May 23, 2025 • 27 mins
IRA Beneficiaries: Who Inherits What and When? – Just back from the Ed Slott
Conference, Chris Boyd shares his in-depth commentary on how the Secure Act changed
rules for distributing assets from an inherited IRA. Chris is joined by co-host Jeff Perry
as they explore the sometimes confusing and technical rules of the three distinct
categories of IRA beneficiaries. Chris outlines the basic rules as he points out that there
are exceptions to be aware of. Jeff highlights the need for financial advisors to
collaborate with client’s income tax preparers and estate planning to not only avoid
unnecessary taxes and penalties, but to have all the pieces work together as part of a
comprehensive financial plan.
For more information or to reach TEAM AMR, click the following link:
https://www.wealthenhancement.com/s/advisor-teams/amr
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Welcome to Something More with Chris Boyd.
Chris Boyd is a certified financial planner, practitioner,
and senior vice president and financial advisor at
Wealth Enhancement Group, one of the nation's largest
registered investment advisors.
We call it Something More because we'd like
to talk not only about those important dollar
and cents issues, but also the quality of
life issues that make the money matters matter.
(00:22):
Here he is, your fulfillment facilitator, your partner
in prosperity, advising clients on Cape Cod and
across the country.
Here's your host, Jay Christopher Boyd.
Welcome everybody.
Thanks for being with us for another episode
of Something More with Chris Boyd.
I'm here with Jeff Perry.
We're both of the AMR team at Wealth
Enhancement and glad to have you with us.
(00:47):
Last week, you may have been listening and
Jeff and Russ were handling the show and
I was really enjoying the mailbag while I
was away.
Well, in any case, as you may have
mentioned, I was doing some continuing education.
(01:07):
One of the video clips they referenced in
the program was by Warren Buffett saying, best
investment is investing in yourself.
That's what we're trying to do.
We're trying to invest in the kind of
education and information that helps us do what
(01:28):
we do with our clients even better.
So I thought I'd try to share, you
know, maybe there's all these various things we
could talk about Jeff, but I thought maybe
one of the tidbits that can get confusing
since the Secure Act and thought we'd talk
(01:48):
a little bit about what happens with different
kinds of beneficiaries from an IRA and try
to clarify some of those rules.
And candidly, this can get confusing, so I'll
try not to make it as clear as
mud as they say.
Well, just the other day, you and I
were talking about a client and he has
(02:10):
a beneficiary IRA and the amount that he
is taking, his inherited amount, seemed too small
based upon what the current rules might be.
But then we looked and he had like
10 years ago, he had started, he had
received this beneficiary IRA, inherited IRA.
(02:33):
So the rules were different then.
So it depends on when you might inherit
it too, right?
So that's exactly right.
So, you know, let's start with that.
So if you have an IRA that you
inherited before 2020, it was under the old
rules that allowed for a stretch over a
(02:54):
lifetime.
So you had a required distribution each year,
but it would last for many, many years.
And the opportunity to extend it over a
long time was great.
So in 2020, that rule changed.
(03:15):
And that was, I think, because of the
Secure Act, the original Secure Act.
And essentially, there's three different kinds of scenarios
you could find for different kinds of beneficiaries.
So we'll walk through them.
And there's a lot of variations within them.
And I'm going to do it in a
different order than Ed Slott and his team
(03:38):
did it when explaining this to our group.
But, you know, so the first group that
I want to talk about is the eligible
designated beneficiary.
And this is essentially someone who might be
eligible to be treated like the old rules,
the stretch IRA treatment.
(04:00):
Now, this would not be a spouse, right?
Or could it be?
Well, a spouse could be, a surviving spouse
could be one of those circumstances where you
could treat that.
And incidentally, even these kinds of eligible designated
beneficiaries who have the opportunity to treat it
(04:21):
like a stretch IRA, they also have the
option if they prefer to do it as
a 10-year rule, which is the other
more common approach now after the Secure Act.
So they don't have to take it over
the prolonged period of time.
I mean, the government is willing to let
you pay taxes before you have to?
(04:42):
You could opt to, exactly.
So let's assume you're not a surviving spouse.
And, you know, what are other circumstances where
you could start the treatment as someone who
could take it over, presumably, a lifetime with
(05:02):
these stretch IRA treatment?
Well, sort of a minor child.
So think about this.
Someone who dies who is old enough to
have required distributions, 73 or older, but dies
(05:24):
with a minor child, someone under the age
of 18.
So not a lot of those, right?
No, but some.
We do hear stories, maybe a former Patriots
football coaches or something like that.
You never know.
Well, it could be adoption, could be adoptions.
(05:45):
There are different circumstances, a minor child, and
it's not a grandchild, just to be clear,
but a child under the age of 21.
So while they're under the age of 21,
can do the stretch treatment.
But once they exceed that age 21, they
(06:05):
fall into the non sorry, the non eligible
designated beneficiary category, which basically means they have
the 10 year rule that applies.
So once you get to a certain age,
you age out of that stretch rule in
that scenario.
But a child, a minor child could be
(06:29):
a stepchild.
It could be an adopted child, could be
a certain eligible foster child.
There can be some circumstances that might go
beyond a biological child.
So that pool is growing as you get
more broadly defined.
Yeah, add some of these different things.
There was some clarifications that included more of
(06:50):
these possibilities.
There's also someone who is disabled, an individual
who is disabled.
And these are usually somewhat restrictive kinds of
terminology.
But think in terms of maybe like a
social security disability, not easy to be deemed
eligible for social security disability benefits.
(07:12):
It's that kind of, it's tough to get
that.
But if you have that kind of disability
level, you could opt for this stretch IRA
approach.
I think it's probably clear, but just for
make sure it is, we're talking about the
beneficiary status here.
So the beneficiary is disabled.
(07:32):
Who's exactly who's eligible to treat their inherited
IRA over a lifetime, like a stretch IRA
situation.
Spouse, a minor child until they age out,
a disabled person who has, you know, a
more serious disability, chronically ill individuals.
(07:55):
And that's a little more loose in the
definition of that.
And then individuals, not more than 10 years
younger than the decedent, the person whose original
IRA it was.
So think in terms of a sibling, within
(08:18):
10 years.
And if you're older, let's say you inherit
your siblings or friends IRA, and you know,
you're two years older than your sibling, well,
you're still qualify as not more than 10
years younger.
Sure.
Right.
Okay.
So those are various instances where you can
(08:43):
use the stretch IRA still, and they refer
to that as a eligible designated beneficiary.
That's who gets to get into that category
of that circumstance.
So a little bit confusing, but.
It seems confusing enough that if you happen
(09:04):
to inherit an IRA, you probably should, before
you do anything, talk to your financial advisor
and just see what category, if you're in
this category somehow, right?
Yeah, that's a good point.
Because it would be preferable, if you could,
to have the option to stretch it out
over a long period of time.
(09:25):
So there are going to be a lot
of benefits of the tax deferral and the
compounding and so forth.
Now, there's two other categories, because most people
don't fit into that category, right?
There's some, but most don't.
Now, as we said, a spouse, it's a
whole different thing.
They can either turn it into their own
IRA, and then it becomes their own issue,
or they can continue to keep it as
(09:47):
an inherited beneficiary IRA and have the option
as to take it over a lifetime.
And the rules for a spouse are a
whole nother layer of complexity, because there's a
range of possibilities.
A friend of mine, Bill Harris, even wrote
a book on this topic, because there's so
(10:09):
many different nuances.
And the rules have changed.
So it's even gotten more complex since he
wrote the book.
So in any case, let's keep that in
mind.
So OK, the least likely circumstance of the
other two possibilities is the non-designated beneficiary.
(10:32):
This is going to be someone who designates
their estate, a charity, a non-person entity,
maybe certain types of trust.
Some trusts have different characteristics than others, so
it depends.
But in effect, when there's not really a
(10:54):
person-type beneficiary that's counted, there's really a
five-year rule that applies.
And if it was a charity, you can
imagine they'd take it out right away.
Sure, well, they're not subject to any tax.
But this is one of those reasons why
don't leave your IRA to your estate.
(11:18):
Or maybe a trust.
This really steps into the estate planning portion
of financial planning, because it's common for people
who have a trust, they might name a
spouse as the beneficiary, and then they might
name the trust as a contingent beneficiary.
And sometimes you don't update your beneficiary.
(11:39):
Some people just name the trust.
So this, in addition to your financial advisor,
maybe it's talking to your estate planning attorney,
too, to see if this impacts your...
The right kind of choice you make, right.
And the terms of the trust are structured
in a way to give you better treatment
(12:01):
than the five-year rule.
Now, I kind of simplified that, because it's
actually more complicated than that.
Of course.
I think Alissa would know that by now.
So the scenario I just described is when
the person who had the IRA died after
(12:21):
the required beginning date, after they were required
to start their RMDs.
Now, the required beginning date is actually not
just when you turn 73, but it may
actually be generally the April 1st after you
turn 73.
(12:42):
So if somebody died even at 73, but
let's say their birthday was, I'll just make
it easy, in December of the one year,
and they just turned 73, but they're technically...
And they died, let's say, on their birthday,
just to make life easy.
(13:03):
So they might not necessarily be considered...or the
day after their birthday, whatever.
They might not be considered having to met
their required beginning date, because they actually could
have opted to defer it until the next
April 1st, within the rules.
(13:24):
So in any case, a little bit in
the weeds.
But again, check before you make any decisions.
Make sure you check.
So if someone hasn't reached their required beginning
date, what happens then is really...
It's a little bit confusing.
So the required minimum distributions on the new...you
(13:50):
know, the inherited IRA owner, what do they
do?
Beneficiary, right?
Yeah.
So it turns out, in that circumstance, they
have to take out the required distributions over
the deceased's single life expectancy table.
(14:11):
Essentially, they call it a ghost life rule.
So the distribution requirement is pretending that the
deceased is still alive to calculate the distribution
requirements, but on the single life table.
Now, is that a minimum that they have
to do?
Yeah.
They could do more.
(14:31):
I think so, yeah.
They could take it all, like the other
example.
People generally don't...the IRS doesn't generally mind if
you take it all.
Right.
So this could conceivably strike a circumstance where
you might have less than 10 years to
take that money out.
(14:52):
Sure.
Yeah, depending on how old the beneficiary is.
So if somebody died at, you know, 90,
I don't know, you know, something like that,
their single life table might be less than
10 years.
Sure.
Anyway, so that's a complicating factor.
Most people, right, in these circumstances, the...now, and
(15:14):
again, this was for non-designated benefi...estates, you
know, if it's left to your state or
if it's left to your certain types of
trusts that don't qualify.
Some trusts do qualify because they see through
to the...the right language is included and it
sees through to the beneficiaries of the trust.
Right.
So the most people fall into this category,
(15:36):
the non-eligible designated beneficiaries, and they have
this 10-year rule that applies.
So, essentially, the designated beneficiaries who do not
fit into those other categories, grandchildren, adult children,
(15:58):
some look through trusts.
They're going to be...and so most circumstances are
going to fall into this group.
Okay.
So what happens here?
We got two circumstances.
The original IRA owner passed either before or
after that required beginning date.
(16:21):
So let's say they died before the required
beginning date.
Okay.
So in that case, the inheritor of the
IRA has 10 years to take the money
out...
Yep.
...but has no distribution requirements each year.
(16:42):
It's just...they can decide whether to take it
all at the beginning, in the middle, at
the end, take a little bit each year.
It's up to them how they take it.
At the end of the 10 years, in
the year following the year that the person
died, they have to have emptied the account,
okay, to avoid the penalties.
(17:04):
So someone could do some tax planning in
this if they think they're in the low
bracket now and might be higher later or
the opposite?
Let's come up with a scenario.
For example, dad dies, leaves me an IRA.
I'm not a minor child.
Right.
(17:25):
I'm in my peak working years, and I've
got maybe five years before I retire.
Right.
Well, maybe I don't really want to take
distributions while I'm working, but once I retire,
boy, my income is going to be lower.
Maybe I'll take it then.
Your tax bracket.
I could take it all in the...
Income and tax bracket, right.
(17:45):
Yeah.
I could take it all over those five
years that are the last five years of
it or whatever.
I mean, just you come up with different
scenarios, but you have the idea.
Yep.
Okay.
Now, what if we change that story?
Same notion, same group of people.
Dad dies and so forth.
(18:06):
Well, in this case, dad was already receiving
his RMDs.
He started his RMDs.
So I don't know if I made a
good example when I did that a minute
ago.
But in this case, so dad is now
89 or 90 to 100, whatever.
Whatever it is.
(18:27):
I've got the stretch rules still apply for
the 10 years.
I've got to take a little bit out
each year, but I also have to have
it emptied by the end of the 10
years.
So because they started their distribution requirements, we
(18:51):
can't stop them.
The beneficiary stays on, in this case, the
father's schedule, but it has to be emptied
by 10 years?
Not necessarily.
That's a good point.
Yep.
So the point I'm making is because the
father had started his distributions, the inheritor has
(19:11):
to then continue to make distributions every year.
And once it gets started, it can't be
stopped.
Right?
Right.
So we have to take something.
Now, the way that's calculated, to your point,
is not actually based on dad's R&D.
Okay.
A good comment.
(19:32):
It's based on the inheritor's life expectancy on
a single life table.
Different chart.
Yep.
Different chart.
And then every year, we just subtract one
from that factor to come up with what
the balance of the value of the IRA
was on December 31st of the prior year.
And we take that original year factor and
(19:58):
subtract one, and now we divide by that
number to come up with our distribution requirement
this year, if that makes sense.
Now, oftentimes, custodians don't really help you make
sense of these, you know, what do I
need to take this year?
Where do I fit in these choices or
(20:20):
these categories of things?
So knowing the advisor that knows the right
answers to these can be really important.
Not only do we have the benefit of
going through these kind of classes and so
forth, we have the back office resources of
the Ed Slot team.
And when we've got a really, really complicated
(20:43):
case, we can just go to them and
say, hey, walk us through, what are the
issues here?
But as you can see, you know, there's
a lot of nuance to trying to navigate,
which circumstance am I in, you know?
And there's other – one of the things
that – we won't probably do this, Jeff,
but there was this great case they walked
(21:06):
through where an advisor said, here's a case
we ran into and approached the team with
their questions.
And it was all these variables that came
into effect and worked out to save the
client a lot, a lot of money that
– by helping them navigate how to make
(21:29):
some of these decisions when essentially in this
situation a spouse died, had a work plan,
the plan hadn't been looked at, you know,
10 years since the spouse died, but now
the spouse's RMD age was coming into effect.
They would have had to take distributions.
(21:50):
So what should they do?
The amount they had to take was very
large.
The way the calculation was based on the
surviving spouse's age.
It came into all these complexities.
They figured out a number of ways.
They did an NUA.
We talked about that topic not long ago.
They made some decisions that allowed them to
(22:12):
have a much more palatable approach to the
whole process.
They found there were some after-tax contributions
in the work plan that allowed them to
treat some of that differently as like Roth
conversion or something.
So anyway, it was a really interesting case.
But the point being, sometimes this stuff can
(22:32):
get really complicated.
And it's not just that you might withdraw
some money too little or too late and
have a tax, but there's penalties involved.
Yeah, and some of these decisions you make
could be meaningfully different in how you're taxed,
(22:53):
whether you have to take it out faster
or if you have the opportunity to take
it slower.
Or in some instances, maybe you're better off
for tax strategy, the timing of when you
take it because of your own RMDs might
be kicking in at a certain time, and
maybe it makes sense to take some of
that money sooner rather than later because of
(23:13):
your own.
It does make sense.
I'm thinking of one client that he had
an inherited IRA, which he knows his own
RMDs are coming at a certain date near
in the future, so he actually accelerated the
inherited IRA withdrawals because of a potential he
(23:35):
would be getting two IRAs and his tax
bracket would be at a much higher level.
Yeah, you can just see how that could
happen, right?
So timing that and strategizing around that can
really make sense.
And knowing the rules as to what you
can do and what you have to do
and the timing around those makes a difference.
This is also another example of where you
(23:57):
should consider your advisor part of your team.
And so you have your financial advisor talking
with your tax preparer, talking to your estate
planning attorney, and all making sure they're on
a united front that this makes sense from
a legal, from a tax, and from a
financial planning standpoint and not just looking at
(24:19):
solely the tax purposes, right?
Because sometimes when you get these types of
problems, you're just trying to avoid a tax
issue.
Yeah, exactly.
There may be estate planning opportunities of your
own to take advantage of, and it may
make sense to your financial plan.
You mentioned a Roth conversion as part of
(24:39):
some pre-tax money or post-tax money.
So there's a lot here, and it makes
sense to work with all of your team
to make sure you get the right answer
because it can have impacts beyond what you
initially think.
So I tried to give a little bit
of an explanation of this issue in a
way that hopefully isn't too complicated, but granted,
(25:01):
it's complicated.
And so it's not an easy—this is the
answer that always applies.
So in any event, hopefully that gives you
a little bit of insight as to how
you might need to think about things when
it's your circumstances, that you're either—as you're thinking
about who you assign as a beneficiary, why
(25:23):
you might choose someone versus someone else, the
rules they might treat around that, or if
you're thinking about when you inherit funds, how
to deal with them.
These are two sides of the same coin,
but these are important considerations.
And talk to your financial advisor, and if
you don't have someone that you're working with,
(25:44):
certainly reach out to our team.
We'd be happy to be a resource to
you anytime we can.
Jeff, I know there's more things we can
talk about.
We'll save it for another time, and thanks,
everybody, for being with us.
Until next time, keep striving for something more.
Thank you for listening to Something More with
(26:05):
Chris Boyd.
Call us for help, whether it's for financial
planning or portfolio management, insurance concerns, or those
quality of life issues that make the money
matters matter.
Whatever's on your mind, visit us at somethingmorewithchrisboyd
.com or call us toll-free at 866
-771-8901 or send us your questions to
(26:27):
amr-info at wealthenhancement.com.
You're listening to Something More with Chris Boyd
Financial Talk Show.
Wealth Enhancement Advisory Services and Jay Christopher Boyd
provide investment advice on an individual basis to
clients only.
Proper advice depends on a complete analysis of
all facts and circumstances.
The information given on this program is general
financial comments and cannot be relied upon as
pertaining to your specific situation.
(26:49):
Wealth Enhancement Group cannot guarantee that using the
information from this show will generate profits or
ensure freedom from loss.
Listeners should consult their own financial advisors or
conduct their own due diligence before making any
financial decisions.
Welcome to Something More with Chris Boyd.
Chris Boyd is a certified financial planner, practitioner,
and senior vice president and financial advisor at
Wealth Enhancement Group, one of the nation's largest
registered investment advisors.
We call it Something More because we'd like
to talk not only about those important dollar
and cents issues, but also the quality of
life issues that make the money matters matter.
(00:22):
Here he is, your fulfillment facilitator, your partner
in prosperity, advising clients on Cape Cod and
across the country.
Here's your host, Jay Christopher Boyd.
Welcome everybody.
Thanks for being with us for another episode
of Something More with Chris Boyd.
I'm here with Jeff Perry.
We're both of the AMR team at Wealth
Enhancement and glad to have you with us.
(00:47):
Last week, you may have been listening and
Jeff and Russ were handling the show and
I was really enjoying the mailbag while I
was away.
Well, in any case, as you may have
mentioned, I was doing some continuing education.
(01:07):
One of the video clips they referenced in
the program was by Warren Buffett saying, best
investment is investing in yourself.
That's what we're trying to do.
We're trying to invest in the kind of
education and information that helps us do what
(01:28):
we do with our clients even better.
So I thought I'd try to share, you
know, maybe there's all these various things we
could talk about Jeff, but I thought maybe
one of the tidbits that can get confusing
since the Secure Act and thought we'd talk
(01:48):
a little bit about what happens with different
kinds of beneficiaries from an IRA and try
to clarify some of those rules.
And candidly, this can get confusing, so I'll
try not to make it as clear as
mud as they say.
Well, just the other day, you and I
were talking about a client and he has
(02:10):
a beneficiary IRA and the amount that he
is taking, his inherited amount, seemed too small
based upon what the current rules might be.
But then we looked and he had like
10 years ago, he had started, he had
received this beneficiary IRA, inherited IRA.
(02:33):
So the rules were different then.
So it depends on when you might inherit
it too, right?
So that's exactly right.
So, you know, let's start with that.
So if you have an IRA that you
inherited before 2020, it was under the old
rules that allowed for a stretch over a
(02:54):
lifetime.
So you had a required distribution each year,
but it would last for many, many years.
And the opportunity to extend it over a
long time was great.
So in 2020, that rule changed.
(03:15):
And that was, I think, because of the
Secure Act, the original Secure Act.
And essentially, there's three different kinds of scenarios
you could find for different kinds of beneficiaries.
So we'll walk through them.
And there's a lot of variations within them.
And I'm going to do it in a
different order than Ed Slott and his team
(03:38):
did it when explaining this to our group.
But, you know, so the first group that
I want to talk about is the eligible
designated beneficiary.
And this is essentially someone who might be
eligible to be treated like the old rules,
the stretch IRA treatment.
(04:00):
Now, this would not be a spouse, right?
Or could it be?
Well, a spouse could be, a surviving spouse
could be one of those circumstances where you
could treat that.
And incidentally, even these kinds of eligible designated
beneficiaries who have the opportunity to treat it
(04:21):
like a stretch IRA, they also have the
option if they prefer to do it as
a 10-year rule, which is the other
more common approach now after the Secure Act.
So they don't have to take it over
the prolonged period of time.
I mean, the government is willing to let
you pay taxes before you have to?
(04:42):
You could opt to, exactly.
So let's assume you're not a surviving spouse.
And, you know, what are other circumstances where
you could start the treatment as someone who
could take it over, presumably, a lifetime with
(05:02):
these stretch IRA treatment?
Well, sort of a minor child.
So think about this.
Someone who dies who is old enough to
have required distributions, 73 or older, but dies
(05:24):
with a minor child, someone under the age
of 18.
So not a lot of those, right?
No, but some.
We do hear stories, maybe a former Patriots
football coaches or something like that.
You never know.
Well, it could be adoption, could be adoptions.
(05:45):
There are different circumstances, a minor child, and
it's not a grandchild, just to be clear,
but a child under the age of 21.
So while they're under the age of 21,
can do the stretch treatment.
But once they exceed that age 21, they
(06:05):
fall into the non sorry, the non eligible
designated beneficiary category, which basically means they have
the 10 year rule that applies.
So once you get to a certain age,
you age out of that stretch rule in
that scenario.
But a child, a minor child could be
(06:29):
a stepchild.
It could be an adopted child, could be
a certain eligible foster child.
There can be some circumstances that might go
beyond a biological child.
So that pool is growing as you get
more broadly defined.
Yeah, add some of these different things.
There was some clarifications that included more of
(06:50):
these possibilities.
There's also someone who is disabled, an individual
who is disabled.
And these are usually somewhat restrictive kinds of
terminology.
But think in terms of maybe like a
social security disability, not easy to be deemed
eligible for social security disability benefits.
(07:12):
It's that kind of, it's tough to get
that.
But if you have that kind of disability
level, you could opt for this stretch IRA
approach.
I think it's probably clear, but just for
make sure it is, we're talking about the
beneficiary status here.
So the beneficiary is disabled.
(07:32):
Who's exactly who's eligible to treat their inherited
IRA over a lifetime, like a stretch IRA
situation.
Spouse, a minor child until they age out,
a disabled person who has, you know, a
more serious disability, chronically ill individuals.
(07:55):
And that's a little more loose in the
definition of that.
And then individuals, not more than 10 years
younger than the decedent, the person whose original
IRA it was.
So think in terms of a sibling, within
(08:18):
10 years.
And if you're older, let's say you inherit
your siblings or friends IRA, and you know,
you're two years older than your sibling, well,
you're still qualify as not more than 10
years younger.
Sure.
Right.
Okay.
So those are various instances where you can
(08:43):
use the stretch IRA still, and they refer
to that as a eligible designated beneficiary.
That's who gets to get into that category
of that circumstance.
So a little bit confusing, but.
It seems confusing enough that if you happen
(09:04):
to inherit an IRA, you probably should, before
you do anything, talk to your financial advisor
and just see what category, if you're in
this category somehow, right?
Yeah, that's a good point.
Because it would be preferable, if you could,
to have the option to stretch it out
over a long period of time.
(09:25):
So there are going to be a lot
of benefits of the tax deferral and the
compounding and so forth.
Now, there's two other categories, because most people
don't fit into that category, right?
There's some, but most don't.
Now, as we said, a spouse, it's a
whole different thing.
They can either turn it into their own
IRA, and then it becomes their own issue,
or they can continue to keep it as
(09:47):
an inherited beneficiary IRA and have the option
as to take it over a lifetime.
And the rules for a spouse are a
whole nother layer of complexity, because there's a
range of possibilities.
A friend of mine, Bill Harris, even wrote
a book on this topic, because there's so
(10:09):
many different nuances.
And the rules have changed.
So it's even gotten more complex since he
wrote the book.
So in any case, let's keep that in
mind.
So OK, the least likely circumstance of the
other two possibilities is the non-designated beneficiary.
(10:32):
This is going to be someone who designates
their estate, a charity, a non-person entity,
maybe certain types of trust.
Some trusts have different characteristics than others, so
it depends.
But in effect, when there's not really a
(10:54):
person-type beneficiary that's counted, there's really a
five-year rule that applies.
And if it was a charity, you can
imagine they'd take it out right away.
Sure, well, they're not subject to any tax.
But this is one of those reasons why
don't leave your IRA to your estate.
(11:18):
Or maybe a trust.
This really steps into the estate planning portion
of financial planning, because it's common for people
who have a trust, they might name a
spouse as the beneficiary, and then they might
name the trust as a contingent beneficiary.
And sometimes you don't update your beneficiary.
(11:39):
Some people just name the trust.
So this, in addition to your financial advisor,
maybe it's talking to your estate planning attorney,
too, to see if this impacts your...
The right kind of choice you make, right.
And the terms of the trust are structured
in a way to give you better treatment
(12:01):
than the five-year rule.
Now, I kind of simplified that, because it's
actually more complicated than that.
Of course.
I think Alissa would know that by now.
So the scenario I just described is when
the person who had the IRA died after
(12:21):
the required beginning date, after they were required
to start their RMDs.
Now, the required beginning date is actually not
just when you turn 73, but it may
actually be generally the April 1st after you
turn 73.
(12:42):
So if somebody died even at 73, but
let's say their birthday was, I'll just make
it easy, in December of the one year,
and they just turned 73, but they're technically...
And they died, let's say, on their birthday,
just to make life easy.
(13:03):
So they might not necessarily be considered...or the
day after their birthday, whatever.
They might not be considered having to met
their required beginning date, because they actually could
have opted to defer it until the next
April 1st, within the rules.
(13:24):
So in any case, a little bit in
the weeds.
But again, check before you make any decisions.
Make sure you check.
So if someone hasn't reached their required beginning
date, what happens then is really...
It's a little bit confusing.
So the required minimum distributions on the new...you
(13:50):
know, the inherited IRA owner, what do they
do?
Beneficiary, right?
Yeah.
So it turns out, in that circumstance, they
have to take out the required distributions over
the deceased's single life expectancy table.
(14:11):
Essentially, they call it a ghost life rule.
So the distribution requirement is pretending that the
deceased is still alive to calculate the distribution
requirements, but on the single life table.
Now, is that a minimum that they have
to do?
Yeah.
They could do more.
(14:31):
I think so, yeah.
They could take it all, like the other
example.
People generally don't...the IRS doesn't generally mind if
you take it all.
Right.
So this could conceivably strike a circumstance where
you might have less than 10 years to
take that money out.
(14:52):
Sure.
Yeah, depending on how old the beneficiary is.
So if somebody died at, you know, 90,
I don't know, you know, something like that,
their single life table might be less than
10 years.
Sure.
Anyway, so that's a complicating factor.
Most people, right, in these circumstances, the...now, and
(15:14):
again, this was for non-designated benefi...estates, you
know, if it's left to your state or
if it's left to your certain types of
trusts that don't qualify.
Some trusts do qualify because they see through
to the...the right language is included and it
sees through to the beneficiaries of the trust.
Right.
So the most people fall into this category,
(15:36):
the non-eligible designated beneficiaries, and they have
this 10-year rule that applies.
So, essentially, the designated beneficiaries who do not
fit into those other categories, grandchildren, adult children,
(15:58):
some look through trusts.
They're going to be...and so most circumstances are
going to fall into this group.
Okay.
So what happens here?
We got two circumstances.
The original IRA owner passed either before or
after that required beginning date.
(16:21):
So let's say they died before the required
beginning date.
Okay.
So in that case, the inheritor of the
IRA has 10 years to take the money
out...
Yep.
...but has no distribution requirements each year.
(16:42):
It's just...they can decide whether to take it
all at the beginning, in the middle, at
the end, take a little bit each year.
It's up to them how they take it.
At the end of the 10 years, in
the year following the year that the person
died, they have to have emptied the account,
okay, to avoid the penalties.
(17:04):
So someone could do some tax planning in
this if they think they're in the low
bracket now and might be higher later or
the opposite?
Let's come up with a scenario.
For example, dad dies, leaves me an IRA.
I'm not a minor child.
Right.
(17:25):
I'm in my peak working years, and I've
got maybe five years before I retire.
Right.
Well, maybe I don't really want to take
distributions while I'm working, but once I retire,
boy, my income is going to be lower.
Maybe I'll take it then.
Your tax bracket.
I could take it all in the...
Income and tax bracket, right.
(17:45):
Yeah.
I could take it all over those five
years that are the last five years of
it or whatever.
I mean, just you come up with different
scenarios, but you have the idea.
Yep.
Okay.
Now, what if we change that story?
Same notion, same group of people.
Dad dies and so forth.
(18:06):
Well, in this case, dad was already receiving
his RMDs.
He started his RMDs.
So I don't know if I made a
good example when I did that a minute
ago.
But in this case, so dad is now
89 or 90 to 100, whatever.
Whatever it is.
(18:27):
I've got the stretch rules still apply for
the 10 years.
I've got to take a little bit out
each year, but I also have to have
it emptied by the end of the 10
years.
So because they started their distribution requirements, we
(18:51):
can't stop them.
The beneficiary stays on, in this case, the
father's schedule, but it has to be emptied
by 10 years?
Not necessarily.
That's a good point.
Yep.
So the point I'm making is because the
father had started his distributions, the inheritor has
(19:11):
to then continue to make distributions every year.
And once it gets started, it can't be
stopped.
Right?
Right.
So we have to take something.
Now, the way that's calculated, to your point,
is not actually based on dad's R&D.
Okay.
A good comment.
(19:32):
It's based on the inheritor's life expectancy on
a single life table.
Different chart.
Yep.
Different chart.
And then every year, we just subtract one
from that factor to come up with what
the balance of the value of the IRA
was on December 31st of the prior year.
And we take that original year factor and
(19:58):
subtract one, and now we divide by that
number to come up with our distribution requirement
this year, if that makes sense.
Now, oftentimes, custodians don't really help you make
sense of these, you know, what do I
need to take this year?
Where do I fit in these choices or
(20:20):
these categories of things?
So knowing the advisor that knows the right
answers to these can be really important.
Not only do we have the benefit of
going through these kind of classes and so
forth, we have the back office resources of
the Ed Slot team.
And when we've got a really, really complicated
(20:43):
case, we can just go to them and
say, hey, walk us through, what are the
issues here?
But as you can see, you know, there's
a lot of nuance to trying to navigate,
which circumstance am I in, you know?
And there's other – one of the things
that – we won't probably do this, Jeff,
but there was this great case they walked
(21:06):
through where an advisor said, here's a case
we ran into and approached the team with
their questions.
And it was all these variables that came
into effect and worked out to save the
client a lot, a lot of money that
– by helping them navigate how to make
(21:29):
some of these decisions when essentially in this
situation a spouse died, had a work plan,
the plan hadn't been looked at, you know,
10 years since the spouse died, but now
the spouse's RMD age was coming into effect.
They would have had to take distributions.
(21:50):
So what should they do?
The amount they had to take was very
large.
The way the calculation was based on the
surviving spouse's age.
It came into all these complexities.
They figured out a number of ways.
They did an NUA.
We talked about that topic not long ago.
They made some decisions that allowed them to
(22:12):
have a much more palatable approach to the
whole process.
They found there were some after-tax contributions
in the work plan that allowed them to
treat some of that differently as like Roth
conversion or something.
So anyway, it was a really interesting case.
But the point being, sometimes this stuff can
(22:32):
get really complicated.
And it's not just that you might withdraw
some money too little or too late and
have a tax, but there's penalties involved.
Yeah, and some of these decisions you make
could be meaningfully different in how you're taxed,
(22:53):
whether you have to take it out faster
or if you have the opportunity to take
it slower.
Or in some instances, maybe you're better off
for tax strategy, the timing of when you
take it because of your own RMDs might
be kicking in at a certain time, and
maybe it makes sense to take some of
that money sooner rather than later because of
(23:13):
your own.
It does make sense.
I'm thinking of one client that he had
an inherited IRA, which he knows his own
RMDs are coming at a certain date near
in the future, so he actually accelerated the
inherited IRA withdrawals because of a potential he
(23:35):
would be getting two IRAs and his tax
bracket would be at a much higher level.
Yeah, you can just see how that could
happen, right?
So timing that and strategizing around that can
really make sense.
And knowing the rules as to what you
can do and what you have to do
and the timing around those makes a difference.
This is also another example of where you
(23:57):
should consider your advisor part of your team.
And so you have your financial advisor talking
with your tax preparer, talking to your estate
planning attorney, and all making sure they're on
a united front that this makes sense from
a legal, from a tax, and from a
financial planning standpoint and not just looking at
(24:19):
solely the tax purposes, right?
Because sometimes when you get these types of
problems, you're just trying to avoid a tax
issue.
Yeah, exactly.
There may be estate planning opportunities of your
own to take advantage of, and it may
make sense to your financial plan.
You mentioned a Roth conversion as part of
(24:39):
some pre-tax money or post-tax money.
So there's a lot here, and it makes
sense to work with all of your team
to make sure you get the right answer
because it can have impacts beyond what you
initially think.
So I tried to give a little bit
of an explanation of this issue in a
way that hopefully isn't too complicated, but granted,
(25:01):
it's complicated.
And so it's not an easy—this is the
answer that always applies.
So in any event, hopefully that gives you
a little bit of insight as to how
you might need to think about things when
it's your circumstances, that you're either—as you're thinking
about who you assign as a beneficiary, why
(25:23):
you might choose someone versus someone else, the
rules they might treat around that, or if
you're thinking about when you inherit funds, how
to deal with them.
These are two sides of the same coin,
but these are important considerations.
And talk to your financial advisor, and if
you don't have someone that you're working with,
(25:44):
certainly reach out to our team.
We'd be happy to be a resource to
you anytime we can.
Jeff, I know there's more things we can
talk about.
We'll save it for another time, and thanks,
everybody, for being with us.
Until next time, keep striving for something more.
Thank you for listening to Something More with
(26:05):
Chris Boyd.
Call us for help, whether it's for financial
planning or portfolio management, insurance concerns, or those
quality of life issues that make the money
matters matter.
Whatever's on your mind, visit us at somethingmorewithchrisboyd
.com or call us toll-free at 866
-771-8901 or send us your questions to
(26:27):
amr-info at wealthenhancement.com.
You're listening to Something More with Chris Boyd
Financial Talk Show.
Wealth Enhancement Advisory Services and Jay Christopher Boyd
provide investment advice on an individual basis to
clients only.
Proper advice depends on a complete analysis of
all facts and circumstances.
The information given on this program is general
financial comments and cannot be relied upon as
pertaining to your specific situation.
(26:49):
Wealth Enhancement Group cannot guarantee that using the
information from this show will generate profits or
ensure freedom from loss.
Listeners should consult their own financial advisors or
conduct their own due diligence before making any
financial decisions.
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