IRA Beneficiaries And The Ten Year Rule

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This is the Truth Network. Welcome to Finishing Well, brought to you by cardinalguide.com, with certified financial planner, Hans Scheil, best-selling author and financial planner, helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in Finishing Well, including discussions on managing social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes.

Now let's get started with Finishing Well. Darrell Bock Finishing Well is a general discussion and education of the issues facing retirees. cardinalguide.com, Cardinal Advisors, and Hans Scheil CFP sell insurance. This show does not offer investment products or investment advice. Darrell Bock Welcome to Finishing Well, with certified financial planner, Hans Scheil, and today's episode, a little bit different, but I like different. So IRA beneficiaries and the 10-year rule.

We got new regulations for 2022. We're going to talk a lot about a gentleman by the name of Ed Slot, and Ed Slot is America's IRA expert, and Hans is on his team of elite advisors that go to these seminars, you know, a number of times a year. And I think it's really amazing when you think about what Jesus brought when he came. Yeah, he definitely was coming to bring his blood and all those kind of things, but he brought new aspects of his word that would bring understanding. And so you look in Matthew chapter 5, he says that, you know, I didn't come to abolish the law. He said, I came to fulfill it, which is just a phenomenal statement.

I mean, it's like, what? And as he goes into this study then, and he goes to explain, you know, you've heard that it was said that an eye for an eye, a tooth for tooth, but I tell you, if you call somebody an idiot, you know, you're in trouble. And so he's giving us not just the regulation that we can check it off a list somewhere, but to give us an understanding. So we have a practical way to use this information, even to the point that as he goes through the Sermon on the Mount, at the end of the time, you say, well, I can't keep all that stuff. Well, he is going to give you the practical way to do that through his blood. Well, as Hans describes, Ed's lot, Ed is going to give us, because of his thorough understanding of this information, he rises above the regulation and gives us practical applications.

However, unfortunately, he doesn't give you the ultimate way through like Jesus does. But nonetheless, Hans, I think it's a great episode. The way I came to Ed's lot and came to know him was through a client, which we've talked about in some of the early shows, who gave me Ed's lot's book, that he had heard him on public TV. And he said, I want you to read this book. He had already done some things with me. And he said, I want you to read this book.

I want you to tell me what you think. And so I went back. That was Dr. Bob several years ago. And he ended up purchasing a very large financial plan from me. And I told him that I was going to use part of the money that I earned from his business to do two things. One is to join Ed's lot and to go to his class.

And then secondly, he wanted to get Bibles into China. And so we've talked about all of that before. That's how I met Ed's lot 10 years ago was through a client who was a very faithful man.

He's now deceased. But we, so I, you know, I went to Ed's lot years ago, and I was just amazed by everything that I learned. And a lot of that's in the book. And we really base a lot of our shows on things that I've learned from Ed's lot. And so for today's episode, and for the video that we put on YouTube, I was going to kind of give the grocery list of what I've learned.

And then I thought about that, ah, it's not so good to just throw a bunch of stuff at people. So I zeroed it in. We still want to stick with our deal of teaching one thing. And so today, throughout the year, we're going to talk about the 10-year rule and the IRS regs and how they changed it. But before I do that, I want to just give everyone a chance to listen to Ed's lot. And just at the meeting, I just came back from in Kansas City.

If you could just listen to him for a few minutes. The big plan is now to get money out of IRAs while rates are low and Roth conversions. I've talked a lot about life insurance. QCDs are probably the best way. Talk about get money out at low rates.

A QCD, zero, zero. And I'm not talking about just give all your money to charity to get a deduction. I'm talking about for the gifts they're making anyway.

They're getting no tax benefit because most people take the standard deduction. If you're going to give anyway and you qualify, you have to be 70 and a half for a QCD and only from an IRA. Do the charitable, qualified charitable distributions right from the IRA. That's a great use for IRA money.

Get it out. This is money you were going to spend anyway at zero percent. Anytime you can keep your AGI lower, you're always going to be ahead of your game. That's excluded from income. Actually, they do better than a tax deduction. They're not getting the itemized deduction. They're getting better and exclusion from income.

So that's how you have to think. The big planning is going to be alternatives to IRAs. I told you under the SECURE Act, I said it was the final nail, in my opinion, in the coffin for using IRAs for wealth transfer estate planning because of the problem of bunching of income into a 10-year window. You have the opportunity now to start whittling that high IRA or 401k down through all of these other alternatives and building up in tax-free territory, use it for charitable planning. IRAs are the best assets to give to charity because they're loaded with taxes. You should be identifying your clients that are charitably inclined either during life, say if they qualify for a QCD, or to leave it to a charity after death, a CRT. Maybe not everybody needs a CRT. Maybe they just want to leave some money to charity. That's okay. Leave the IRA to charity.

More of the other money that's better money that gets a step up in basis, more of that will go to their family. So wow, Hans. That's the first time I ever got to hear him. And I mean, just practical it. I mean, it's like Mr. QCD himself. I mean, I learned about QCDs from him. I mean, I certainly read about them in the news, but they didn't really have an effect till I learned about it through him. And then I've taught them to a lot of people. And I think there's probably been a lot of donations made to IRAs around, including Dr. Bob's, where people learned it through me.

And then, or through indirectly through Ed Slott. And then consequently, the people have given a lot of their IRA money to the Lord. And basically gave them the IRA money, plus the taxes that would have been due if they had not done a QCD or left the church as the beneficiary of the IRA. And so, let's kind of jump into the 10-year rule and talk about just what are we talking about. So, the SECURE Act was passed in 2019, as we talked about it a lot a couple of years ago. And one of the biggies in the SECURE Act was, is the stretch went away. In other words, if you're the beneficiary of an IRA that's not a Roth, and you pass away, or excuse me, your parent passed away, or whoever left you the money, the IRA owner, after January 1st, 2020, you now have to empty the entire IRA by the end of the 10th year after the person died. So, that's different than being able to stretch the distributions out over the whole of your lifetime. So, that was a change, and it's basically the government wanting their money, wanting their tax money. And so, they're forcing people to take the money out of the IRAs quicker.

So, we've been acting with that and advising people on death after such and such a date. And then we've also been advising people that are much younger, like a lot of our listeners, in terms of thinking about how their children are going to inherit their IRA money and what it's going to look like. And so, what we're talking about today is, first of all, that 10-year rule that's in the SECURE Act, but then the IRS many times takes, in this case, they took a couple of years before they came out with their preliminary regulations, where they're going to rule on certain things that were in a new tax law, like the SECURE Act. And so, they added something to the 10-year rule, in addition to, it's not, they didn't get rid of what it says in the law, they can't do that, but they had an interpretation where there's now additional money that you need to take out in years one through nine. And I'm going to talk about that in a little bit in the show, and not so much, I certainly don't want to confuse people, but I'm going to talk about that. I certainly don't want to confuse people by going into a lot of detail, but I also don't have any expectations that I'm going to teach you this, like I was taught this.

I mean, just the purpose is to make you aware of it. And, you know, it kind of all roads, if people have a question about this, you know, by all means, give me a call and I'll, you know, I can look at your specific situation and tell you about how the 10-year rule applies to you, either as a beneficiary or as an IRA owner, leaving your children as a beneficiary. Well, as a Hans disciple, maybe before we even get into that, I mean, I would think a good Hans disciple would not want to have, I mean, if I had an IRA, I want to get that thing emptied before I ever pass away, because it isn't a really good way to even set that up, is it? Well, it's not. And one of the things I heard at this seminar, and I didn't hear it directly from Ed Slott, I heard it from one of the speakers, he said, you know, an IRA is tax infested. And I just thought, you know, tax infested. And what he's really describing that it's just not a good wealth transfer vehicle. It's not. And unfortunately, a lot of people view them that way.

Is that IRA money that's there for my kids? Okay. But it's tax infested. So maybe we ought to think about another way. Yeah. And in the video that you did, which again, is at Cardinal Advisors on YouTube, you mentioned that on the other hand, a Roth IRA, as a wealth transfer is a pretty sweet deal, especially the way the 10-year rule works on it. I hadn't even thought about that.

But, you know, we'll get into that more in the episode too. But the Roth IRA is a different whole ball. It's not tax infested, I guess would be the way to say it.

Well, yeah. So you're paying the taxes and you don't want to do that all at once, by the way. But we can get a several year plan to turn your traditional IRA or your pre-tax IRA into a Roth. And then there won't be any taxes due for your heirs or for you if you want to pull money out of there. So we're going to get rid of the tax infested. We're going to get the exterminators in and exterminate the tax.

Well said. All right. Well, we got to go to a break, but we always want to remind you that this show is brought to you by cardinalguide.com, where you can get Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement, as well as contact Hans, you know, through email, get the phone number, however you want to get that done.

It's all there at cardinalguide.com. When we come back, we're going to get more into this 10 year rule for the IRA beneficiaries. We'll be right back. Well, welcome back to Finishing Well with certified financial planner, Hans, Shyle and today's show is IRA beneficiaries for the 10 year rule. And Hans, let's pick it up where we left off.

Okay. So the 10 year rule has been in effect for now two years and five months, and it really is 10 plus year rule because in the year of death, that doesn't necessarily count because in the year of death, if there's a minimum distribution due, an RMD, you have to take it out of the IRA for the person that died. So even death doesn't get you out of RMDs. That needs to be taken out of the IRA before it's distributed to you. And then the first year of the 10 year rule starts really the year after death. And then you have 10 years to empty the IRA. And what is different in the new law is if you wanted to take nothing out, leave it all there for 10 years, and then take it all out in the 10th year, which we could kind of argue is the 11th year, then you could do that and you'd have more tax deferral, but you'd also have a pretty big tax bill in the 10th year because you're taking it all out at once. So hopefully there's not a lot of people planning on doing that, but there are reasons to not take anything out in year one, two, and three. Let's say that somebody who is 60 years old inherits an IRA, there's taxes due, there's the 10 year rule, but they're still working.

And so they're still at a high income, they don't really need the money. And so they might wait until they retire at 66. And then after 66, if they're six years into it in year seven, eight, nine, and 10, they might take 25% of it out and spread it in some low tax rules. So we do have a little bit of flexibility in how to plan out the 10 years, given the fact you don't have any requirements in any one year. Now, that's the way we understood it. And that's the way the law is written. But then all of a sudden the IRS comes in in February of 2022, and they publish this little add on, and it's a big add on. And they're saying, okay, it's the 10 year rule, just like you understood it, just like I explained it a minute ago, except for one thing. If the IRA owner who died had already started required minimum distributions, RMDs, then you can't leave all the money sitting there for any number of years.

You need to continue taking RMDs, or required minimum distributions, each year until the 10th year. And here's one, two, three, four, blah, blah, blah, blah, blah, blah. So, and frankly, most people that die with an IRA, not everybody, but I mean, most of them are 72 and over. So this covers a lot of people. And so it's just a wrinkle.

And so these are their preliminary regulations. And of course, Ed Slot freaked out. I mean, I didn't wait till this meeting to hear this.

I mean, I'm on a Zoom with him every month. And we've been noticing this since February. And then for people that, here we are in 2022, this law has been in effect for two and a half years. What about the people that died in 2020, and they were starting RMDs?

Do we need to go back and take something out of here if we haven't done anything yet? And you would think you would need to do that. But Ed Slot's advice, and I agree with this, is let's not do anything because the IRS is well aware of this. And they're going to come out with something during this year telling you how to handle those back RMDs on where you're the beneficiary of an IRA. And my sense is this doesn't affect a whole lot of people that we're talking to. And where it really affects you is if your parents are still alive and you're going to be the beneficiary of an IRA.

Well, it absolutely affects you of how you pull the money out. Or what I'm really speaking about this is in your planning for your IRA, just as I'm doing. I mean, I'm planning for when my wife and I are both gone, what's going to go to our kids and what the tax implication is on that. And I'm preparing my kids for it, but I'm also thinking through things because they kind of half pay attention.

You're not going to die for a long time, dad and mom. And that's all fine and good. But I'm doing planning in such a way that my kids aren't going to have a big tax bill or a big planning problem when they inherit.

Right. With this structure again being to get the money out of all the traditional IRAs before you ever pass away and get it either into life insurance or something. So now this new wrinkle, you could say, doesn't really apply to Roth IRAs because the 10 year rule still applies, but there's no required minimum distributions on Roth. That's why I've put most of my money in a Roth. And because there are when I get to be 72, I don't have to take any money out.

I will be, but I don't have to. And so when I die and if there's anything left in the Roth, well, it's going to go to my wife. But then when she subsequently dies and she has her own Roth, it's going to go to our kids and our kids will still be under the 10 year rule. They just won't have any minimum distributions to keep track of because there are none in a Roth. There's also no taxes. Yeah.

And I love what you taught in the video. I think it's more than cool that the 10 year rule kind of works to your favor because if you're the beneficiary, because that thing is going to continue to make returns or interest, whatever it, whatever it is to do to grow inside that IRA, it's not taxable either. And so as it grows, you don't have to pay tax on it there either. It could double in 10 years. So if you don't need the money, like let's just say one of my kids doesn't need the money.

And, you know, hopefully this is many years from now. And then he inherits, he doesn't have to take anything out of the Roth for 10 years. And then he's got to empty it at the end of the 10th year, but a balance properly invested could double in 10 years. So if he inherits $300,000 in a Roth, if he waits till the 10th year, that could be $600,000.

And he's not gonna pay tax on any of it. Right. That's, that's incredible. So, you know, they're the 10 year rule kind of works.

It was beautiful. Well, it does. And unfortunately a lot of, you know, we're going to call them middle-aged adults, graying adults who are the beneficiary of their elderly parents who passed away. And it's in a taxable IRA or any kind of IRA. A lot of them just take all the money in the first year because they need the money and they need it for things. And it's not their money that they earn. They feel like it's their money because they rightly inherited it. And, you know, 40% taxes or something like that are not that big of a deal to them because of it. You know, they inherit $300,000 and taxes are all due. And they get a check for 180 when they had nothing three months ago.

Yes, send me a check for the 180. So a lot of this 10 year rule business is, is, is fine. And it is good. And it's like, IRS will let you play with this thing for 10 years. Whereas they used to let you stretch for your whole life. It doesn't apply to a lot of people because a lot of beneficiaries just come into me and they just say, send me a check. Yeah. And there goes just a ton of money every single time. It's scary. It happened to my, you know, my siblings with my father.

Cause that's exactly what he did. Here's the deal is leave your taxable IRA money to the church and give it away through QCDs during your lifetime. And then, or pull it out during your lifetime, pay the taxes and put it in a savings account or put it in a Roth and then give that money to your kids. And you know, all the stuff that has taxes do give that to the church because the church doesn't pay any taxes. They just get the full amount.

And it even counts as a required minimum distribution. So it's sweet. And so a lot of people are mixed up about that. And my mother-in-law was, I mean, she, she left money just out of her money, money, you know, to the church, the sizable amount. And she left the IRA to my wife and her siblings. And, um, and she left them money, money. I mean, it's not like she didn't leave me anything, but it just, that whole thing switched around would have been sweeter to just give the church all the money out of the IRA and then give the other money all to the kids. Cause they don't have the other way.

They don't have to pay taxes on it. Right. And, and am I right that Dr. Bob even, um, used a life insurance strategy too, rather than just convert it to a Roth? He did because his wife was the beneficiary of all of his IRAs.

Okay. And, but he changed after he met with me. He changed a bunch of that stuff. He made her the beneficiary of the biggest IRA. And then he bought life insurance to pay the premium. I mean, he bought life insurance second to die and he's now deceased.

His wife's still alive. And then what's going to happen is he's using the minimum distributions that she has to take, paying the taxes, then paying the premium on the life insurance, and then his kids will get tax-free life insurance instead of IRA money, which is taxable when they die, when he dies. And then he took the second biggest IRA and changed the beneficiary to that Bibles to China mission that I just mentioned. And then the third IRA, the third in size, he bought that long-term care life insurance thing that I talk about all the time with IRA money. And by the time she dies, that's all going to be converted over.

That'll be tax-free too. So he, he, he followed a lot of good advice and I followed his advice and that business of Bibles to China were real important to him. You know, stewardship ideas that just flow out of this, that, you know, you think, wow, here's a bunch of IRS regulations. Here's a bunch of this, that and the other, but then all you see, wow, all these opportunities to transfer wealth, you know, for the kingdom is beautiful. I mean, anybody that's over 70 and a half or your parents are over 70 and a half, and they have a desire to give money and give significant benefits, and they have a desire to give money and give significant money to the church.

And then they have a desire to give money to you as their beneficiaries. I can help them set up all this stuff. So it, the church gets more and you'll get more. And again, wow, we're running out of time before we ran out of show, but we're so grateful for all this stuff, Fred slot and for all that God has provided in the way of information and stewardship ideas. They're all there at cardinalguide.com as well as Hans's book, as we talk about the complete cardinal guide to planning for and living in retirement.

And again, you all the contact information is there at cardinalguide.com and a beautiful longer version of all this is a video that is done at cardinal advisors on their YouTube channel. You don't want to miss that. And, and wow, great show Hans. Thanks. Thank you.

God bless you. Finishing Well is a general discussion and education of the issues facing retirees. cardinalguide.com, Cardinal Advisors, and Hans Schile CFP sell insurance.

This show does not offer investment products or investment advice. We hope you enjoyed Finishing Well brought to you by cardinalguide.com. Visit cardinalguide.com for free downloads of this show or previous shows on topics such as social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes, as well as Hans best selling book, the complete cardinal guide to planning for and living in retirement and the workbook. Once again, for dozens of free resources, past shows, or to get Hans book, go to cardinalguide.com. If you have a question, comment, or suggestion for future shows, click on the Finishing Well radio show on the website and send us a word. Once again, that's cardinalguide.com cardinalguide.com. This is the Truth Network.