7 Rules for An Inherited IRA | Personal Finance Tips
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- Опубликовано: 8 сен 2024
- In this video, Colin Exelby, CFP®, breaks down the important rules for handling your inherited IRA.
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Inheriting an Individual Retirement Account (IRA) comes with different rules and considerations that may significantly impact your financial planning.
Understanding these inherited IRA distribution rules can have a significant impact on your short-term and long-term financial situation.
Tax planning is about making strategic choices within the tax code, and knowing your options will help you maximize tax efficiency and preserve your inherited assets.
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When you inherit an IRA from your father. And your filling out the paperwork in order to receive it. Why does your spouse have to sign this paperwork as well? My husband doesn't want to sign something when he has no idea what it is.
That is a great question. I am not sure why they would need to sign. At the custodians I work with that isn't required to open a new inherited IRA. It could be required in a joint advisory relationship however in which both of you have accounts that are being managed. Often a spouse has to sign off on withdrawals from a retirement plan like a 401k however.
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please add caveat for disabled. which is no time set to remove the IRA.
Question my wife got a Ira from her mother It was a 50 / 50 slit with her step dad . She wanted to give it back to her step father can it be done?
Great question. It is definitely possible to "disclaim" inherited assets. Here is a helpful article on the topic. It's best to discuss with legal counsel.
thelink.ascensus.com/articles/2022/3/15/what-you-should-do-when-an-ira-beneficiary-rejects-the-inherited-assets
I hope this helps!
Question is the bank responsible to Notify you of the IRA and what happen if they don’t notify you?
I really don't know the answer to that one. On one hand, someone needs to notify the bank of the death of the account owner. And, if no one knows what accounts the deceased owner has in can take time. Typically that is the executor of the estate who is in charge. At that point, it is often a joint effort between the executor and whomever is custodian of assets to notify the beneficiaries of the account and their options. In my experience, I try to be as proactive as possible in seeking out beneficiaries from the contact information on file and discussing their options with them. I hope this helps.
Question were can I find the 9 month rule. I want to thanks you very much for you time.
Great video. I have a question on a possible exception. I am 58 years old. I have been disabled (and on SSDI since 2013...10 years) I fully expect to be on SSDI for 9 more years until I turn 67 and then my SSDI automatically converts to regular SS retirement until I die. My 85 year old mother just passed away last month and very generously left me an Inherited IRA valued at $116,000. Here's my question....As you talk about in the video will I have to have all my Inherited IRA dollars withdrawn within the 10 year rule -or- do I qualify for one of the EXCEPTIONS to the 10 year rule (because I'm disabled) whereby I can keep open this Inherited IRA for as many years into the future as I want to? Thank you so much for your time....
Great question, and yes there are a few exceptions and you may just be one of them. I'm glad you asked. It's also a great idea to discuss with your tax professional to make sure you abide by all year-end rules assuming this was inherited this calendar year and she passed away this year.
IMO, based on what you said, you are an eligible designated beneficiary (EDB).
This is a term established in the (SECURE) Act, which is effective for individual retirement accounts (IRAs) as of January 1, 2020. The SECURE Act distinguishes between an eligible designated beneficiary and other beneficiaries who inherit an IRA.
EDBs are:
*A surviving spouse,
*A disabled individual,
*A chronically ill individual,
*A minor child (under 18), or
*An individual who is not more than ten years younger than the account owner.
*Only the five individuals listed above can continue to take distributions over their life expectancy from IRAs.*
I hope this helps clarify your situation. Thanks for watching and the Sub!
@@seetheforestthroughthetrees Thank you so much for your response. It helps me tremendously.
Thank you very much for your detailed response. It helps me tremendously. Thank you @@seetheforestthroughthetrees
Glad to help. As always, everything on this channel is to bring awareness to different strategies. This is not personal financial advice.
Can you expand/clarify #5 and discuss the rules regarding whether or not you have an annual RMD if you inherited a traditional IRA after 2020 as a non-spousal beneficiary? That is the most confusing part and I've received conflicting information about it.
Great question regarding traditional IRAs and it can be confusing. Especially in 2023 when rules were updated. IN fact there was a Notice 2023-54 the IRS provided to give RMD relief in 2023. I would first direct you to your own personal financial and tax advisors. They are familiar with your particular situation. Any information on this channel is to provide additional education.
For 2024 and beyond, whether or not someone has an RMD depends upon several different factors. It's not as simple as spouse or non-spouse. It's now are you an eligible designated beneficiary or are you not?
An Eligible Designated Beneficiary (EDB under the secure ACT) still qualifies to stretch out distributions over their lifetime. EDBs are surviving spouses, minor children of the deceased owner (up to age 21), disabled individuals, OR non-spouse beneficiaries who are NOT more than 10 years younger than the deceased IRA owner. That last one is most applicable to someone naming a sibling, cousin, or friend around the same age as the beneficiary. These people are allowed to stretch out their RMD over their lifetimes.
This basically excludes adult children beneficiaries unless one is disabled.
If one is a Designated Beneficiary, like an adult child, and inherited in 2020 or later from someone who was not taking an RMD, then that individual is subject to the 10-year rule. They are NOT subject to RMDs.
If the person who passed away WAS taking RMDs, and one is a Designated Beneficiary, like an adult child, and inherited in 2020 or later, then that individual MUST continue taking RMDs each year for the first 9 years according to their own life expectancy AND the entire IRA must be withdrawn within 10 years of the original owners passing.
I hope this helps answer your question. It's always difficult in the beginning of rule changes. For many people, the key question to the answer is "Was the original owner taking an RMD?"
@@seetheforestthroughthetrees Thank you for the thorough response. It does align with what I was initially told by our account but then I read other "experts" that seem to contradict it. In this case, the parent died in 2021 at the age of 66 (was not receiving an RMD) and the designated beneficiary was an adult child (47 at the time of parent's death). So, it seems the 10 year distribution, but no RMD is in play.
You are welcome. And glad this channel could be a resource. There are many people who will read your question with different situations so if I answer, it must be thorough. Assuming that child did not have a disability or chronic illness then it seems your conclusion is correct. But, again, I encourage you to consult your accountant or tax advisor to make a final decision. Thanks for the sub!
@@seetheforestthroughthetrees Hi Colin - Thank you for posting this video. It's really helpful. I have a question for clarity.
You explained that an Eligible Designated Beneficiary who inherited in 2020 or later still qualifies to stretch out distributions over their lifetime. That includes non-spouse beneficiaries who are NOT more than 10 years younger than the deceased IRA owner.
Does that include a non-spouse beneficiary who is OLDER than the deceased IRA owner? Example: a parent who inherits an IRA from their adult child.
Thank you. Does this video also apply to an inherited traditional 401(k)?
Great question. In general, the same rules apply. Some plans let beneficiaries stay in the plan. All plans are different, and spouse and non-spouse beneficiaries must adhere to plan rules. Generally Inherited 401(k)s can be rolled into an "inherited IRA" or "inherited Roth IRA" at another custodian but you can't roll over the assets into a personal traditional or Roth IRA. _It's best to consult with a tax advisor before making any decisions. This is for general educational purposes and is not personal advice._
Thank you and I understand. Been subscribed for several months now and really appreciate your content!
Awesome! Glad to have you as part of the community! What's your favorite video so far?
@@seetheforestthroughthetreesI especially enjoy your videos that address updates based on new regulations or something new being talked about in the community.
question, if it was a brokerage IRA account do you pay state tax on that money if so do you pay the state taxes in your state or do you pay it in the state of the deceased
Great question. For clarification, These are two different items. Taxation of an estate occurs in the state in which the deceased lived. If you inherited and IRA and are now distributing that IRA, the state tax (if applicable) is paid in the state in which the person who withdraws the money has their primary residence. The distribution counts as income to the recipient, so state tax on that amount is determined by that person's income level.*
_*It's important that you discuss your personal strategy with your tax or financial advisor before making any planning decisions. All information in this post is for educational purposes. The information is deemed accurate from sources included but is not verified._
My sister left me as beneficiary on her Vanguard traditional retirement account. But she owed Medical and care home expenses.....is it protected because she named me as the beneficiary or will they take that money?
That's a great question, and one that unfortunately I don't have the answer to. My guess is that the estate would settle all claims and that would probably qualify as a claim against the estate. Maybe someone else in the community knows the answer here?
Can you combine inherited IRAs that are both traditional?
Great question. And the answer is...it depends. In many cases the answer is no. If they were inherited from different people the answer is no. If they were inherited at different times the answer is no. However, I believe that if a single person had multiple IRAs that you are now the beneficiary of, (acquiring two inherited IRAs from the same person at the same time) that you can combine them. That is the only situation I can think of where that is potentially possible. You would want to review with your IRA custodian as well as your financial and tax advisors.
@@seetheforestthroughthetrees thank you! It’s the same person, same time. Different companies. Sounds like it’ll just be easier to keep them separate till fully drawn though.
Some articles say only the original Roth IRA account has to have been 5 years or older for withdrawals by a beneficiary to be tax free.
But some seem to indicate the Inherited Roth IRA account the beneficiary opens to hold the money has to be 5 years old.
Do I have to pay any taxes on distributions from the Inherited Roth IRA account holding the money or do I have to wait 5 years myself also?
This is definitely a question to ask your tax advisor. It can be complicated, but I believe it is completely based on what the original owner did. 5-year rules are also different for conversions and for contributions. To be safe, in my opinion, in a hypothetical situation where someone inherited a Roth IRA that wasn't open and funded for at least five years, I would wait until five years total is satisfied (previous owner and inherited owner combined) before making withdrawals of earnings. Remember, withdrawals of principal contributions are always available tax and penalty-free. What you are asking about applies to earnings.
@@seetheforestthroughthetreesThank you. I'm virtually certain the original Roth IRA was more than 5 years old. My mother was 75 when she passed and retired in her 60's, plus the balance was over $80,000 which would have required at least 5 years worth of contributions before her retirement.
Assuming that the original Roth IRA account was over 5 years old why do you think my brokerage put a "T" in box 7 on the 1099-R instead of "Q"?
Should I be being taxed for any withdrawals from the inherited Roth IRA account given that the original was over 5 years old?
This is not personal advice and is for educational purposes. The custodian that held the original Roth IRA would have the data on when the account was opened and first funded, as well as the amount of annual contributions. But, this is also why I recommend my clients hold their form 5498 in their own files for each year. That way you have proof of the type of contribution/conversion and when it happened. I would attempt to acquire this information from the custodian who held the original Roth IRA.
According to retirement plan custodian, Ascensus: Use code T, _Roth IRA distribution, exception applies_ , to report Roth IRA distributions before the five-year waiting period has been satisfied (or if it’s not known whether the period has been satisfied), but the IRA owner is at least age 59½, has died, or is disabled (assuming there is proof of the disability). Code T also should be used when the Roth IRA owner takes substantially equal periodic payments.
Code T should not be used with any other codes.
I hope this information helps.
@@seetheforestthroughthetreesThank you. I will definitely keep this information in mind when talking to my brokerage.
Just a heads up here: Just recently took a continuing education course from WebCE. In the course regarding the five year rule in this situation, they say the following:
The primary advantage of Roth IRAs is that they provide for completely tax-free distributions as long as certain requirements are met. These requirements are both:
_The Roth IRA must have been held at least five years.
The distribution is taken per a triggering event, such as the owner’s age 59½, death, or disability._
These rules apply to Roth IRA beneficiaries as well as owners. Obviously, the triggering event is met since the Roth owner died; however, the five-year holding period must also be met. The original owner’s holding period *carries over* to the beneficiary; however, if owner’s holding period was less than five years, the beneficiary must “make up” the difference if he or she wants to receive distributions from the Roth completely tax and penalty free.
I hope that helps.