Ep. 20 - You Do Not Want To Inherit An IRA

Ep. 20 - You Do Not Want To Inherit An IRA - Transcript

Ledly Jennings: [: 00:00:00

to the Good Steward Law and Wealth Podcast, where host Ledley Jennings explores law and finance to help listeners become better stewards of their wealth. Each episode covers the latest trends and strategies in estate planning, elder law, investment, and wealth management. Tune in for the knowledge and tools for financial success and security.

Welcome

anges since it was enacted in: 2019

So, it's important to talk about now that the [00:01:00] law has been clarified and we've kind of settled in. Um, it's important that people know the changes that. Came with that law. So what is an IRA? Um, it's an individual retirement account. Many people know about that because a lot of wealth is accumulated in IRAs right now throughout the United States.

Um, you contribute to that account, um, with tax benefits. So you get deductions when you contribute. And then it grows, they call it a tax advantaged account. Uh, when you take it out, it is taxable then. Um, but you get benefits when you put money into an IRA. So kind of the old rule, the government made us, you know, three promises.

money, it helps you, uh, tax [: 00:02:00

The second promise was in retirement, you would pay that tax back gradually over time. So once you start withdrawing your funds that you worked your life to save for, Gradually, throughout your life, you would pay that tax back. And the third promise was any funds you didn't use, you could leave to your beneficiaries, and they could also gradually pay that tax back throughout their life.

That was called a stretch. They could stretch the payments out throughout their life. So it wasn't all taxable at once, but so a lot of people made their life's plans around this promise, you know, 20, 30 years ago, they looked at the laws with IRA said, yes, this seems like a good account. I'm going to bank on the benefit tax benefits, the growth, and being able to leave something to my kids.

a lot of those promises. So [: 00:03:00

And when we're talking about IRAs, you may not have an IRA now, but most people will, even if they don't now, because company play ads like 401ks. Usually end up in an IRA, whether it's through a rollover inheritance, you know, when you retire, you have to do something with the account. So a lot of times, if you don't have an IRA now, you will.

efore that, um, but once you [: 00:04:00

And how that is figured out, they, uh, figure out, you know, what you have to take each year, and it's based on a table called the Uniform Life Table. And basically, you look at the amount in your account, you looked at your age, and on the table, and it tells you what you have to withdraw every year. Um, the greater your life expectancy, or the younger you are, the smaller your RMD will be.

So, as an example, I looked at the rough table, so you had 400, 000 in an IRA, you're 75, your RMD for that year would be about 16, 000, so that's just how you ballpark it, and as you get older, Um, your table goes up. Now why is this important as it concerns inheritance? Because all these distributions are taxable, they're taxed at ordinary income.

other change that the secure [: 00:05:00

Well, if you leave your IRA to someone and they inherit it, your beneficiary, previous to this new act, they could stretch those benefits throughout their life. So they could start taking it, you know, at age and stretch it all the way throughout their life based on a table. But what that did is it, it, um, widened the gap of when you pay taxes.

So You could, you know, pay it throughout your life rather than a big tax hit all at once. Because again, this is all taxed as ordinary income when you pull from an IRA. And what they replace that stretch with for most beneficiaries is called the 10 year rule. So what that means is you have to withdraw an entire IRA account within 10 years of inheriting it for most people.

on dollar IRA, And you don't [: 00:06:00

So let's just say 30%. So that million dollars is going to be taxed and 30 percent is going to go away. And a lot of clients come to me and their big thing is the state taxes and capital gains tax. They want to say, well, I don't, I worked hard for what I have. I don't want to give the government my inheritance.

I want it to go to my kids. Well, one of the biggest ways that they can fail at this is through improper IRA planning because that 30 percent tax hit is looming out there. Um, so The, the concept is you have to plan for your IRA and there are ways to plan around this to that can be most advantageous for your family.

d that's what we're going to [: 00:07:00

We have some beneficiaries that are flying first class, some beneficiaries that are flying coach. Let's start with the first class. So these are the premium beneficiaries. They get the best benefits. They're called eligible designated beneficiaries. Uh, they go by EDBs in the industry now. And who these people are, are certain individuals that are eligible.

And that means they are either a spouse, uh, they are a minor child under 21, or they are disabled or chronically ill, or they are less than 10 years younger than you. So within 10 years of a deceased person. So what these people get is they get the stretch. So the stretch, um, has disappeared for most of your beneficiaries, but not for these eligible designated beneficiaries.

[: 00:08:00

Now, one thing that the last example, cause disabled and chronically ill, you know, there's definitions of how those are defined. But the other one is within 10 years. So if you, um, leave your account to say your brother, that is five years younger than you, he can still qualify because he's within 10 years of your age.

e benefits that we will talk [: 00:09:00

So we're just hitting the high notes here and we'll go into detail of each type of beneficiary down the road. But the next type of beneficiary is the non eligible designated beneficiary. So NEDB is what it goes by. And all these great acronyms, they just try to make it confusing. But what an NEDB is, is basically any other beneficiary other than the ones that get the special treatment.

So, These NADBs are flying in coach, you know, they, they still get some benefits, but not all the benefits. And what benefits do they get? Well, they get the 10 year stretch. So they don't get a full lifetime stretch, but they get 10 years, meaning people that qualify in this category can stretch their benefits over 10 years.

y have to take it all out by [: 00:10:00

It's just a number that you figure out based on your, uh, current tax filing status and what these distributions would do. So you, you play the tax, uh, margin brackets there. You know, if you're in the 22%, uh, tax margin, you don't want these distributions to bump you up to the 30%. So you kind of play that game there.

common of what, um, I leave [: 00:11:00

But if something happens to the spouse, most people want it then to go to their kids. So then we leave it to their kids and it's qualified as that any DB where they only get the 10 year stretch. Um, So that is first class and coach. And then we'll briefly hit on the third category that, um, the secure access and that is in DB.

So non designated beneficiary. So that just means you didn't designate anyone for the most part. Uh, the first two is you designated a beneficiary. It's just either, are they eligible or not eligible this one? You didn't even designate anybody. So the, the worst case is this non designated beneficiary. They are flying, you know, in the cargo bay.

ost of the time they have to [: 00:12:00

So if it goes to an estate. Um, or you just didn't list anybody, then it would go through probate, which is the same as in a state. Then that's where these people would come in. Um, so a takeaway from here is make sure you have your beneficiaries listed, make sure your advisors have them listed, and they provided you a copy of your beneficiary form.

o take away is there's a big [: 00:13:00

So why I said is you want to plan ahead so you don't hurt your beneficiaries. because it hurts them in the long run if they are at a tax bracket, a lower tax bracket, and then you leave them an inheritance that bumps them up to a higher tax bracket, it affects every bit of income they have. So it can have some real negative consequences, not only on your inheritance, but also on your beneficiaries.

So the next episodes that we're going to hit on is the next one we'll talk about trust. Can you leave a IRA to a trust? Just a quick answer here is yes, but that trust has to qualify, uh, meet certain standards to get the 10 year stretch. It will get the 10 year stretch if it's drafted appropriately. So can you leave it to a trust?

Yes. [: 00:14:00

It's a Roth IRA is what I consider one of the best inheritance type accounts. So how do you get your IRA to a Roth IRA or how do you start a Roth IRA? So we're going to hit on all those in our IRA section. But this has been the Good Steward Law and Wealth Podcast. We're glad to have you here where we consider everything a gift, and it's our job to do the best with what we've been given.

Thank you.

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