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Tom Vaughan is a Certified Portfolio Manager and CEO of Retirement Capital Strategies. Retirement Capital Strategies is a registered investment advisor located in San Jose, California.

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Should I be doing anything differently with my strategy for withdrawing, from my beneficiary IRA, with the proposed rules caused me to have any kind of penalties for missing these withdrawals in the past?

TOM VAUGHAN:
So let’s try to discuss what the question is. Number one, somebody inherits an IRA, right So they call it a beneficiary IRA. There are a lot of different things that can happen depending on who you are and who the person was that gave it to you. So if you’re a spouse and so your spouse passes away and that spouse has an IRA, you can make that your IRA, right So that’s fairly straightforward and that we get a lot of those. Those are pretty simple. And then, then it’s just yours. And you’ve handled that like you normally would, when you get to be 72, you have to start taking money out.

That’s a normal process. but a beneficiary IRA is established if it’s not a spouse. So it’s a separate account is kind of set up money, goes in there. So it could be from your parents could be from a sibling, a friend, whoever it is. And then there is criteria for how you take the money out and it gets super crazy. So first of all, a normal IRA is one where you have to distribute the money over a 10 year period. So this is somewhat new. It’s only been around for what, a three or four years now.

Yeah. So they snuck this in there. I think it’s bad. They moved the minimum distribution age back from 70 and a half to 72, which sounds great. Except they made it so that the beneficiaries have to take the money out over a 10-year period which before they could stretch that. What we used to call a stretch IRA. We can stretch that out for the lifetime of the beneficiary. and so those were really awesome and take out a little bit each year and no real big problems as far as that goes. So now if you have to take all the money out in 10 years, there’s a couple of issues that I see. Number one is just the size, the size of the IRA that you have inherited matters. If you inherited a $20,000 IRA and you have to take it out over 10 years, the strategies aren’t that critical.
It’s not enough money to really push you into higher tax brackets. If you inherited a $2 million IRA, that’s a totally different deal. Now you’re talking about a lot of money, and, basically what I would do without knowing anything else is basically just take out a ten-year requirement of distribution divided by 10, the first year, take that out, divided by nine, you know, use the ending year value next year, divided by nine, take that out, divide by 8, 7, 6, 5, 4. And so if I didn’t know anything else that that’s one of the strategies I would use just because what I don’t want to have happen is all of that money, a $2 million IRA, that’s now turned into $3 million over 10 years because that 7% money doubles every 10 years.
Right. So, that’s right. Double. So before a million dollars, that’s a huge amount of money to have come out at the end. There are all kinds of other issues there. maybe you’re about to retire. We were talking about this earlier, you know, so two years from now you’re going to retire.
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Withdrawal Strategy From a Beneficiary IRA

When you inherit an IRA from a deceased loved one, you may be unsure of how to manage the account and what withdrawal strategy is best. As the beneficiary of an IRA, it is important to understand the rules and regulations that govern the account and to develop a withdrawal strategy that fits your individual needs.

The first step in developing a withdrawal strategy is to determine who the beneficiaries are. The beneficiary designation determines the distribution of the account and how much each beneficiary will receive. It is important to review the beneficiary designation form to make sure it is up-to-date and that all beneficiaries are listed.

Once the beneficiaries have been identified, it is important to understand the different types of withdrawals that can be taken from a beneficiary IRA. Generally, withdrawals from a beneficiary IRA are taxable and must be taken within five years of the deceased’s date of death. There are also rules regarding minimum required distributions that must be taken each year.

It is important to consider the tax implications of each withdrawal. Beneficiaries should consult with a tax professional to determine the best way to minimize taxes and maximize the benefits of the account.

When developing a withdrawal strategy, it is important to consider the long-term implications of taking money out of the account. Beneficiaries should consider their current and future financial needs when determining how much to withdraw and how often.

In addition to taking withdrawals, beneficiaries may also want to consider other options such as rolling the account over into a new IRA or converting it to a Roth IRA. These options may provide additional tax benefits and can help to ensure that the account continues to grow over time.

Finally, it is important to periodically review the beneficiary IRA and make sure that the account is still in line with the beneficiary’s goals and objectives. This may include making changes to the beneficiary designation or adjusting the withdrawal strategy.

By understanding the rules that govern beneficiary IRAs and developing a withdrawal strategy that meets the beneficiary’s needs, beneficiaries can ensure that their loved one’s legacy is preserved and that the account can continue to grow and provide benefits for years to come.