. So complicated that the IRS is still publishing regulations on how the original rules should be interpreted.

Because this is a tug of war between investors and the IRS, it is important to understand the tax implications of inheriting an IRA.

So let’s start off with inheriting your spouse’s IRA. If your spouse passed away, and you're the sole beneficiary of your spouse’s IRA, you can take over the account (also known as a spousal transfer or “assuming” the IRA), and the IRS will treat it as though it has been yours all along. This means that you can continue to make contributions to the inherited IRA, and the schedule for required minimum distributions is reset so that it’s based on your own life expectancy.

As the sole beneficiary, you can move the assets into your name and continue to stretch the IRA over your lifetime.

For spouses, things are pretty simple. It is when you inherit an IRA from a non-spouse where things can get confusing. The goal for most people when inheriting an IRA is to use that money to maximize their financial life while paying as little to the IRS as possible. That is why it is important to understand the rules and start planning early in the inheriting process. With the passing of the Secure Act, the old rules of being able to stretch the IRA and continue the tax deferral changed and the IRS introduced the new 10-year rule. The general rule for non-spouse beneficiaries is that you must withdraw all the money from the account by December 31 of the 10th year after the original owner died. The IRS’ 10-year inherited IRA clock starts in the year after the owner dies. That essentially means you have 11 years to drain the account, if you choose to start taking money out in the year the original owner died. During the 10 – year period, the beneficiary isn’t required to take annual RMDs. The only thing that matters is that the account is emptied at the end. This gives you some flexibility if you are inheriting the IRA. You could take it all out at once, you could space it out over the entire period or you can wait until the deadline and take it all then. This is where you want to be very strategic with how you withdrawal the assets. Remember every dollar that comes out is considered ordinary income. One scenario where you want to plan ahead is if you have kids that are going to college soon, financial aide looks at your income over the past 2 years, so maybe you want to wait until that process is over. If you are approaching retirement and still have a salary and you know your income will be lower in a few years. If you are already retired,

could impact social security being taxed, Medicare premiums or even subsidies for health care. For Normal taxpayers you could lose tax credits/deductions, could put you in a higher tax bracket, could phase you out of roth IRA contributions – all things you need to consider. It is Important to map out that 10-year period

There are some exceptions to the 10-year rule. If you are disabled or chronically ill as long as you meet the IRS definitions of either disabled or chronically ill, then annual RMDs can be based on your life expectancy. Minor children of the deceased are also exempt from the 10-year rule, but there’s a catch. For minors, Annual RMDs based on the child’s age can be taken until the child reaches the “age of majority” in their state. That’s typically age 18. At that point, any remaining money in the IRA will need to be withdrawn according to the 10-year rule. This exception only applies to children, not grandchildren. The last type of eligible beneficiary that is exempt from the 10-year rule is an individual within 10 years of age of the deceased. So, if it is a sibling or a friend, anyone within 10 years of age is exempt from the 10-year rule and can take RMDs based on their life expectancy.

Initially when the Secure Act passed, there was some confusion on the 10-year rule. It was initially thought that even if the deceased was taking RMDs at the time, that the beneficiary would be able to distribute the account as long as they followed the 10-year rule. It wasn’t until this year that the IRS came out with clarification on the rule. The IRS now requires beneficiaries using the 10-year withdrawal schedule to take annual RMD withdrawals in years 1-9 and fully deplete their account by December 31 of year 10, provided they inherited the account from an owner who was already taking RMDs. This doesn’t mean you can’t take more than the RMD amount or that you couldn’t deplete the account earlier, it just means that if RMDs were started, they must continue. This rule will not be enforced until 2023 because there was a lot of uncertainty around the rule to begin with.

As you can see, there is a lot of confusion around inheriting an IRA and when you must take distributions from the account. That is why it is important to start planning now if you are expecting to inherit an IRA. Even if you aren’t expecting to inherit anything, you are saving in an IRA yourself for your own retirement. If part of your long-term planning is to leave a legacy to your beneficiaries, then planning early can help create the most tax efficient transfer. If you want to learn more about ways to reduce your taxes or your beneficiaries’ taxes use the link in the description below and schedule some time with a member of our team. We would be happy to help with your specific circumstances or even help answer questions you have about inheriting an IRA. When it comes to family dynamics and retirement, things can always get muddy and complicated. More and more children are now helping with the care of their aging parents. For more about how aging parents impact your retirement, be sure to check out this episode of our retirement podcast called the Retire Once show where we go into detail on caring for aging parents. I’ll see you there.

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