Inherited IRAs can be very challenging for investors to understand. Not only are there a series of different rules that govern how money must be withdrawn from them in each unique situation, but those rules also changed substantially with the recent passage of the Secure Act. In this episode, we provide an overview of Inherited IRAs and what investors need to know about them.

02:39 – The key rules that govern required minimum distributions for inherited IRAs.
06:52 – The pre 2020 rules for inherited IRAs
11:10 – The rules for non-spouses pre-2020
15:23 – The Secure Act and the post 2020 rules for inherited IRAs
18:32 – The rules for non-spouses post 2020
20:12 – Financial planning opportunities with inherited IRAs

ABOUT THE PODCAST
Learning how to be a financial planner is one thing. Doing it is another. Follow along with new financial planners Jack Forehand (@practicalquant) and Justin Carbonneau (@jjcarbonneau) as experienced veteran Matt Zeigler (@cultishcreative) helps them navigate the complex world of financial planning and learn about the most important topics that impact all of our financial futures. From investments to retirement to college planning to estate planning to insurance and beyond, we will cover the major financial planning issues that impact all of our lives and will provide a framework to help investors tackle them. We hope you will join us on our learning journey.

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Inherited IRAs – What Investors Need To Know

Individual Retirement Accounts (IRAs) have long been a popular investment option for individuals looking to save for retirement. However, many people may not be familiar with the concept of “inherited IRAs” and how they can play a role in estate planning. Inherited IRAs are unique investment vehicles that provide beneficiaries with several benefits and considerations. This article aims to shed light on what investors need to know about inherited IRAs.

What is an Inherited IRA?

An inherited IRA is an individual retirement account that is passed down to a beneficiary after the account owner’s death. Unlike traditional or Roth IRAs, inherited IRAs have specific rules and regulations that beneficiaries must abide by to fully maximize the benefits of the account. Inherited IRAs can be established regardless of the relationship between the account owner and the beneficiary, whether they are a spouse, child, or another family member.

Key Considerations for Beneficiaries

1. Required Minimum Distributions (RMDs): One of the crucial aspects of inherited IRAs is the requirement to take the required minimum distributions (RMDs). Depending on the beneficiary’s age and the age of the original account owner at the time of their death, RMDs must be taken annually to avoid penalties. The rules regarding RMDs for inherited IRAs can be complicated, so it is advisable to consult with a financial advisor or tax professional to ensure compliance.

2. Stretching the IRA: One strategy for maximizing the benefits of an inherited IRA is known as “stretching.” This method allows beneficiaries to withdraw smaller amounts over an extended period, potentially reducing the tax burden and allowing the remaining funds to continue growing tax-deferred. However, the stretch IRA strategy must be implemented correctly according to IRS guidelines.

3. Tax Implications: Inherited IRAs may have tax implications for beneficiaries. The tax treatment of the account may vary depending on whether it is a traditional or Roth IRA. With traditional inherited IRAs, withdrawals are generally subject to ordinary income tax rates, while inherited Roth IRAs are usually tax-free if certain qualifications are met. Again, seeking professional tax advice is vital to understanding the tax implications of an inherited IRA.

4. Non-Spouse Beneficiaries vs. Spouse Beneficiaries: Non-spouse beneficiaries have different rules and options compared to spouse beneficiaries. Non-spouse beneficiaries must generally start taking RMDs immediately, while spouse beneficiaries can choose to treat the inherited IRA as their own and delay RMDs until they reach retirement age.

5. Inherited IRAs and Estate Planning: Inherited IRAs can be utilized as part of an individual’s estate planning strategy. By designating a specific beneficiary for the account, the assets within the IRA can pass directly to the beneficiary without going through the often-lengthy probate process. Additionally, certain trust arrangements can be established to provide greater control and protection over the inherited IRA.

Conclusion

Inherited IRAs provide individuals with a valuable estate planning tool that allows for the seamless transfer of assets to beneficiaries. Understanding the rules and considerations surrounding inherited IRAs is crucial for maximizing the benefits of these accounts. Seeking professional advice from financial advisors or tax professionals can help investors navigate the complexities of inherited IRAs and ensure compliance with regulations. Taking the time to educate oneself on inherited IRAs is a proactive step towards securing a financially sound future for both account owners and their beneficiaries.