IRA Beneficiaries

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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. 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. Welcome to Finishing Well with certified financial planner Hans Scheil. And today we're talking about IRA beneficiaries. And you might think, wow, how can you fit a whole show on?

Well, we're loaded for bear on this one, I can assure you. You will be amazed with all that we're going to talk about today. I've learned so much just from watching the video. But, you know, one of the things that got encapsulated for me about the IRA beneficiaries as I watched the video, Hans, was Tom said something that, wow, that makes perfect sense.

He said that IRAs are crummy or lousy wealth transfer devices. And as I thought about that, it's really at the heart of so much of what we're going to be talking about today. But it made me think about our faith transfer devices and all the lousy ways that I've gone about trying to share Christ with my family.

But I think one of the great ways that is not a lousy faith transfer device, but a great way to transfer your faith, it says in the 119 Psalm that thy testimonies are wonderful, therefore my soul keepeth them. In other words, you keep stories in your heart of your family. And so I remember when I understood this, I asked my parents, my mother and father both, would they write out their testimonies? And my mother took me right up on it and wrote, you know, a very long, detailed explanation of all that she went through. And of course, we put it up there, the ancestry in my whole family.

I mean, it's like a treasure. And we all know how that happened for my mother. But unfortunately, I couldn't get my father to do it as I pushed him. He told me the story, but he wouldn't write it out. You know, that's just how it went.

And I've always felt like, man, I kind of got ripped off when it came to my dad. Maybe at some point I'll write it out as I know what it is. But I just would urge you, right, that you take your testimony, because your family's souls will keepeth them, okay? So write out your testimony, maybe with your important papers, your will and all that stuff, and give it to the next generation.

Because it really is your legacy, right, Hans? It is. Mine happened in a meeting room of AA. Oh, wow.

Oh, yeah. I mean, that's the first thing, you know, when you're in an AA meeting and you're going through and you're working the steps, I mean, God's right there. I mean, God's in charge, and you're going to turn your life and your problems and your addiction over to God. And so that immediately takes anybody that's in the program right to the point.

You've got to make a decision about this, because God's going to be the one that's going to heal you. And he came through big time for you in that, didn't he? Absolutely.

Absolutely. Just like it says in the program, in the promises. I mean, it's just, it's there. And you've just got to work the steps and, you know, God's in charge. But, I mean, you just brought me back there when you were telling the story, just getting ready for the show. And then when you're telling it again, is that's my testimony.

I mean, there's a lot more to it, but that's where it happened. Well, I'm going to encourage you. Go ahead and write that out, you know, because just think how precious that would be to your children at some point in time they may face something.

And then I remember, oh, yeah, my dad, you know? Sure. It's great. Absolutely. So this idea of beneficiaries, the SECURE Act has made a lot of changes that we want to talk about today, right? Well, we do. And the SECURE Act, you know, most people don't know how beneficiaries worked before the SECURE Act. And they certainly don't know what the SECURE Act did to them.

And, you know, I want to keep everybody around because this doesn't sound like that interesting of material. But the first thing I want to say is that 20, 30, 40 years ago when I was starting in the business and I was a young person, starting to accumulate money in my own 401K, most people in America just didn't have money, period. I mean, they just – now, most people had a pension or a lot of people had a pension available to them so they worked, and some people still do. But, you know, if you think about your parents and your parents' parents, your grandparents, if they worked somewhere a long time, they had a pension coming to them. And then that pension, after working there a number of years, would pay for the rest of their life no matter how long it was. And then it would also have a benefit for the surviving spouse if, you know, a lot of times it was the man, and then the man would die, and then the wife, the widow, would get some portion of the pension for the rest of her life. And then when people would pass, when both of them were gone, there was nothing paid to anybody.

There was no money there. It was just a – it was a paycheck for life. And what happened in the 70s is all of the defined benefit plans, or the pension plans, not all of them, but many of them started to go away, and they were replaced with the 401K, the IRA, the Simplified Employee Pension, I mean, all the different things which are called defined contribution plans, where you're allowed to put so much money aside and get a tax advantage for that, which is all intended to replace a pension. And for that reason, spouses have the highest beneficiary status. So, in other words, my wife, who is the beneficiary, and she is my spouse, on my plan, and then me on her plan, we have the highest status of, and given the most tax advantages, of distributing IRA money. So we're the best class of beneficiaries.

And that's remained constant. But what I want to be clear is people in the modern day have accumulated a lot of their wealth. In some cases, their only wealth is in that 401K. Or another way to put it, I have all kinds of people coming to me with $500,000, $800,000, $1,000,000, $1,000,000, $3,000 between the two of them in their 401K or their IRAs, and they never pay tax on any of this money. And then they have maybe $10,000 or $20,000 of money that is not in an IRA.

Maybe they have $100,000. But compared to the IRA balance, most of their wealth is in an IRA. And so, and these people, when they start approaching retirement, most of them don't want to take any money out of it, because they really like seeing that balance next to their name. I mean, it makes them feel wealthy. And they know they haven't paid taxes on it, and many of them resent when they get to be 72. They've got to start taking a minimum amount of money out. And so, what we're talking about today is if you're successful in keeping a big balance in there, pre-tax or post-tax, if you have it in a Roth, for your whole life, and then you leave it to your children, which is where it ends up in most families, then the SECURE Act has made it more difficult for your children to spread the taxation over a lifetime. So, again, I don't really want to talk too much about whether I like this or I don't like it, because it really doesn't matter, because it's the law now.

It's the regulation. But I do want to make people aware of this and aware of the rules so that we can take it back into their planning, and they can plan out their whole IRA, their distributions, the money for the spouse, the money that gets left to the kids, and they can be smart about it, and they can be good stewards of their money. So, yeah, I think it's helpful to think through that, wow, here comes this million dollars or $500,000, or even if it's $50,000, okay? If it comes in one year, in one lump sum, then you're going to put whoever's receiving it in this unbelievable tax bracket versus being able to spread this thing out over a period of time. And this is where the SECURE Act really moved in to kind of push IRAs back into that pension status in their own way to say, you know, these were designed for you to live in retirement. They weren't designed as a wealth transfer instrument. And so, like you always talk about this, you know, we need to plan how to spread this out during our lifetimes so that our heirs get the full benefit of our assets, right?

Well, yeah. And so, when the spouse inherits an IRA, the spouse has all kinds of options. And they're really put in the same place as the IRA owner, so they can stretch it over their lifetime, they can delay them until 72, the minimum distributions, they can recalculate life expectancy every year. I mean, the whole rule for spouses really is unchanged. In the new law, and it's good because the spouse was always taken care of in the pension, that's why people have it. And in fact, a spouse is better off being the beneficiary of an IRA because they get the whole thing, as opposed to many pensions get cut in half for the surviving spouse. So, the spouse isn't the issue here, but then that spouse that inherits it, if that's the path of things, then that spouse is going to name beneficiaries, and so sooner or later, when the spouse dies, the kids are going to inherit this. And that's where the big change is. There used to be one way that was handled in 2019 and before, and under the SECURE Act for deaths 2020 and after.

It's different and less favorable. So, and I want people to know what that is when they're planning their beneficiaries and they're planning how they manage their IRA money. So, really what you talked about in the video, which again is at cardinalguide.com, and so all this that we're talking about is at cardinalguide.com, and again, under the IRA worry, and as we always talk about, as well as Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement, it's all there at cardinalguide.com.

When we come back, more on beneficiaries. Hans and I would love to take our show on the road to your church, Sunday School, Christian, or civic room. Here's a chance for you to advance the kingdom through financial resources by leveraging Hans' expertise in qualified charitable contributions, veterans aid and attendance, IRAs, Social Security, Medicare, and long-term care. Just go to cardinalguide.com and contact Hans to schedule a live recording of Finishing Well. At your church, Sunday School, Christian, or civic group, contact Hans at cardinalguide.com.

That's cardinalguide.com. Welcome back to Finishing Well with Certified Financial Planner Hans Scheil, and today we are talking about IRA beneficiaries, but I guess before we go much further on the idea is one of the things about IRA beneficiaries, Hans, is people need to designate them, right? They need to get that recurrent and right and know what they're doing there, right? Well, yeah, that's the whole reason we're going over this is that, I mean, we want to drive change. If people have been apathetic about their beneficiaries and they just haven't looked at them in a long time, I mean, so that's what we're going to do.

But before that, I'm going to give you some reasons here to look at. So the SECURE Act was passed in 2019 and it became law and it started for beneficiaries, the beneficiary portion of it started with deaths 2020 and after. So if you've had one of your parents passed away and you're the beneficiary of their IRA, 2020 and after, you're under the new rules under the SECURE Act. If they died before 2020 and you've been receiving payments or you received an IRA payment and you didn't take it all and you're stretching it, you're grandfathered in, so don't be worried about that.

But I want to explain, spouses, let's not talk about spouses today because spouses are in a really good position to do a lot of things, if somebody has a spouse where their other spouse has passed away, it's a good time to call me to explain all these options to them. But what I really want to focus on today and where the big change was for beneficiaries that aren't a spouse. So before 2020, you were able as the beneficiary to stretch out the payments or the withdrawals out of the IRA and then stretch out the taxes more importantly over your whole lifetime or your life expectancy. So just whenever your parent died and you were the beneficiary, if that was age 56, you got out a table and it said that you're going to live till by life expectancy to 82, then you've got 26 years to stretch that money out over and there's just kind of a formula. And if anybody's in that and they want any help with that, just call me, I'll be glad to go through the math. But that was a pretty good deal and it allowed you to just kind of get a check for a whole bunch of years and not pay a whole lot of taxes and just spread them out over your lifetime. Well, what they decided, no more. They created with the SECURE Act, they created really two more classes of beneficiaries, which the non-person was always there beforehand, but the two more classes is the non-spouse eligible designated beneficiary, EDB, and then you have the non-spouse non-eligible designated beneficiary. That's a whole lot of words.

I don't really like that. So what it amounts to is they created this class of eligible designated beneficiaries, which is kind of a special class, and that includes minor children under the age of 21, but it can't be grandchildren. It needs to be your natural children, or disabled, it can be children or adults, the chronically ill, or someone who's not more than 10 years younger than you. So that could be a brother or sister in the same generation. So if you're that classification of beneficiary, you fit under one of those, then you've got a certain set of rules that you can follow, which are similar to the spouse, but they're not the same, and they're favorable. So they've given a break to minor children, disabled, either children or adults, the chronically ill, or what is usually a brother or sister that's not more than 10 years younger, the ability to stretch this out over their lifetime. And then for everyone else that's a beneficiary, that is a person, they put in the 10-year rule. And so the 10-year rule is a little complicated. But what it essentially says is you've got 10 years to empty this IRA. And what it says in the law is that you could take nothing for the first nine years and let it grow tax-deferred, and then in the 10th year you've got to have it empty by the end of the 10th year. So you could take it all out in the 10th year, or you could take it out at 10% a year until it's empty, or you could take a whole bunch out, you could spread it out any way you want to, but it's got to be empty by the end of 10 years.

And so it appears that, as I was thinking about this, the way you guys described it in the video as well, is that it wasn't designed to be a wealth transfer device. It was designed to take care of people through a pension. But how cool, better than a pension, because I teach special needs Sunday school, and we have all these students that are—some of them are in their 60s.

I guess one guy's getting close to it in his 70s. And so his parents, were they to have an IRA and were taking care of them, they could continue to distribute this thing out for a much longer time to take care of somebody like that, either a minor child or, in this case, a disabled or somebody that's got a disability. And I even love the brother and sister, you know, because I can see where there would be a situation where you literally have kind of taken care of a brother most of your life, and you're left an option to continue to do that.

I really think that was thoughtful on their part. Well, yeah, or you don't have any kids. And your brother, you know, that's your family.

That's your next of kin. So, and it gives them the benefit of stretching the thing. Now, there's more ramifications when you leave money to a disabled, what is now adult child, but we won't get into that today, but the IRS has given, and the law, the SECURE Act, has given special treatment to those people.

So, now let's talk about everybody else. So, this 10-year rule is much more restrictive than the old stretch rule. And then it's also got another provision they threw in this year, which we talked about on an earlier show, is that if the person who died was already on minimum distributions, which means they were 72 or over, which is a lot of times the case, then you have to continue taking required minimum distributions under your age or your life expectancy. It's a little complicated, but it creates, that's in addition to the 10-year rule, so you can't leave all the money there until the 10th year and then take it out.

You've got to take little bits according to this new provision. So, I just want you to get and understand that it's more restrictive for people who, other than the spouse, that inherit money through IRAs. And frankly, that's a lot of the money that passes to the next generation, his IRA money, because that's where most people have most of their money. So, it gets back to what Tom said in the video, which you commented on, Bobby, which is that an IRA is really a lousy wealth transfer device. I mean, it has a beneficiary. They are going to get the money from a practical standpoint. It's fine, but from a tax standpoint, and access to the money standpoint is terrible. And there's other ways, starting with, you know, when I ask people a lot of times, is what's your IRA for? What's it for?

And then we kind of go in. People have a hard time coming up with anything because they're leaving it all in there, and then they say it's for my kids. Well, if it's for your kids, you know, I can tell you multiple strategies that we could sit down now if you're in your 60s and 70s and plan this in such a way that your kids can get tax-free or just money after your death in an expedient way, and they're not going to have a big tax bill attached to it.

Oh, yeah, yeah. And interestingly, you know, the worst of the classifications are the non-person entity, right? If people make the mistake of leaving that money in their estate or putting it in a trust, if it's an IRA, man, it's all got to go away.

We emailed this video to our whole customer list Tuesday, and I had a guy call me on Wednesday that I'd never talked to before, and he was just on our list because he had called in and talked to somebody here, given us his email address, and he has done exactly that. He went to an attorney, he got a trust, his daughter's not real reliable and would squander the money, so he set up this trust for all his assets, and the trust is the beneficiary of the IRA. And when he read that non-person beneficiary, five years, and then when I told him what trust tax rates are, he about choked, and so we're taking him on as a new client. I mean, an estate is not a good bit – an estate or a trust is not a good beneficiary designation.

Yeah, because that's the most penal. But interestingly, I'm wondering, in that case, right, if you took some of that money out of the IRA earlier, created life insurance, is it possible to make the beneficiary life insurance, then, some kind of trust, so to make sure that it isn't scored? Oh, absolutely.

Absolutely. And there's also a way to set up a trust, if that's what you really want to do. We can set up a see-through trust that retains their beneficiary status, but if you don't know what a see-through trust is, or an IRA-friendly trust, then you don't have one set up at this point. I mean, we can do that as well, is if people want to have post-death control over the distribution of their assets, and they want to leave money in an IRA, and we can set that up for them. But life insurance is a whole lot easier way to do it, and a lot of people end up buying life insurance from me, and spreading the payments out over 10 or 20 years, and then they're making the payments out of distributions from the IRA, so that they create an ultimate tax-free death benefit going to the kids.

And then we could also set up a settlement option inside of life insurance, where we only have to do a trust, so the life insurance creates a trust-like, and it'll just send the kids a check every month for the rest of their life, or for 20 years or something, and most of that will be tax-free. And the really cool thing I like about that idea, I guess because there's just part of me that just says, you know, wow, so if you die three years into the deal, then the IRA money, for the most part, is still there, and your beneficiary gets all that money, right? Oh, yeah, absolutely. Absolutely. We want to set them up and know about the 10-year stretch, and there you go.

Yeah, because if they get all that money through life insurance policy, then they've got to pay some taxes on the IRA. Well, hey, they've got the money to do it, you know. Sure.

So, yeah. Well, I hate we're out of time, but we are. So we want to remind you to go to cardinalguide.com, and there you're going to see the seven worst tab. Today's worry is the IRA, and there's show notes.

It's got all sorts of ideas on this 10-year rule and all sorts of information, all the resources under the IRA at the website cardinalguide.com. Thank you, Hans. Great show. Thank you. Finishing Well is a general discussion and education of the issues facing retirees. Cardinalguide.com, Cardinal Advisors, and Hans Shile, 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.