How to Protect Your Inheritance

Hunter describing RMD strategies for inherited retirement accounts.
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TRANSCRIPT:

Sadly, Uncle Sam doesn’t show up to a funeral to give his condolences, instead he shows up in the form of a letter from the IRS informing you that you owe a penalty for missing a required minimum distribution from the deceased’s retirement account. Make sure you properly inherit a retirement account as it fits your situation, then make sure you properly distribute the money as it aligns with IRS guidelines and your plans. Hi, I’m Hunter Brockway, founder of Boca Retirement Strategies, here to guide you to a successful stress-free retirement while spending more and avoiding being killed in taxes. One less desirable side of my job is talking about and experiencing tragic life events such as death with clients. However, I know in my heart that by having these hard conversations with the clients, they are better prepared and can focus on their family in the grieving process when life tragedies happen, knowing we are there to help them. A quick reminder about about RMDs.

These are mandatory withdrawals from a tax-deferred retirement account after reaching a certain age, currently 72 but soon to be 73 or 75 under regulations. RMDs are calculated based on the account balance of December 31st of the prior year with different rules for different individuals. The first key thing to know about inherited RMDs is selecting how you inherit the account in the first place. There are different sets of rules if you are an individual more than 10 years younger than the account owner versus the account owner’s spouse versus someone with disabilities versus a trust or other entity. The IRS breaks you down into categories known as eligible and non-eligible beneficiaries. There are also designated and non-designated. The rules also changed recently with Secure Act 2.0. The way the rules were written caused so much confusion that when professionals asked for clarity, the IRS seemed wasn’t even sure themselves. For this video, we’re going to briefly discuss the unique sets of rules for spouses, then we will focus on inheriting a tax-deferred retirement account as a child of the deceased or someone who is not the spouse, not disabled, not a trustor entity, and at least 10 years younger than the deceased, but also not a minor. Let’s start with the spousal rules and options. If your spouse passed away after their required beginning date, the beginning start date of their RMD that is, you must distribute a year-of-death RMD.

If you need to access the money and they passed before their required beginning date, you could do an inherited IRA. With an inherited IRA, you could delay distributions until after the decedent reached RMD age, or take distributions according to your own age, or distribute per the 10-year rule. If you need access to the money and they passed after their required beginning date, you could again do an inherited IRA. Under this scenario, you would take distributions based on your life expectancy and the IRS’s distribution table. Another option you have as a spouse is to roll over your spouse’s IRA into your own IRA. This alleviates some distribution rules but the one downside is this restricts access until age 59 and a half. So if you’re younger than that and need the money, it would not be a good fit. You could disclaim the IRA and send it to the contingent beneficiary if you don’t need the money at all. This is generational tax planning. One last tidbit about inherited IRAs, they offer no creditor protection and are not eligible for Roth conversions. If you are not a spouse and you are listed as a beneficiary on a tax-deferred retirement account at the time of the account owner’s passing, again, more than 10 years younger, not a trust, not disabled, and without going down any other rabbit holes.

Speaking in generalities, to most of you watching this video, I am not a beneficiary you will have two different options, two dramatically different options. Option one, inherit the IRA, take a check, and give a huge portion of your loved one’s legacy to Uncle Sam. Option two, establish an inherited IRA. Let’s discuss the usually smarter option two. Again, you’ve selected to establish an inherited IRA so you are not distributing the account. If your loved one passes after their required beginning date, being the start date of their RMD, you must distribute a year of death RMD. In most cases, as we’re discussing here, you will likely fall into the 10-year rule. If your loved one passed after their required beginning date, you must take RMDs throughout the 10 years according to the IRS’s table, and the account must be emptied by the end of the year 10 following the account owner’s death. The IRS’s table isn’t split evenly to divide the account by those 10 years, you’re looking for tax planning opportunities may take more in years of lower income or less in years of higher income or maybe more in years one through five if you expect to get a promotion and a raise in year six. I could go on and on with the examples I’ve seen but I think you get the point. Now if your loved one passed before their required beginning date you don’t owe yearly RMDs however the account must still be emptied by the end of the year 10. So that might look something like taking nothing in years one through nine and taking everything in year 10 but just as we just discussed that probably wouldn’t be the wisest tax move. Again this is a tax deferred retirement account so everything pulled from this account is taxed as ordinary income. No you cannot make a Roth conversion with an RMD but you could distribute the money and then contribute it to an individual investment account as one example if you don’t need the money.

Take action and remember there are different rules for spouses, minor children, disabled people not more than 10 years younger, individuals more than 10 years younger, and trusts. Roth IRAs have no RMDs in your lifetime or the lifetime of your beneficiaries. Timely converting tax-deferred dollars to Roth can enhance the legacy you wish to leave the hunt. Be cautious of what you read on the internet. Many articles, including on the IRS’s website, are outdated. Consider trust options to maintain control of your legacy beyond your years and protect heirs from getting a tax hit at inopportune times. Consider lifetime gifting to limit tax hits to heirs. Hold family meetings to discuss legacy goals and what to expect, and have a 10-year tax plan. If you would like to learn more about the value we deliver to our clients, you can schedule a brief phone call on our website at bocaretirement.com or send us an email at contact at bocaretirement.com. Enjoy your successful retirement, and thank you for watching.

 

 

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