Episode 120: What’s Changed with Inherited IRAs?

Today’s Prep:

When financial planning, what do you need to know about inherited IRAs when it comes to leaving a legacy? What is most beneficial to your heirs in the future?

(Click the featured times below to jump forward in the episode)

Equipping Points:

Inherited IRAs don’t work the same way they used to. In a past episode in 2019, we focused on what you need to know about inherited IRAs, but things have changed since then. Between COVID and other changes in the financial world, it’s worth learning the updated rules.

The biggest change is the length of time you have to withdraw an inherited IRA. In the past, it could be taken out over your lifetime. Now, the rule is to clear with it out within 10 years (with a few exceptions). Why does this make a difference? Think about the tax implications of this. Would this put you over the edge and into the next tax bracket?

What if you inherit an IRA from your spouse or you are less than ten years younger than the person who died? In both of these cases, the old rules still apply when it comes to the timeline you have to clear it out. Children under 18 don’t start their ten-year timeline until they reach 18 years old. With some careful planning, you may want to consider these possibilities.

When some clients have met with David after inheriting an IRA in or near retirement, it has changed their retirement plan slightly. There are some positive opportunities to work through your retirement plan if you’re lucky enough to inherit an IRA.

Some parents or grandparents may wonder whether it’s better to pass a Roth IRA instead of a traditional IRA to their heirs. While no one can predict the future, if leaving an inheritance is important to you, ask: what gives me the highest probability of passing on the best assets to the next generation? To pass onto the next generation, by far Roth IRA is best–taxes are already paid and it will grow tax-free. This allows heirs to decide how much and at what point within the ten years to take out the money.

Listen to the entire episode or use the timestamps below to skip ahead to a particular piece of information.

[2:34] – In the last few years a lot has changed with inherited IRAs.

[4:05] – Generally, you have up to 10 years to clear out an inherited IRA.

[6:32] – What if you inherit an IRA from your spouse?

[10:19] – What implications after the shift in rules?

[12:37] – Is it better to inherit a Roth vs. a traditional IRA?

[14:33] – How do you rollover an inherited IRA?

Today’s Takeaway:

A lot of these questions would be so simple if we knew when we going to die, but we don’t. So, the best you can do is have a plan and try to figure out: what gives me the highest probability of passing on the best assets to the next generation?”

– David Dickens

Additional Resources:

PODCAST: Things You Should Never Assume In the Financial World

PODCAST: 5 Keys to a Strong Financial Foundation

PODCAST: 5 Things to Know About Capital Gains


More From David:

The host: David Dickens

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