Inherited IRA Advice: California Estate Planning Attorney explains how SECURE Act changed IRAs, why you need IRA Trust. 👉 Book a Call at to review or set up an IRA Trust and pass on your IRA the right way.

The laws around inheriting IRAs are complex and fraught with danger while the opportunities are huge. Learn the crucial steps to ensure your legacy. Topics include the SECURE Act, IRA Trusts, Roth Conversions, Out-of-State IRAs, and the mistakes made by almost 90% of heirs.

Among the many topics we’ll cover in this legal webinar are:

The SECURE Act
Required Minimum Distributions (RMDs)
Tenth year rule
Designated beneficiaries
IRA Trusts
Asset Protection
Tax Bracket Arbitrage
ROTH conversion

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Passing on an Individual retirement account (IRA) or other retirement accounts to heirs can be a valuable asset transfer strategy for estate planning. However, to avoid making mistakes that can lead to costly tax penalties or disqualify the account from stretching over beneficiaries’ life expectancy, it’s essential to avoid common errors and pitfalls. Here are some common traps to be aware of when contemplating IRA or retirement account inheritance:

1. Forgetting to Name Beneficiaries or Not Updating Them
One common mistake is failing to designate a beneficiary or forgetting to update your IRA or other retirement account beneficiary designations. When no beneficiary is named, the account passes to the estate and may trigger premature distribution or higher taxes. If an outdated beneficiary is listed, the designated person could unwittingly lose their rights to stretch the inherited account over their lifetime.

2. Naming the Wrong Beneficiaries
Designating beneficiaries is critical when planning to transfer retirement accounts. However, failing to name appropriate beneficiaries, such as minor children or disabled heirs, can cause adverse tax consequences. Naming an estate as the beneficiary can also result in adverse tax consequences, as the account’s distributions must be distributed either within five years or within the first year of death, resulting in more significant tax liabilities.

3. No Successor Beneficiaries or Contingent Beneficiaries
Another mistake is failing to name successor beneficiaries. A successor beneficiary is a person who receives ownership of the IRA or retirement account if the primary beneficiary dies before the account owner. If no successor is named, the account must be distributed to the estate, triggering higher taxes and potentially losing the ability to stretch over the beneficiary’s lifetime.

4. Overlooking the Required Minimum Distributions (RMDs)
For those reaching 70 ½ years old, a crucial factor to consider is that the IRS has required minimum distributions (RMDs) for most Traditional IRA or retirement accounts. Not taking out the RMDs before the deadline or taking out less than the required amount can result in a 50% tax penalty. Taxes are due on all RMD amounts not withdrawn by December 31st of the year in which the account owner turns 70 ½.

5. Not Understanding the “Stretch” Option.
One of the biggest mistakes by beneficiaries is not taking advantage of its “Stretch” option, which allows the inherited IRA or other retirement account to be distributed over the beneficiary’s lifetime rather than being redeemed at a higher tax rate.

The Bottom Line
Passing on an IRA or retirement account with care and prudence is essential to ensure that the designated heirs and beneficiaries benefit as much as possible. Understanding the common traps and avoiding these mistakes is critical for minimizing adverse tax consequences and ensuring satisfying execution of your estate plan. Consulting with a qualified financial or tax professional can also be beneficial in clarifying any retirement account questions or concerns.