Speaker 0: Welcome to this edition of Advisor Insights. Joining us today to discuss changes to inherited Ira accounts that came with the passing of Secure and Secure two point oh, is Erica Saffron Certified Financial Planner and Principal at Saffron Wealth Advisors, Erica? Thank you very much for joining us. My

Speaker 1: pleasure to be here. Thank you.

Speaker 0: As we started, the, the act uh passed in 2019, created a new set of rules for inherited Ira s mainly eliminating the stretch Ira. Um

Speaker 0: And then the Secure two point oh Act that passed in December of 2022 gave uh owners of those inherited Ira accounts uh far more options. So can you can you dig into some of those options and, and those changes?

Speaker 1: It would be my pleasure, but let's go back to the Secure Act because we have to go through that again.

Speaker 1: So the Secure Act essentially created three categories prior to the Secure Act, you're either a spouse or not. Those are the two only options, but the Secure Act decided to divide that into three different areas. So if you're the spouse or a minor beneficiary or someone who's disabled or someone who's less than 10 years younger than the person who died, then you're not subject to the 10 year rule.

Speaker 1: And then that makes you an eligible designated beneficiary. Everyone else is a designated beneficiary.

Speaker 1: But the third category is a non designated beneficiary. So if an individual has an IRA and they either fail to name a beneficiary or they named an estate or trust as a beneficiary that makes them a non designated beneficiary. And the set of rules for the last two are very similar, but it's generally the spouse is an eligible designated beneficiary who has specialties.

Speaker 0: And can you dig in a little further into the designated beneficiaries?

Speaker 1: Um Now this is a non spousal beneficiary is a designated beneficiary and their options when they inherited her account are the basic. No stretch Ira. You must exhaust the funds within 10 years. You can take some in the first year or take none throughout the entire time. However, if the designated beneficiary inherited an IRA from someone who is already taking R M DS, then they must continue taking R M DS on that account

Speaker 1: and they must take that distribution on their age.

Speaker 0: What are some of the factors uh for deciding for a spouse to consider when considering a spousal ira or uh versus an inherited ira?

Speaker 1: Ok. So let's, let's look at it from this perspective. If you're the spouse

Speaker 1: and you inherit an IRA,

Speaker 1: you have multiple options. But let's say you decide that you need the money

Speaker 1: and because you need the funds, you're going to open an inherited IRA. The primary reason is that there's no 10% tax penalty for early withdrawal from the inherited Ira. So if you're 50 years old and you have this Ira, you need the funds to maintain your life, then that is going to be your option

Speaker 1: on the other aspect if you are. Well, let's, let's back. Actually, let's back up and add to that. So here you're 50 years old, you inherit an IRA, you need the funds

Speaker 1: and you open it inherited Ira.

Speaker 1: But let's assume that your spouse was substantially older than you

Speaker 1: as the spouse, uh who owns an inherited Ira, you can either take the distributions on your life or you can defer distributions until the original account owner would have had to take R M DS. Now, if you don't need the money

Speaker 1: and your spouse is substantially older than you think of it. This way you have the IRA, you don't have to take distributions, but when your spouse would have had to take distributions, you must begin taking out that money. So, is this, this is making sense? Ok, good. So wait. So then, but there's a catch here. So what would you do?

Speaker 1: You have an inherited Ira and your spouse is substantially, I'm sorry, you inherit the funds and your spouse is substantially older than you and you don't need the money then ideally, you would move into your own ira, treat it as your own and then you would take the R MD at the time when you would be taking R and D and today it's 73. Ok. So you can see you kind of, you, you decide what the goal is, whether you need the funds and whether your spouse is older or whether your spouse is younger than you.

Speaker 0: And are there any other differences between the inherited Ira and spousal Ira that that should be considered? Or is it primarily when those R M Ds kick

Speaker 1: in? Ah Welcome. Secure two point oh, ok. It's great. You, you hit it. So prior to Secure two oh one of the disadvantages of an inherited IRA is that the distributions on an inherited Ira based on a single life expectancy,

Speaker 1: distributions on a regular Ira and no inherited Ira are based on the uniform lifetime table. And it just so happens that the uniform lifetime table has a much lower distribution rate than an inherited Ira. So you may have two IRA side by side with the same dollar amount, but an inherited Ira will be distributing a greater amount. But secure two really created an opportunity for spousal beneficiaries

Speaker 1: in that. Now, they don't have to, if they don't need the funds, they don't have to make that decision to move the funds into a spousal ira to reduce the R MD. But they can maintain that inherited IRA, they can defer the distributions and still get the lower distribution rate. So I think that's a key factor.

Speaker 1: But even either decision, whether it's an inherited IRA or a spousal ira, it's really important to keep in mind the age of the deceased relative to the age of the beneficiary.

Speaker 1: And if the age of the deceased is older, then without question, maintaining that inherited I r I'm sorry, then moving into a spousal Ira is key.

Speaker 1: If the deceased is much, much younger and you maintain that inherited Ira and now you no longer have the additional penalty of taking out larger

Speaker 0: distributions. And we've been talking about spousal Ira s but you mentioned earlier that uh a minor is also an eligible beneficiary of an an inherited Ira. Uh Do they have the benefit of, of taking out funds over a lifetime? What is, what does that timeline look like for a minor?

Speaker 1: The answer to that is yes and then no.

Speaker 1: So a minor inherits uh the, the IRA and prior to reaching the age of majority, 18 or 20 but it's probably 21 in most states, they can begin the distributions on their own life

Speaker 1: and then when they reach the age of majority, then the new 10 year rule begins

Speaker 1: and then they have to exhaust the funds within the next 10 years. However, remember that R MD rule, if the original account owner was taking the R MD and they must begin taking that R MD when they first received the funds and continue that throughout the life of the account

Speaker 0: and, and going back to the 10 year rule. So they would, they would have to start taking their required minimal uh minimum distribution as soon as they hit the age of majority

Speaker 1: at age 21. And the 10 year rule applies. But if they were taking our, but if the original account owner was really taking required minimum distributions, they're going to be taking that throughout the lifetime. And I'm sorry, they'll continue taking that when the 10 year rule begins. Maybe that's the clarifier. Thank you for asking that.

Speaker 0: And then uh the Secure Act brought about a lot of confusion around the 10 year rule which we just discussed. Uh And so many, many beneficiaries did not take their required minimum distribution. Uh What is the penalty for not taking distributions and what are options

Speaker 0: uh If, if someone overlooked that and, and did not uh start taking those distribute,

Speaker 1: I'm sure there are many folks who have not done, have not taking their R M DS. Um When the Secure Act came into effect in 2020.

Speaker 1: Remember that in 20 that shortly the Cares Act came into play

Speaker 1: and the Secure Act said you have to take distributions based on R MD. And then the Cares Act came in and said, you don't have to take your distributions this year, adding a level of confusion and perhaps some people forgot it went by the wayside, who knows? So, if an individual has not taken their R M DS for the past few years, uh, well, the penalty went from 50%.

Speaker 1: Uh, then it went down to 25%. And now with the new law, the IRS is much kinder and then they're imposing a 10% penalty on withdrawals that haven't been made.

Speaker 1: What are your options?

Speaker 1: Ideally, the first thing to do is to make those distributions now stop whatever you're doing and make those distributions make the wrong right.

Speaker 1: And when do you have to do those distributions? That's my opinion. You should do it now. But what does the law say when you have to do this? You have to rectify the situation beginning a time window. Uh that begins when the IRS sends a deficiency letter. So if the IRS sends you a deficiency letter next year, it's time to take action. Ideally, you should take that action now. And then the other option really is that if the distributions were sizable,

Speaker 1: that would have a substantial impact on your current year's income, so it might benefit the taxpayer or it would benefit the individual to ref file prior years taxes and include those as income

Speaker 1: and then see how that might play out. So those are really the options. But if you, if it has not been done, do so, and we do have some clients who are new, who have not taken those R M DS and because they were in sizable amounts, the accountant recommended. Let's just take it this year and move along and see what happens.

Speaker 0: And, and are you seeing a pattern, maybe, maybe not so much with your clients because I'm sure you'd be on top of it. But, uh,

Speaker 0: is there a pattern among people who miss the, the timeline for R M DS? Is there a common reason maybe that they might be overlooking the, the, the

Speaker 1: withdrawal? I, I'm going to say, I don't think it's a function of wealth by far. I think it's a function of communication between them and their accountants, their advisors and their attorneys.

Speaker 1: Um, same way, it's not unusual for beneficiaries to take action on their own without having that conversation. They know that they have to open an inherited IRA. They've done what they had to do. They were asked, did you open an inherited I grade? I did. Thanks. See you later. And I think it's communication. We've

Speaker 0: talked about Secure, uh the first Secure Act to pass. And in 2019. So how is Secure 2.0 impacting beneficiaries?

Speaker 1: Secure two point oh, primarily

Speaker 1: benefits spouses who have inherited funds from someone who's substantially younger.

Speaker 1: And remember we talked about the distribution table now that they're maintaining the assets and inherited ira, their distributions are going to be substantially lower.

Speaker 1: And in the past, we may have made recommendations to split your ira between an inherited IRA and then move some into a spousal ira. You don't need some of the funds. But then when it's time to take the distributions, it'll be at a lower rate today. There's not much reason to move into an IRA unless your spouse was substantially older. But now that the rules for the distributions were at the lower level for both types of accounts,

Speaker 1: that's a huge benefit and gives individuals a lot more options in determining how they're going to allocate their funds. That's the key benefit for spouses under the new Secure two point oh Act.

Speaker 0: How are you advising clients in terms of strategy to, to not get around but, uh, handle best, handle the, the 10 year rule when it comes to taxes.

Speaker 1: Well, the easiest thing to do is to do absolutely nothing.

Speaker 1: Let the assets grow in the account and then 10 years you take the funds out, you have 10 years of tax deferred growth and then after 10 years, the funds are assumed they're going to be a sizable amount. You'll be subject to a larger tax penalty. Well, it's not a tax penalty. You'll just be paying more taxes, there's no penalties involved.

Speaker 1: So that's the easy thing to do. And, and that, that would be if you were very tax conscious about today and not worried about tomorrow. But our role is to think about today and tomorrow and plan for it. So, let's go. Here are some examples. Let's assume that you're a, um, young person, probably out of school don't really have much income. Let's say you're in medical school, you're an adult have no income

Speaker 1: and you have to take R M DS. Well, you don't have to take R M DS. So there's no R M DS involved here. Let's just make it clean.

Speaker 1: What are your options? Well, if you do nothing, you pay no taxes. However, if you can remember that we get the standard deduction of roughly $13,000 on the fed side. And then there's also a state, you can take up to $13,000 from that inherited Ira and pay zero federal taxes. Why not take advantage of that?

Speaker 1: You and also, uh, the other consideration is that under current tax law, any funds that you withdraw from an inherited Ira or taxed to you as ordinary income.

Speaker 1: But if it's outside the Ira and you buy a security mutual fund, uh, if you do sell that fund after year, then it's subject to longer capital gains tax, which is at a lower rate than income. So, yeah, without question,

Speaker 1: use the tax brackets, use the deductions to your advantage. So you take money out tax free and then you can reinvest it tax efficiently, hopefully at a lower tax rate. I don't know what the new tax laws may or may not be coming and that might be our next conversation. Um So that's it for a younger person. Now, for someone who has steady income, someone who has steady income,

Speaker 1: their tax situation is not likely going to change.

Speaker 1: And if they have steady income far from retirement, then one strategy might be to agree on a given rate of return on portfolio. And of course, we know that's always subjective and you might be wrong in the ninth year.

Speaker 1: And let's say that whatever dollar amount you have, it's worth $200,000 in 10 years, you can take that dollar amount divided by 10 and then begin a strategy of taking $20,000 every year, giving you a measured way of withdrawing funds from the account and, and still exhausting in the 10th year. Now, if you're someone who is working and near retirement,

Speaker 1: and that might be typical in a situation, then you may opt to take minimal to zero amounts at the beginning years. And then as you enter your retirement years, and now you're at a much lower, you have less income subsequently, you're in a lower tax bracket, then this might be the time to begin taking those inherited ira withdrawals. And if it's an unfortunate year where the individual is unemployed

Speaker 1: or someone is in a high risk career, like they're real estate broker. One year, they make a killing and then a different market, they met a much lower income. That's a great opportunity to do tax planning and figure out what's the most that I can take, stay within my income tax bracket and pay taxes as low as possible. So, if I put those three together, what do they all have in common? They all require thoughtful planning.

Speaker 0: Well, Erica, thank you very much for joining us and sharing your insights on, on uh inherited Ira s,

Speaker 1: my pleasure. It was good to be here

Speaker 0: and to our viewers. Thanks for watching, for Asset TV. I'm Jonathan for, we'll see you next time.