Inherited An IRA from a Relative? What's the Tax?

This is the Truth Network. Um 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, IRAID, long-term care, life insurance, investments, and taxes.

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Well, welcome to Finishing Well with certified financial planner Hans Scheil and Got a great show for you today. Inherited. IRA from a relative. What's the tax?

So, if you had that situation, you've inherited this IRA, you know, that's got to be a big question. When it comes to inheritance, I can assure you throughout the Bible, God takes that stuff very seriously. And if you see the video that's at cardinalguy.com on the same subject, Ton says that. When it comes to these IRAs and the taxes and the rules, don't take this stuff lightly. Don't necessarily try this stuff at your home.

Just get some help. And the point is that God doesn't take it lightly. And in the book of Numbers, chapter 27. Um There were five daughters that lost their father. And he had no sons.

And so beautifully, rather than just try to work out their inheritance themselves, they went to Moses, right? They didn't have Hans.

So they went to Moses, and Moses went to God. And God came down with these beautiful laws. You got to read it in Numbers 27, not just for her. Not just for those five daughters, but for women of all time in Israel. I've always been protected by these rules that are all laid out in Numbers 27, because to God, inheritance is a huge deal.

Again, we're all inheriting the kingdom of God. But for them, it was their promised land, et cetera, et cetera. And the same is true today. that man, if you got this and inherited, you inherited IRA, somebody loved you a lot. And somebody wanted to make sure.

Um that you had a chance at this inheritance. And so it's a beautiful opportunity, I think, today to get in and figure out how can we really steward these assets for the kingdom. And so with that said, Hans, Take it away. Yeah, the the Secure Act. And there's been Secure Act and Secure Act two point zero that's gone off over the last few years.

I've changed this stuff. A lot. talking about beneficiaries. of an inherited IRA and what they changed was how quickly you need to take the money out of the IRA and pay the taxes.

So Just as a general Guideline, like I said, don't take it lightly. And people, unfortunately, do. And you're just speaking to the beneficiaries, like if you just inherited an IRA, But I want to talk. to the whole audience, not just about inheriting an IRA. But leaving an IRA.

So now we're talking about your own IRA. Yeah. Who you have named as the beneficiary, and then we're talking about educating them. First of all, planning for them in advance, not just leaving them the IRA. but looking at how you want them to distribute it.

And then again, educating them.

So there's a whole lot involved. with I want to get you ready to inherit money from an IRA. Um that's in an IRA. And then I secondly want you to go to your own IRA. or 401k.

and look through the beneficiaries. Yeah. make sure they're set up the way you want them to be. And then you're welcome to come to me. And I'm going to show you what the tax implications for your heirs will be.

if you just leave it like it is and possibly recommend some changes.

So that's kind of a whole mouthful. We're going to not take this stuff lightly. We're going to take it very seriously.

Okay, so What you used to be able to do for deaths before 2020. If 20 somebody you had a relative that passed away 2019 or before. and you inherited an IRA. You were able to Stretch it out. the distributions and the taxes over your remaining life expectancy.

So You know, if you were 56 years old. When you inherited this IRA, I just happen to know the numbers for that. Your life expectancy was 30 years.

So you would be able to distribute this whole IRA over the next 30 years.

So You know, you stretch it out over your life expectancy, which is. really minimizes the tax and allows you to take advantage of tax deferral. for a lot of years.

Now That's the way it was, and that's the way it still is for a special class of beneficiaries. But what the Secure Act did. Is it said Okay, we're not going to let you stretch it out over the lifetime anymore. What we're going to do is we're going to make that 10 years. is the period of time you can stretch it out.

So you know, for most people If you inherit. An IRA, let's say your mother or father passes away. and they leave you $100,000 in an IRA. Or maybe they had 300,000 in there. and you got two brothers and sisters.

or one brother and one sister.

Well then that leaves each of you $100,000 if you were the named beneficiaries. Then you would have 10 years So if this happens in 2026. you're going to have through Yeah. 35 actually Um to to distribute that money to yourself.

So that sounds like a long time. But it really isn't. Because you you got to have it all emptied within ten years.

So it's so it's it's a it's a lot. quicker In 10 years, then 30 years would be. I'm just giving an example.

So that was the main crux of the law: the IRS and the government once a month.

So, that your parent had been able to defer taxes on this money. all these years and then they passed away.

Now they're leaving it to you. under the old law you could defer it another like as an example, 30 years, now they just shortened that to 10 years. But then they went in and wrote in some exceptions. They're saying, well, That's gonna be the rule for just about everybody, but we're gonna create this special class of people. And that special class of people Can If they meet these criteria, They can do it the old way.

They can do it over the life expectancy. Uh calculated.

So what they've done is they've made this stuff really confusing. And I bet you that there's some people that just turned off your radio. And I'm just telling you about what I'm going to tell you. And it's just It's complicated.

So so you know you you're going to get to a point where you say You know, don't try this stuff at home. We're here to help. or people like me that understand this stuff, other professionals. You know, get to somebody that knows what they're doing. when it involves naming your own beneficiaries.

And if certainly if you've just inherited an IRA. And you got all kinds of people telling you what to do and even your stockbroker. or your banker or somebody. They might be just throwing something at you real quick. Um Call me.

I mean, I will be glad. Even if you have a small amount of money, I don't look at. like how much money I'm going to make off of selling you something. Yes, with you. If you got a small amount of money, it's a large amount of money to you.

by all means I want you to give me a call or send me an email or to have some kind of communication, Tom or me. And we're going to help you through this. It makes sure that you do the right thing. Yeah. So, what I'm talking about is you the IRS, they don't make this easy.

The people under the 10-year rule are the non-eligible designated beneficiaries. NEDB.

So you don't need to memorize that.

So just understand: you inherit an IRA, you got 10 years. under the ten year rule to distribute the money to yourself and pay the taxes. Unless You're in a special class, you're the eligible designated beneficiary. And I'll just go over the list real quick. Is the surviving spouse.

So if it was your spouse that died. You've got a whole bunch of provisions, so you're an eligible designated beneficiary.

So if you're inherited from your spouse then you really need to call me. 'Cause we got a whole bunch of decisions. Um Second thing is if you're a minor child. of the deceit.

So that's not a minor child like a grandchild left as a beneficiary. You're a minor. You're a child. And the person that left you the money Was your mother or father? Um If you're disabled.

So if you're disabled now. You are an eligible designated beneficiary.

So you can, instead of the 10-year rule, you can stretch it over your lifetime.

Now those are strict IRS rules.

So they'll just think Well I'm disabled, you can't declare yourself disabled. I mean again you're going to need to go to a professional. Make sure you're following the rules correctly. But if that's what you want to do, you can stretch it over your lifetime. Then you have the chronically ill, which chronically ill really means You need long-term care.

You're you have trouble with the activities of daily living. you would otherwise qualify for long-term care insurance claim. That kind of thing. you are an eligible designated beneficiary, so you can stretch it over your lifetime. And then the last one is individuals not more than 10 years younger.

The government doesn't make anything easy. I mean, you have to slow that individuals not more than 10 years younger. And what this usually is, is siblings. Like if I left My IRA. to my brother Jim.

Okay, he's nine years younger than me.

Okay, so he's not more than 10 years younger.

So if I did that He would be able to stretch it over his lifetime instead of use the 10-year rule. But if I leave my IRA My son. Who is 29 years younger than me. He that's my All the sign. Um He would still be on so anybody that's more than 10 years younger.

But then the person who died They're under the ten-year rule. Yeah, I I think it's important to note that The reason why it's better to stretch it out.

Okay. you know is you're not having to pay the same amount of tax because if you If you take a big lump sum, like 80 grand or something in one year, it changes the tax bracket you're in.

So by stretching it out to 20 years, 30 years, whatever you can do, and taking it in smaller amounts, you're not ending up having to raise your tax bracket every time you take a distribution. It's a good great time to remind you that the show is brought to you by Cardinal Guide, CardinalGuide.com. If you go to cardinalguide.com, you're going to see at the homepage, all these... different there are the seven worries tabs they're like memory they're like menu items and so those seven worries tabs one of those is ira and this is where you're going to find this particular episode about um There's a video right along these same lines, right there under the seven worries tabs. This one again would be the IRA.

Great information, wonderful show notes that go into all these designations to give you further information. Of course, there's wonderfully all in Hans's book as well: The Complete Cardinal Guide to Planning for and Living in Retirement. A wonderful workbook that goes with that. And the easiest thing to do, and what we all recommend, since you can't go to Moses. Certainly go to God in prayer and call Hans.

The contact ons page is there at cardinalguides.com. CardinalGuide.com. We'll be right back with a whole lot more inheriting an NRIRA from a relative. What's the tax?

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.

So, welcome back to Finishing Well, a certified financial planner, Hans Scheil, and today's show. Inherited an IRA from a relative. What's the tax?

And so we Had a Good summation there at the end of the last segment about how these designations kind of fit into the picture. But I love what you said there at the end too, that if you need the money, you need the money. And obviously the person that made you the beneficiary wanted you to have the money. And so You got questions, it's helpful to get some answers right.

Well, you can always take more. I mean, you could take the whole thing right away if you wanted to. And some people do that, unfortunately. And people will do it without even professional advice. Or people will do it.

in spite of professional advice. I mean, I've had lots of people come into my office and say, okay, how much did I inherit? And I say, you know, $216,000.

Okay, we just got to fill out these forms. and say but just whoa whoa wait a minute you may not want to take this all at once because you're going to have to pay tax all at once. And we're going to say we're going to add $216,000. to your 2026 income.

So if you made $80,000 anyhow. You're gonna now for the IRS you're gonna make 200 and 96,000 is going to be your taxable income if you take all this money right now.

Well, how much tax would I have to pay? Ah, about forty percent. Um thirty thirty five percent by the time we get done paying the state and then the Well, how much will that be?

Well. You know, it's only going to leave you with $170,000. Yeah, I'll take a check. I mean, there's just people. It is that quick and that simple.

So this people a lot of times the beneficiaries Timothy. Didn't work for the money. I mean, this is just a windfall, and they're not happy about the tax, but they're more than happy it's the only way to get it all the money. A smarter thing to do. would be to sit down.

With somebody like us or us, and we're going to say, okay, we just inherited this money. And it's still at the custodian. And they were here's the beneficiary paperwork. And now we're going to tell them: like, if you don't want to leave it at the custodian, you want to put it in a new place, or you want to put it with us. Then we'll just transfer it.

From the custodian into an inherited IRA account, we'll open up an inherited IRA account. And then from there. We will distribute as much of it as you want right now, and a lot of people do this, they'll say, Well, If this is the only money they're inheriting, they're going to say, well, I'd really like to take $50,000.

Now And then you say, well, do you want a net 50,000? Or is that what you want to take out? What do you mean by that?

Well, if you take out 50. We got to withhold. probably 15 for tax, so you're going to get 35.

So are you satisfied with 35? Or do you really want a net 50? We're going to have to take out like 70, 75 somewhere in there. Um You decide.

So we can always take. money out right now or in any future year. We can go to the thing and we can Pull out more than than what's required I just think it's smart. When you inherit this money, you just put together a plan. But the IRS has got one already made out for you.

They're saying at a minimum, at a minimum, you got to have this thing emptied in 10 years.

Okay, that's That's what they're saying. Um For the first group of people. And if you're in the special group of people, Then they said they don't have a that have a time frame, it's You've got to go on this schedule. Where which we're not going to get into that today. We have other shows, but.

where you're going to stretch it over 30 years or whatever but you can always go rob more Even not. Under one of those schedules, if you're a spe Eligible designated beneficiary, you were taking 10,000 a year. Yeah. kind of doing that if that fit with the schedule and all of a sudden in the fourth year You want $50,000. You could just take it.

You withhold the tax and then you're just going to have less in there. and that'll make less necessary over all the years.

So You're holding all the aces as a beneficiary. that it and the decisions It's just My point is, is people do this stuff, they don't even know the rules.

So, and we're very comfortable with the new rules. And there's a lot of CPAs that are not. They know some of these rules, but they don't really. Deal with people that just inherited money, or they deal with them where they're filling out their tax return, but they already made the decision somewhere else. based upon wanting the money.

So um So I want to get clear, there's actually three classifications. There's the non-designated beneficiary. Not an eligible designated beneficiary. And the eligible designated map. fishery.

And you say, well, what are you bringing in the third one for?

Well, the non-designated beneficiary, these are the people. They went to sleep at the wheel. and they just left their IRA to their estate. A non-designated beneficiary is just Like it says, there's It's not a person. It's an estate.

It's a trust. It's some entity. that is not a person. And The rules are even tougher with that because Okay. That that's going to have to be stretched.

over five years.

So you can only stretch the beneficiary. or the distribution's out over five years. If you leave your money to a trust, Or you leave your money to your estate. A lot of people think they're just going to blow off the beneficiary form and just write a state. estate and they think that they're done and so they've left the money to their estate.

and the IRS is going to say, oh, it's not a person. five-year distribution. And even worse, They're going to do it at trust tax rates which are higher. and the thresholds are much lower. For a for a trust or an estate.

You don't want one of those yeah. This is one of those places where you really. Really, really want to do some planning. With your IRA.

So, if you're one of those people, I have an RA IRA right this minute that you haven't paid tax on and You look in your and which we recommend time and time again. Look at your beneficiaries, probably yearly. Like, who, where is this going? And you see, that's going to your estate or that's going to a trust, really think through. That that that's going to change.

Whoever's getting that is going to have to distribute it. Five years, and if there's a trust, it's going to have to pay a lot different tax rate. And so. I just want to avoid that if there's any way possible. Lehman untaxed IRA money.

To a trust. Or doing the state.

Okay, people. No If you're in that situation, then talk to me. we can maybe make it better. but it's a bad situation. But I really want to talk to the people.

before all this happens.

So so so now I'm talking to you, Robbie. with your own IRA and your own 401k. You know who needs to be your beneficiary of that. is your wife.

Okay, where on hers. Robbie needs to be the beneficiary. Go ahead. Yeah, and most people have that one covered. But some people don't.

Some people... Get married late, and then they leave their IRA to their kids from their first marriage. And then They don't write their spouse into that. Real problem, those people come into us. Yeah.

You know, that was a way of equalizing the estates and all that kind of thing. There's better ways. I like to use life insurance for that. to take care of that generation that was started. You know, the separate out of the marriage.

I like spouses to be the beneficiaries, and I'm going to tell you why. A spouse has the highest or the easiest Distribution rules.

So let's talk about that for a second.

So, if I leave my IRA, which I have, to Rhonda's the beneficiary. And she is going to receive this money after I die. She's has a whole bunch of options. Number one, she can treat it as an inherited IRA. and stretch it out over her lifetime, just like any other special beneficiary.

eligible designated beneficiary. She can also roll it over into her own IRA and co-mingle it with her own. and then treat it as her IRA. And she's a little bit younger.

So she will have better R D rules. Yeah at lower distributions. That's usually the thing to do. Not always. But a spouse can do that.

And there's a few other options.

So a spouse is the. most desirable and then leave the kids as the contingent. And there's a lot of people that do that and then they never change them. after their spouse dies.

So now they're sitting there and they come into us We look at this thing and their deceased spouse is still the primary beneficiary. but they at least have the kids down as the contingents. And when they die, when this person dies. The insurance company or the custodian will look right through the primary and say, oh, deceased. I mean, they'll have to prove that they're deceased.

So we That's another hassle that you're going to leave for your kids, but still, once they prove. that that spouse beneficiary or primary beneficiary is deceased. then the contingents become the beneficiaries. And most likely they're going to be under the 10-year rule. Um So I just think it's smart for you to think about your own IRA.

and your own all your beneficiaries. And make sure they're done properly. and they're who you want to get the money and you haven't forgotten your spouse. especially in a later marriage.

So you get that stuff straightened out. And then I want you to educate those people. or at least tell them to call us. I mean, what we do with our clients. is we have it right in their stuff that you know when i die Call card domain.

And because they're up on all this stuff, and they're going to tell you how to properly handle this. new money that you just received. Yeah, or you know, I can assure you that You know, my daughter. Is my executor, and she knows that very well. She knows where all the papers are that Hans held to Philip Fout.

But the good news is that. Why not help them have a relationship with Hans or Tom? Like my daughter knows. She'd talked to Hans many times, like the very second anything were to happen to us. You know, I there's no doubt in my mind.

Tess knows exactly who to call, what to do. And that makes me feel so good. And again, it's a great time to remind you that. you can set that all up to where you just know that man This stuff Is in good hands. People that have planned it, it will be handled with the best stewardship possible.

And all you have to do is go to cardinalguide.com.

So if you go to cardinalguide.com, you're going to see the seven worries tabs again, as we always talk about. Today's was under IRA, a wonderful video with all sorts of show notes about all these different rules that Hans was talking about today. A lot of stuff if you're Wanting to set yours up. Of course, Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement, all that information is there at cardinalguide.com and the workbook that goes along with that. And of course, you know.

To me, it's just so, so wonderful. Again, if you've inherited an IRA, as Hans said, don't hesitate. Go to the Contact Hans or Tom page right there at cardinalguide.com. Great show today, Hans. God bless.

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.

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