This is the Truth Network. Now, let's get started with Finishing Well. Welcome to Finishing Well with Certified Financial Planner, Hans Scheil. And today's show is your IRA is an IOU to the IRS, top IRA rulings of 2024. So that idea of your IRA being an IOU made me think about, oh man, what does that look like for us daily in our lives? And you know, Jesus gave us the Lord's Prayer in Matthew 6, but you know, right after he gives you this very, very important prayer, he kind of hones in on the point he was trying to make in the next two verses when he says, for if you forgive other people when they sin against you, your heavenly Father will also forgive you. In other words, anytime you take on any kind of unforgiveness, you don't realize that you've taken on this IOU, and interestingly, you owe that other person forgiveness because you got this big, huge debt of forgiveness that you've been given, and so now you've got to find a way in your heart to continually, and I think this is a minute-by-minute, hour-by-hour kind of thing where, oh man, I need to forgive that person.
I need to forgive, especially, let me just say, the people that are closest to you, your wife, your kids, your mother, your father. It's a constant idea of handling this IOU, and so an idea of IOUs, this idea of your IRA being an IOU to the IRS is fascinating to me, Hans. Well, it is, and you know, when you first looked at doing this show when you started preparing and you're looking at the title of this, you thought these IRA rulings were about getting money into an IRA or a 401k, and because when you read things and you listen to things, most of it is, how do you put money, how do you get the tax deduction, how do you get money in there, and my work a lot is now that we got it all in there, how do we get it out of there without getting killed in taxes? And then, specifically, this show is going to be about what happens after you die, and what are your beneficiaries going to deal with, what kind of a tax bill are they going to deal with, what kind of rules, and that's what these rulings are all about. The SECURE Act, the SECURE Act 2.0, which we've been dealing with for about the last five years, they're all about taxing your beneficiaries. So that's what we're going to be talking about today, and specifically what happened in 2024.
Good, good. So the first thing that is talking about non-spouse beneficiaries, which is a lot of IRAs. In other words, if you leave your IRA to your spouse, your spouse is going to go on with about the same amount of rights that you had on your IRA when you're holding it yourself. So that's a good part of the tax code is that the IRAs are meant for people that are married when one of them survives is going to survive with the same rights and privileges that the person that owned it. The problem comes in is when it is now passed to the next generation, to the non-spouse beneficiaries, you've got a whole bunch of stuff that comes in under the SECURE Act basically for the government to collect their taxes as soon as they possibly can. I don't know that they'd appreciate me saying that, but that's really what the SECURE Act is all about.
Wow. You know, it's a little hard to grasp, but that is the idea of your IRA is setting this up. It does a wonderful job of letting you build that wealth, but then obviously the IRS is waiting to get their part.
Well, sure. And so they passed this thing called the 10-year rule and what that says, and we started with this in 2020, any deaths in 2020 or after, if it was a non-spouse beneficiary and then it didn't fall under this other eligible designated beneficiary that we're going to talk later. So most people inheriting an IRA, they fell under the 10-year rule and people say, oh, that means I got 10 years before I have to do anything. And I guess you could read it that way, but the 10-year rule is more restrictive than what they used to have in place beforehand. And what the 10-year rule says is you got 10 years to completely empty the IRA and pay all the taxes.
So and if you wait till the 10th year, that isn't necessarily smart. Sure you got tax deferral, but you know, if you inherited $200,000 in an IRA and you took nothing for 10 years and then you took it all out in the 10th year, that 200 may have grown to 300 or 350 and then you're going to add say 350 to your tax bill 11 years from now or 10 years from now to your income. So if your income is $80,000 a year in the year 11 years from now, it's going to be $430,000. So we don't want to do that and pay high tax rates, but the 10-year rule was just meant from the IRS's perspective and the tax collector's perspective. We want all our tax money by the end of 10 years. Okay, that's another way to restate it.
And so the new regulation that came in is you not only have the 10-year rule, but you also have to take minimum distributions starting in the first year after death and continuing each year for the 10 years and then empty it out in the 10th year. Now there's a mouthful and that's, I've already got people, I'm sure I've lost some people already. They're confused. I mean, talk to me a little bit, Robbie. Yeah, that idea of the, you know, that the idea was that originally for most people like, you know, me before I knew anything about this show, if I was the beneficiary of, and I'm being an obviously a non-spouse, if my father or somebody had left me that, then I would have just simply said, okay, you know, give me the money. I don't think twice about it, just take it out. And hopefully I'd have come across somebody like you who said at that point in time, it was said, no, Robbie, look, that one year you're going to hit your taxes this way and you could do this.
And so by spreading it out over 10 years, you know, that obviously is going to reduce the amount that you're going to lose in taxes. And do you really got to have it all right this minute? Right?
Well, yeah, all of those things are true. And what you would have done if you hadn't known me is you would have just taken all the money and paid the taxes and called it a day, probably spent what's left over. And frankly, you can still do that and a lot of people still do that. They don't listen to any of this stuff and they just, they got, you know, $200,000 is there and they say, okay, send me the money, when can I get it now and what's your taxes going to be? Well, probably 30, 35%, okay, send me a check for 140 or whatever.
And so unfortunately that's what a lot of people do. Now under the old law, you used to be able to take that 200 grand, if you were smart enough or you ran into somebody who gave you advice like me, and we used to spread that out over your whole lifetime. And we used to be able to just turn it into maybe like $10,000 a year for 30 years or that kind of thing. And then it would just create an income for you, the rest would sit in there and grow.
And then we'd take out a little bit more each progressive year. But there were really favorable rules to do that under the old law. Under the SECURE Act, they said, oh, you can't stretch it out over a lifetime or 30 years, you got to have it all done in 10 years.
So that's all that the SECURE Act did. And then the revenue ruling came in and said, oh, wait a minute. You also need to take a minimum distribution out of it every year in year one, two, three, all the way up to 10, and then empty it out in 10.
So they added another little confusing point. But that was only true if the deceased was already at minimum distribution age. So in other words, like when your father passed away, he was in his late 80s. So he was obviously into minimum distributions. So if this would have been the current now, you would have had to take a minimum distribution each year. And then you could leave the rest in there. But then you'd have to have it all emptied out at the end of 10 years. So it's what happened in 2024 is they put that minimum distribution rule in there in addition to the 10-year distribution rule.
So it gets pretty confusing. And what we do – Darrell Bock Oh, actually, it's the first time the light came on for me. I've been stuck at this for – Robert Chisholm Okay. Darrell Bock So that was what – in 2024, now it's saying, okay, if my dad had this distribution going on, you've got to start taking that same distribution even under the 10-year rule. And that changed this year. Robert Chisholm That's the change.
Darrell Bock Okay. And one little factor is your distribution is going to be less than your dad's was because it's going to be based upon your age and your life expectancy. So what was maybe 10 percent for your dad every year or 9 percent is going to be more like 3 percent for you.
But it's still a number that you've got to take out, and it's difficult to calculate. And so what I'm going to try to make this simple, what we do for people that want to delay it is we just put them in an account. It's an annuity that pays out evenly over 10 years. So if this person that had 200,000 would just roll the whole thing into this annuity, and then the annuity pays out either annually or monthly over the 10 years, and it pays you an equal amount each year so you don't have a tax bracket spike.
Darrell Bock We've got to go to a break. When we come back, we're going to have a whole lot more on these, your IRA, isn't it, or you do the IRS, the top IRA rulings for 2024, but we're going to remind you that this show is brought to you by Cardinal Guide, cardinalguide.com, and at cardinalguide.com is where you'll find the seven worries tabs, and of course one of those worries is IRA. And so if you click on that, you're going to find a wonderful video that has show notes, a board that you can look at that kind of puts this in a visual sense where you can get an idea of what we're talking about, and that's all there at cardinalguide.com as well as the contact Hans and Tom's Tom page. So if you've got a particular question on your IRA, this is a great thing to do, and Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement, we'll be right back with a whole lot more. Mike Gillis investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.
Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well with Certified Financial Planner Hans Scheil, and today's show, Your IRA is an IOU to the IRS, the top IRA rulings of 2024. And I got to tell you, Hans, right before the break we were talking about if you inherited this IRA, to roll it into an annuity that matches these rulings is just, to me, that's genius.
You know, like, man, I don't have to worry about it and I'm going to get this check every single year and it's growing and I'm being a good steward of it and, you know, that's just awesome. Well, yeah, and we, I mean, that's what we make our business doing is we have all kinds of beneficiaries that watch our videos and listen to us on the radio and then they call us and their parent, who's now deceased, left them the IRA and they don't know what to do. And usually the ones that are calling us are already beyond the take the money right now, pay all the taxes and call it a day. I mean, they've already figured out that's probably not a very good option and they're probably in a higher tax bracket themselves. So they're looking for a way to spread this out and, you know, lessen the tax effect.
And so what this new ruling was about is a lot of people are familiar with the 10 year rule. It means I have 10 years to take it out, but, you know, that's not a good plan either is you just put it off and put it off and then all of a sudden you're just going to have a big tax bill 10 years from now. So this annuity thing is a way for you to comply with all this stuff and then just get an even check and then the taxes, we can project those and have them withheld from the monthly payments or annual payments so that you don't even have to go find in the money come April 15th.
You can just cash in checks and then you'll get a 1099 from the insurance company that shows how much taxes you owe or it shows how much it was withheld and how much income you received. So, uh, it's a pretty simple solution to a problem. Okay.
Absolutely. That's awesome. Now they also just put a couple more wrinkles on that is, is that from 21, 2021, 22, 23, 24, the IRS waived this RMD rule for deaths. So in other words, if somebody died in 2021 and you inherited money in 2021, you didn't have this RMD rule for 2022, 23, 23, 2024, or you had the rule, but it was waived, but they explicitly said they ain't waving it in 2025. So if you've been writing the fact and not taking any, if you're an inherited IRA beneficiary, you're going to have to take an RMD this year. So you're going to, we can, we can get you mid plan if your parent died two or three years ago and you just got money sitting in a, in a, in an IRA and inherited IRA and you haven't done anything with it because you thought you had 10 years. Now you've listened to the show, you've let three years go by where you haven't taken anything.
You haven't violated any laws, but you're going to have to take something this year. What we can do is we could have an annuity shorter than, than nine. We can calculate like a six year annuity or a seven year annuity and calculate the amounts inclusive of the RMD and put you in something like, and you'll just get checks till the end of the 10 years. So we've got a lot of flexibility there in making a simple solution. Yeah, that's awesome. And it, you know, it, it fits within these new rulings and now you understand why these become important, right? Sure. And they waived some new stuff.
Okay. So these rulings, you know, they're, they're guised in being positive, but the whole thing is they're coming from the IRS. And so they're generally, most of these rulings are just to clarify what you have to do and what you can't do and what you can do. But the IRS in the secure act, or maybe it was not the IRS, but it was the Congress. They created this new classification of beneficiaries called the eligible designated beneficiaries.
So this isn't new news in 2040, 2024. This has been around since the secure act started and they said, okay, so we've got the 10 year rule for most beneficiaries, but we're going to create this special class of beneficiaries that can still play by the old rules. They can extend the distributions over their life expectancy. So like in my example of the $200,000 if, if you were an eligible designated beneficiary, and I'll tell you what they are in a sec, then you could start taking distributions. You'd have to take something starting the first year, but you could extend it out over your lifetime, which would make those distributions smaller.
The money could grow longer in the thing and you'd have checks for the rest of your life. And so what is an eligible designated beneficiary? And it's defined in the law, it's a minor child, it's a surviving spouse, it's somebody who's disabled, somebody who's chronically ill, and it's a person not more than 10 years younger than the person who died or the IRA owner. So that's kind of a whole mouthful.
I'll kind of work them backwards. So the not more than 10 years younger is when your brother or sister, if they're not more than 10 years younger, your brother or sister leaves you their IRA money, you're going to be called an eligible designated, so you could stretch it out longer than 10 years. If you're chronically ill, means you're in an assisted living or you're receiving home health care at home, designating you as a person in need, they're going to let you stretch these things out over your lifetime. That one's huge. If you're disabled. That one's huge, right?
It is. If you're disabled, same thing is you can stretch them out over your lifetime. If you're the surviving spouse, we talked about that earlier, but you get all the same benefits that you had when you and your spouse were both alive, and a minor child, they only get these benefits until they reach the age of majority.
So this isn't that big of a deal, but it's something. It makes Congress feel good about it, but it actually creates a lot of hassle if a minor child inherits IRA because you've got to have a custodian and you've got to have all kinds of stuff. But in any case, that's all the eligible designated beneficiaries.
They're all listed. And what they did in 2024 is they left the categories the same, but they eased some of the definitions. And by easing the definitions, what they're saying is the definition of disability is much easier than it was under the SECURE Act. So you had to be almost not breathing to be disabled, not capable of doing any job, and they made the disability a bit easier. They made the chronically ill of the definition a bit easier and less certification. You don't have to constantly recertify with them.
You can just be declared with a doctor's letter chronically ill. So they eased the definitions with some, which isn't huge. But it can be huge for people of being able to stretch out over a lifetime when they're probably going to need those payments over their lifetime. Does that make sense? Oh, yeah. I mean, we actually, my family is dealing with that. We have a cousin that has special needs, that's the best way I know to put it. And unfortunately, that exact same thing just happened that her mother actually was the only person left who was her caregiver, passed away. And with all this money in this IRA, and I can't even imagine, you know, if she couldn't stretch that out over a lifetime, how she would navigate that.
Yeah, especially if this is the only money she has, or if she has other money, then you get into tax problems. Yeah, I mean, so they didn't necessarily fix the planning that needs to be done. They just fixed the law a bit, that it makes the work that we do a little bit easier to take care of these people that are in the list. So next up, owners of multiple IRAs, okay? So I mean, it just, people that have multiple IRAs, and they're getting up there in years, one of the recommendations that we make is we like to consolidate them all, if that's possible. Now, sometimes that's not possible, sometimes it's not wanted, because, you know, this IRA came from that.
People have reasons for having multiple ones, but it creates a lot of confusion. And within what they've said, the IRS has ruled in 2024, that you can aggregate the RMDs before you do a Roth conversion. So it used to be, you've got to do all your IR, all your RMDs, you've got to have those all done before you do a Roth conversion, even out of the one IRA that you're converting. So there's this thing called RMD aggregation, where if you had multiple IRAs, we can just pull the money, we can calculate the amount based on the balances in all of them, and then just pull the money out of one IRA. And now you can still do that, and then do some conversions with different accounting than you've used in the past. So not a huge deal, but it's helpful to us, because it adds another step, because people get themselves in a lot of mess over these RMDs, especially when they have multiple accounts over when to take them, how to take them. And then if you throw Roth conversions in there, it's even more complication.
Right. And unfortunately, we're running out of time before we ran out of show, but we got an obviously wonderful video that you can watch on the same exact subject. It's there at cardinalguide.com. This show is brought to you by cardinalguide.com, and there you're going to find the Seven Worries tab, and this particular tab would be IRAs. And so when you go to that tab, you'll see this video, show notes, all sorts of wonderful stuff on these same rulings and the things we're talking about. And then there also is the Contact Hans and Tom page, which might make this a whole lot easier for you, just to go there and get some one-on-one with your particular situation. And Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. And again, wonderful show, Hans. Thanks so much.
Thank you, and God bless you. The opinions expressed by Hans Scheil and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such.
Any statements or opinions are subject to change without notice. Investments involve risk, and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you. Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation.
Finishing Whale is designed to provide accurate and authoritative information with regard to the subject covered. Investment Advisory Services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.
Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. We hope you enjoyed Finishing Whale, 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' bestselling 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 Whale radio show on the website and send us a word. Once again, that's CardinalGuide.com, CardinalGuide.com. This is the Truth Network.
