Inherited IRAs- Beneficiary Tax Options - YouTube

Okay, so today's Cardinal Lesson we're  talking about Inherited IRAs. And so  

why are Inherited IRAs important? Well,  first of all, for you folks watching,  

many of you have already inherited an IRA and  possibly you're stretching out the distributions  

over the rest of your lifetime, and  have been doing that for a while.  

Second of all, many of you are due to inherit an  IRA possibly from your parents, or a brother or  

sister. And for, they're just important.  And then many of you have IRAs yourself,  

and you have Beneficiaries. And in your  planning, at least if you come to me,  

we're going to be talking about how do you want  to leave this? Who do you want to leave it to?  

And then how do you want to leave it to them? And  how do you want them to pay taxes on it after they  

receive it? Okay. And those are all things that  can be planned out. So what we've got going on  

here is the Secure Act, which is a little bit  of old news by now. It was passed in 2019, and  

the effect that it had on Inherited IRAs started  with deaths after January 1st, 2020. So we've been  

living under this for a little over two years,  with anybody, where they've inherited an IRA  

and it's been two years or less, they're following  under the new rules of the Secure Act. And so why  

are we talking about this now? Well the IRS had  not issued regulations putting into practice  

the changes that were made in the  Secure Act. So for a couple of years,  

we were just reading the law literally, and  interpreting it, and giving people advice.  

And then now this, the new IRS Secure  Act Regulations have hit the street.  

And there's some kind of different stuff in  there, and it's still a little bit of uncertainty,  

but at the very least it's confusing. And  then they put them out for like 90 days, for  

people to comment or whatever, but they're pretty  much in. And so the Secure Act changed things for  

Beneficiaries on Inherited IRAs. And I'm going  to talk about that. And then they created a new  

class of Beneficiary, and then the new IRS  regulations that just came out in February of 2022  

changed it again, okay. So let's talk about the  Secure Act and the Secure Act did a whole lot to  

Retirement Plans, and the retirement space changed  a lot more than just this. But all we're talking  

about today is Beneficiaries and Inherited  IRAs. And what they changed is, before 2020,  

so if you inherited an IRA with a death ‘19..  2019 and before, you were able to stretch it,  

the distributions over your  lifetime. And the reality is  

most folks don't stretch it. Most folks is this  is the first money, the IRA money, that shows up  

when an Estate is settled. Because it doesn't go  through the Estate. It doesn't go through probate.  

IRAs have a named Beneficiary, and so most people  name their kids or their spouse. And when it's  

a case of the second death, and you're naming  the kids, this is the first money that the kids  

receive. And if it's traditional IRA money, which  most of it is, it's taxable. So if they draw $1  

out of there, which they have to start taking  some money, that's what this law is all about,  

but to get any of the money, they've  got to pay taxes on it. And for a lot  

of people that are Beneficiaries, this is the  first money that they can get their hands on.  

A lot of Beneficiaries just clean the account out,  just take it even though 40% of it goes to taxes.  

They want the other 60% so they can get their  hands on it. That's what we want to try to avoid  

when it comes to your planning for your Estate.  So your kids are a little better, or adult kids  

are a little better educated, and we have a  little better understanding of their situation  

so they don't do that. So that they're going to  at least possibly spread this out over several  

years to minimize the tax bill. A whole lifetime  of work and earnings in an IRA can be wiped out  

with just a quick transaction by an adult child  that's Beneficiary. So what the Secure Act did is,  

it said okay, we're not going to allow these  lifetime Beneficiaries anymore. So, or or lifetime  

distributions, where you're stretching the tax  out. You know a 60 year old person inherits an  

IRA, and they can stretch those distributions  from 60 until they ultimately die at 95.  

And that's a long time, and they say we're going  to take it from lifetime to 10 years. And so the  

10-Year Rule came into effect for deaths: 2020 and  after. And so we still had a limited understanding  

of how the 10-Year Rule works, because it isn't  like you had to take a certain amount every year  

for 10 years. The way it really worked, and  for some people this was actually better,  

is you could take nothing for the first 9 years,  and then in the 10th year take it all out. The  

only rule in the 10-Year Rule is that it has to be  empty by the end of the 10th year after the person  

passes away. So, but that's not really smart  planning either, because you know, if you had a  

$300,000 IRA- and to take it all in the  first year right after somebody dies-  

you know if 40% of it's gone to taxes,  that leaves the Beneficiary $180,000.  

If you leave the whole $300,000 in there  for 10 years and it grows to $500,000,  

and then you take the whole $500,000 out in  the 10th year, that's even more taxes. It's,  

you know, it's $200,000 of taxes if you use the  40%. It might even be more than that because  

the person's Tax Bracket, the Beneficiaries, would  just be blown out of proportion. So the real thing  

that you want Beneficiaries to do, when there's  a tax liability, is at the very least spread  

this over a number of years so that it doesn't  make their income have a huge spike, and they  

get into a high Tax Bracket. That's what we do  in our planning, for people like, for your IRA.  

I mean that may not be the top of your list,  the top of your list may be your own planning  

and your own distributions out of this thing.  And you're kind of saying, ‘Whatever's left,  

the kids can have.’ That's what people say to  me, but when I watch them and I watch them just  

squirrel money in their IRA, and just take out  the minimum. They actually, it plays out, that  

they're saying that that this IRA money is for me,  but then they're reluctant to actually do that.  

So it leaves a bunch of Pre-Tax money going to  their Beneficiaries at their death. I mean, that's  

just what I've witnessed throughout my practice.  And so I try to help people put together a plan  

where they're not going to put anybody, including  themselves, in a high tax situation. So the Secure  

Act changed it from lifetime to 10 years, and then  it also created a new class of Beneficiaries. We  

didn't have this before and they're called the  Eligible Designated Beneficiaries- how's that  

for a mouthful? I mean I just love these acronyms  that are created effectively. I guess this one was  

done by Congress or the writers of the  bill, because this is actually in the Secure  

Act. Eligible Designated Beneficiaries,  and we're going to call them an E-D-B,  

isn’t that fun. So you now, you got another  acronym that you don't know what it means. But  

I'm going to tell you what it means. An Eligible  Designated Beneficiary is either a spouse, so your  

spouse can be an Eligible Designate, children  under the age of 21. But you know if you're  

60 now, and you're doing the planning,  and you say, ‘Oh I'm going to name my kid,  

because he's just 14.’ But by the time you die,  he might be 34 or 44, this isn't going to work.  

But if a person dies, while  they have children under 21,  

and then one of those children or several of  them under 21, are actually the Beneficiaries-  

they're an Eligible Designated Beneficiary.  I'll tell you what that gets them in a sec.  

A Beneficiary that's disabled is one of these.  And anyone less than 10 years younger, in that,  

this is right in the the law.  I mean anyone less than 10  

years younger. So that means somebody about  your same age, a little younger or older,  

like your brother or sister, or your best friend,  or your boyfriend or girlfriend or just whatever.  

They are, if they're around your age, let's put  it that way, they can be an EDB, okay. And so what  

does an EDB get? An EDB, an Eligible Designated  Beneficiary, can still do the lifetime deal, okay.  

They don't have to go on the 10-year deal. That's  it, okay. So we've worked with that, doesn't sound  

like a big deal, but believe me it is. And it's  left a lot of Beneficiaries really in the dark  

because this stuff is pretty confusing. A lot of  financial advisors don't really study this stuff.  

I'm holding Ed Slot's book. Ed Slot is- I'm one  of his groupies- I mean he or his Master Elite  

Advisors and you know I go to him he's America's  IRA expert. He's a CPA out of New York and he's  

made a business, written a lot of books, and he  just has a whole team of people that all they do  

is study IRAs and Pension Plans. And try to advise  and teach lawyers and financial planners like me,  

and then we sign up and be part of his group.  So that he does a lot of the research for us  

and then we go to meetings with him and we  learn all this kind of stuff. And the real  

reason for learning it, you don't have to get the  detail that I'm giving you here, I just want you  

to understand that there's there's ways to plan  your retirement and then plan your estate so that  

you pay less taxes than you otherwise would pay.  And that the money goes swiftly to who you want it  

to go to. So that's what I do for a living. He's  my source when it comes to IRA money. Now this,  

the IRS they come out with this regulation  they've been preparing it for a couple of years,  

and they added something. So they said now if the  deceased already started RMDs- Required Minimum  

Distribution. So pretty much means if the person  who died is over 72, you know, and they've already  

started distributing to themselves over their  lifetime and they died 2020 or after, which is  

that's going to be the case if what  we're talking about now for the future.  

That and they already started RMDs, non-... so  if you're, and they're not an Eligible Designated  

Beneficiary, what they need to do is what you're  going to need to do if you're the Beneficiary.  

Is you're going to need to take RMDs or Required  Minimum Distributions years 1-9. And then in the  

10th year, you're going to need to empty the  thing. So they've added something. So if you  

inherit this money from like your parents, one of  your parents, and your parent was 85. And they've  

been collecting or they've been distributing  to themselves, they're already in RMDs,  

and you inherit let's say $400,000. Before we  read this rule, and to- excuse me, in February,  

we thought you could just take that $400,000  and just take it out in any way you want to do  

it. It just needed to be emptied after 10 years.  Now what we've got to do, is we've got to take  

RMDs starting this year or with the year they  die. And then every year we can take more,  

but we can't take less than the RMD. One, two,  three, four, five, six, seven, eight, nine. And  

then whatever's left by the end of the 10th year,  then we have to draw it all out. We can take more,  

we just can't take less. So I'm sure some of you  are going, ‘Wow, I'm just going to call you when  

I inherit money.’ And that not a bad idea, I  wouldn't expect you to memorize this stuff.  

You you could say it's kind of boring and the  reason it's not boring to me is I I deal with  

clients dying every week. I mean we're just, we're  dealing with this and helping out the heirs. So  

it's not boring to me because people come in with  what they want to do and then we tell them what  

they can do. Or if they can do what they want  to do, we show them how much taxes they're going  

to pay and possibly propose a different way. So  knowing all this stuff is real interesting to us,  

and it helps people. Now, so why does it  matter? Two things in your planning. Number one,  

is you might inherit an account, you  might be due to an inherited account,  

you're not sitting around waiting for somebody  before you to die, but a lot of people,  

when that's coming, they know that. And it's  an IRA and we can kind of prepare for all of  

this and just plan out so that it doesn't kill  you tax wise. And then for your own accounts,  

in your own plan, and your own Beneficiaries,  if you're leaving it to your children.  

Or your spouse first, and then maybe the second  one of you. If you're a married couple that  

passes away, it's going to go to the kids,  and then you may have kids that are going  

to treat this differently. You may have one kid  that's just going to clean out his or her third,  

and the other two kids you're hoping they're  going to stretch it, and stretch it to their  

best thing. But we can at least get a picture  of that, you can put your wishes down.  

The other thing that I'd suggest in  this planning, and we do a lot of this,  

is there's a lot of people- Let's take this  back to your age. Now if you're 63 or 64,  

and you're planning out your retirement. I mean  for some folks that retirement money or that IRA  

is for them. I mean they're saying we  got to create an income because they  

got to live on that supplement,  their Social Security check.  

That's some folks but there's probably  still going to be something left at the end.  

And especially we don't know when the  end is, so we still need to plan it out.  

But what I was going to mention is  we have a lot of folks doing the Roth  

IRA Conversion, and they're starting to do that  in their 60s. So that they don't face RMDs at 72,  

and then when they inherit or they pass this money  on to their kids, it's going to be Tax-Free to the  

kids. I mean the the Roth Conversion is one  way to do that, another way to do it is with  

you know with RMDs. Just take the RMD every  year, pay the taxes, and use the difference  

to purchase Life Insurance. And then Life  Insurance will come to their kids Tax-Free.  

You just name Beneficiaries the same way as this,  and they don't have all these rules to follow.  

Another way to do it, is just to pull it out, pay  the taxes, put the money in an After-Tax account,  

and just live off that. Use it, just have it, and  then leave that to them, and at least they don't  

have a bunch of rules in how they inherit it.  So there's a lot of planning we can do around  

this IRA and I'm finding that people have a  thirst for this. And they they kind of know  

about this stuff, and they really, this is what  we do, day in and day out, is we we help people  

plan out their whole retirement. And then we  do Estate Planning to to make sure that things  

are left to their family to their liking. So  I'm Hans Scheil and I thank you for listening.