As a financial advisor at Impel Wealth Management, I see a variety of inheritance situations. But lately, several of our clients have inherited Individual Retirement Accounts (IRAs) and other tax-advantaged retirement plans. Let’s talk about how to manage these blessings.
What are my options?
When inheriting an IRA, you can either cash it out and pay the taxes, or you may roll it over to a “Beneficiary IRA,” also known as an “Inherited IRA,” with no immediate tax consequence. Other options depend on whether you are an Eligible Designated Beneficiary or not, and what year the original account owner passed. Examples of an Eligible Designated Beneficiary or EDB, are a spouse, a disabled or chronically ill person, someone more than 10 years younger than deceased, or a minor child of deceased.
Source: iStock.com/Moussa81
If you are a Spouse or Eligible Designated Beneficiary:
If you are a spouse or other Eligible Designated Beneficiary, you may “stretch” the IRA. This means that you can roll it over to your own retirement account or IRA. Then you can take out money as needed, and pay taxes on each distribution, over the age of 59 ½ without a penalty. However, if the original owner passed on/after the year 2020, and was taking required minimum distributions (RMDs), you need to start taking RMDs yourself, based on your life expectancy.
If you are NOT an Eligible Designated Beneficiary
If you are not an Eligible Designated Beneficiary, you now have 10 years to take out the money in the form of required minimum distributions. These inherited IRAs must be distributed over 10 years from the date of death, and they must be completely distributed by December 31st in year ten. There is a 10-year rule as part of the SECURE Act of 2019 that states you must take RMDs each year and deplete the account by the 10th year. This has been waived for years 2020 through 2024.
What if I need the money to live on?
For clients that need the money, you can take out the distributions right away or pro-rata (one-tenth every year for 10 years). There is no penalty, but you will need to pay taxes on your distributions.
Source: iStock.com/Oleksandr Melnyk
What if I don’t need the money right now?
For clients that don't need the money currently, you have a couple of options. First, you can take out the required minimum distribution as required by law and look for an opportunity in the next 10 years to take out the bulk of the assets in the beneficiary IRA.
For Example: If you are retiring at the age of 63, and you will not collect your pension or social security until age 65, you can use the Beneficiary IRA to supplement your income without increasing your normal tax basis.
Many of our clients want to take the smallest amount in withdrawals to avoid the extra taxes they will pay. These clients take out the required minimum distribution until they see a point in the future (retirement) where their income may be lower and take more withdrawals then.
Source: iStock.com/Ridofranz
Can I use my distributions to fund a Long Term Care Policy?
Another option for Beneficiary IRAs is to fund a long-term care insurance policy. You can take the money out pro-rata over 10 years and use the taxed distributions to help pay the premiums on a 10 year-pay policy. At the end of 10 years, you will have depleted the Beneficiary IRA and you may have completed funding a long-term care policy.
What are some other strategies?
Some other inherited IRA strategies we may advise you on include Roth IRA conversions, charitable giving, and coordinating distributions with other retirement account withdrawals.
At Impel Wealth Management, we can help you calculate which strategy is best for you. We are here to help you with your investment and retirement needs. If you have any questions, please feel free to reach out to one of our Certified Financial Planners to help “move life forward.”
© 2024 Irene Zurowski CFP® CRPS®
Financial Advisor
The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
Investors cannot directly invest in indices.
This information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
Securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker/dealer and Registered Investment Adviser. Cetera is under separate ownership from any other named entity.
Registered Address:2006 4TH ST CUYAHOGA FALLS, OH 44221
Featured Blog Image Source: iStock.com/cienpies