Inherited IRA Update For 2023

Jesus said, Blessed are the persecuted and they are suffering big time right now. This is Bible League International and 19-year-old Aria was beaten by her own father and violated by local authorities. You know what her crime was?

Simply that she gave her life to Jesus Christ after leaving radical Islam. They need Bibles in order to endure and persevere. And that's why Truth Network and Bible League are teamed up to send God's Word to 3500 persecuted believers around the world at $5 a Bible, $100 since 20. Call 800-YES-WORD, 800-YES-WORD, 800-YES-WORD, or give at TruthNetwork.com. This is Robbie Dilmore from The Christian Car Guy and Kingdom Pursuit, where we hear how God takes your passion and uses it to build a kingdom. Your chosen Truth Network Podcast is starting in just a few seconds. Enjoy it and share it. But most of all, thank you for listening and for choosing the Truth Podcast Network.

This is the Truth Network. R.A.'s, long-term care, life insurance, investments and taxes. Now let's get started with Finishing Well. Oh, welcome to Finishing Well with certified financial planner, Han Shyle.

And today's show, really cool, Inherited IRA update for 2023. And so when it comes to inheritance, I can't help but just love the 16th Psalm. And actually the fifth verse in the 16th Psalm talks about inheritance. And if you really put your mind to it, it's a spectacular verse. It says, the Lord is the portion of mine inheritance and my cup. Thou maintainest my lot. In other words, if you're in Christ and you accepted his sacrifice on the cross for your sin and you know what I'm talking about, then, right, God is your dad. And your inheritance is huge, man.

I mean, you get it all and he's all you need as a result. And again, there's no 10-year plan, no complication in this one. It's real simple. However, Hans, as far as the Inherited IRA update, that I wouldn't require, I wouldn't describe that as simple exactly.

No, it is not simple. And it takes me a while to get through all these regulations and laws notices from the IRS and then translate all that into what a specific person is supposed to do. And so, but we have an update for you, but we really can't give you the update unless you have all the background. So you've got to kind of go through this whole Inherited IRA concept again from the starting of the SECURE Act and carry it forward to show how this new update that just came out in the beginning of October, how that affects everybody.

Yeah, beautiful. And, you know, the SECURE Act just happened two years ago, but boy, it sure put a fly in the ointment, I guess, would be a good one. Well, there was a number of things in the SECURE Act that changed IRAs, some of them for the better. But this was not one for the better, because I think what the IRS and the congressional budget, federal budget writers, they want their tax money on this IRA.

Okay. And what what they find is that a lot of people, this is their savings. And a lot of people just take the minimum for their whole life. And and then they pass away with substantial balances. And then they pass them on to their kids. And then, you know, some kids, which are now adult kids, when they're inheriting these things, some of them need the money right away. And they take it all at once, right afterward, which is exactly what the IRS wants them to do. But many of them stretch it out over their lifetime.

And you used to be able to do that in all cases of inherited IRAs, as you could stretch the payments or the distributions of the IRA out of your lifetime, which, you know, if you inherit at 60 years old, and you have a life expectancy of 88, you know, you've got 28 years to take distributions out of this thing. And in pay the taxes little by little. And of course, in the secure act, they want to prevent that.

They want to get all their money as soon as they possibly can. Oh, yeah. Which doesn't necessarily create a disadvantage, really, because it kind of brings an awareness, right, to something that people really ought to probably deal with sooner rather than later anyway. Well, absolutely. I mean, the whole concept, when you have people like me, who are financial planners, when we, when we read the IRS rules, it's a required minimum distribution. And you think about those three words is that first of all, when it says required, you know that, that tells me they're requiring you, you have to do this.

Okay. And so that's probably not good for me. But when they're requiring me to do it, and then the next word is minimum. And it says, this is the minimum amount you can take.

And there's no rule that says you can't take more. But it's just saying in this year, we're requiring you to take a minimum amount. And then you really almost need to be an actuary to figure out what that amount is subsequent years, but we'll leave that aside for a sec.

And then the word distribution. So RMD is distribution is the taking of money out of the accessible IRA, and paying the taxes on it. And so, you know, common sense is going to tell you that if you take us out in a big lump, you're going to drive your tax rates into the stratosphere. And I mean, unfortunately, if people inherit money, and this was the lion's share of what they're inherited, which in many cases it is. And it's the first money that shows up because it's paid by beneficiary.

So somebody passes away, they get the death certificate into the IRA custodian, and then they want to know what you want to do. And with with some people, it's like send me a check. And then they don't realize that if they pull out $100,000 all at once, that that hundred thousand is going to be added to their other income and put them into a very high tax bracket. And so a big chunk of that distribution is going to be gone immediately. So that that's typically not a good move.

And the secure act didn't have any effect on that. Okay, I mean, you just you can pull all the money out, pay all the tax, and go your merry way. Any of these kinds of beneficiaries. Right. Well, another thing we probably ought to mention, because it confused me when I first you know, I didn't know the difference between an IRA and a 401k. But these laws essentially are the same for both right instruments, either whether it's a 401k or an IRA, right? That's correct. Okay, we're going to refer to this whole area as tax qualified money.

Right. And so if you're a beneficiary, and by the way, all tax qualified money has a beneficiary. And it is a mistake to just name the estate. It's like kicking the can down the road, but the estate has the has the least favorable tax consequences or distribution rules.

So and some people do that. And so when we run into people that are clients that are coming in, and they have the estate named as their beneficiary on their IRA or 401k, we encourage them to pick some real people so that they'll be able to take advantage of some of these rules. Now, the secure act created three classifications of beneficiaries before the secure act, they were just spouses, and then everybody else. And so the spouse gets the most favorable terms of being the beneficiary.

And then everyone else could stretch it over their lifetime. And so what they did is they created three classes of beneficiaries under the secure act, and this started the beginning of 2020. And those three classes are number one is the non designated beneficiary. And this would be, they're not people, their trust states, that type of thing, they're an entity. And they have the least favorable term.

So let's not spend a lot of time on them today. But that's the first classification non designated beneficiary. The second classification is now the non eligible designated beneficiary.

So this gets a little confusing. But what it's saying is that you have a designated beneficiary, but they're not eligible for lifetime stretching. They're falling under the 10 year rule. And the way we understood the 10 year rule, under the law, under the secure act was that you had 10 years after after your IRA owner, your parent, or whoever that was, passes away when you're the beneficiary.

Under the under if you're a non eligible designated beneficiary, which is most people, you, you have 10 years to empty the IRA. So in other words, you could take nothing till the 10th year, and then take it all out. And then that which wouldn't be a very smart move, but because it would create a big tax situation.

But yet, you know, you used to be lifetime, now it's 10 years. So that really created the secure act created the 10 year rule. And then the third category is the eligible designated beneficiary. And that includes the surviving spouse. But it includes several other categories like minor children, disabled, chronically ill, individuals not more than 10 years younger, like brothers and sisters. You know, like if I, well, it just is mainly meant for siblings, is all of those people are not under the 10 year rule, they can stretch it out over their lifetime.

Now, so I'm confused a little bit, but hopefully you can help me out. Yeah. So you know, I've worked with special needs a lot. And, and so say someone has a special needs child. Right. And it seems like, wow, that would be someone who would be qualified. But since they're more than 10 years younger, they're not qualified.

No, no. So I mentioned five categories, just as examples. And the five categories, one of them was the individual not more than 10 years younger.

And then the other one was the disabled. Okay. And I guess the other one is minor children. So three of the five are kind of covered under this person, like a family person, like if they're a minor, then they don't even have to be disabled. Okay. If they're disabled, they don't have to be a minor or more than 10 years, you know, not more than 10 years younger. So, so those five categories that I mentioned of eligible designated beneficiaries, surviving spouse, minor children, disabled, chronically ill, and individuals not more than 10 years younger. Okay.

I get that. And chronically ill obviously picks up, you know, a lot of folks as well. So really the secure act in its own way created, right. These eligible beneficiaries that, that, that it's actually a benefit to them where they don't have to take as much as quickly. But the irony in the thing is other than filing spouse, they're the very people that are going to probably want to take some of it quicker. Like a minor child. I mean, a minor child can't take the money out of there, but if somebody is looking after them, they may need this money for their means and support. So it doesn't really matter that they've allowed it to stretch them over their lifetime.

And with the disabled that you mentioned, or the special needs, um, a lot of these people are adults, but if they have a special needs trust, um, set up, or even if they don't, I mean, this, this could disqualify them from their, um, government benefits. Oh, wow. Oh, wow. Well, we got to go to a break, but when we've got a whole lot to cover, but we're going to remind you, the show is brought to you by cardinalguide.com. Go to cardinalguide.com. There you're going to find show notes, all sorts of more information, details if you need them, but most importantly, ways to contact Hans and get some help because I know if you're like me, you're like, ah, this one's over my pay grade. Well, you go there to cardinalguide.com and get connected.

We'll be right back. Hans and I would love to take our show on the road to your church, Sunday school, Christian or civic group. 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's show is Inherited IRAs and 401ks 2023 Update. And so Hans, kind of give us a summary back where we talked about in the first segment. Hans Scheil Yeah, so this is all about an IRS notice that came out, that's today's shows, on October 7, 2022.

Okay. And that show, or that notice, had an effect if you're the beneficiary of an IRA. And your parent, which it typically is, or the IRA owner died in 2020, or 2021, there was a bunch of confusion.

So we're going to get to that. But I want to get back to where we were just before the break, as we were talking about these eligible designated beneficiaries, is they've given more people than the surviving spouse under the SECURE Act, they can take longer, take the rest of their lifetime to make withdrawals, or they can stretch it out, and possibly as the taxes. But the real notice today, we can get into that in another show, because there's now three classifications of beneficiaries.

And the one that most people fall in is the non eligible designated beneficiary. And they fall under the 10 year rule. And the 10 year rule states that if you're the beneficiary, and you fall under the 10 year rule, that IRA has to be completely emptied, and all the taxes paid by the end of the 10th year after death. So if somebody died in 2021, then the first first year would be all of 2022. And then you count 10 years 10 years out, and by the end of the 10th year, the whole IRA has to be empty. And that part of the law hasn't changed.

Okay. That's the deal. And so if you want to stretch out the tax payments, you have 10 years to do it. Now, what they added on October 7, or the with this notice is they ruled on something that they added a lot of confusion back in February, because they added another little hitch. And they said that if the owner, which would be your parent or your aunt or somebody that left you this money in their IRA by beneficiary, if they were started already started on minimum distributions, which is 72 or after, which again, is many, and most people that you also needed to take an RMD or required minimum distributions in each of the years, one through nine. So now all of a sudden, something that was simple, is very confusing. Because you've got to take a minimum distribution every single year.

And then you got to calculate what that is. And then years one through nine, and then whatever's left in there at the 10th year, you got to take it all out then. Does that make sense to you? Oh, yeah, yeah. And that was the notice that came out in February, right? No, yes, that's correct. In February, that was the IRS regulations. And it took them almost three years to put out their regulation. This is from us at the IRS.

This is how we determined our interpretation of the SECURE Act. That's what the regulations were. But they were just proposed regulations. And they came out in February, and they didn't speak to people that had died in 2020 and 2021. So there were people that were wondering what to do.

I mean, they thought that they were able to just do nothing until the 10th year, or kind of do it at their will during the 10 year period. But then in these regulations, it said that they needed to take a minimum distribution each year. And so we were all in limbo from, from February, till now, of what to do. And I had a number of clients calling me and asking me and then it was from Ed slot that we got this information, or this update.

I mean, I guess I could have read it in the news a few days later, but I got it from him first. And what it said is, if you're the IRA owner died in 2020, or 2021, that you don't that they're waiving the penalties for not taking the minimum distribution because you obviously didn't know about it. And my guess is, is I've got everybody kind of confused.

Well, I think I've got it. I mean, so essentially, since nobody knew about it, and the IRS is now saying, hey, good news, don't worry about it if that happened to you over the last two years, because the regulation wasn't clear. But it also kind of insinuates that from here going forward, if somebody was in doing, you know, required minimum distributions, and that person passed away and left you their IRA, you better be concerned about it, right?

Oh, yeah. And then you also just better be concerned about any IRA that you're going to be the beneficiary of in the future. So I'm sure there's people listening that are the beneficiaries of their parents IRA, and their parent is still living. Or somebody else are the beneficiaries, and when they pass away, and they fall into this 10 year rule, yes, the person that passes away was 72 or over, they're going to need to start taking minimum distributions, at least during the 10 year period. Right?

Yeah. Then the other place that this affects them is if they have their own IRA, and or 401k, and then they're planning on naming their children as the beneficiaries, then they better prepare their children for this. Yeah, and show them or at least provide some resources. So after they pass away, they can get to somebody that can sit down and discuss this and be thoughtful about. Right, but I'm guessing that you would prefer they actually came up with a plan to distribute that some other way, so that their children didn't have to deal with it. Well, yeah, I mean, so you think about somebody who is 62, and they inherit, okay, and it's the 10 year rule.

Well, and they're still working. And so they're still in a higher income. And after they retire, and say they plan to retire at 65, well, then you don't want to take any money out early, you're going to have to take some out in RMD, but that's actually small. But nonetheless, you're going to have to take out a distribution at 62, 63, 64, and 65. And then you may then start taking substantial distributions after you retire, and then know that you got to have this whole thing emptied out by 72.

So you need to be strategic about it, and kind of look at tax rates, look at your tax rate, look at your income needs, and just be smart about it. Yeah, and then that's if you're the one getting it. But if you're the one giving it, you know, it seems like you could create life insurance or a whole lot of things that would be better off than, you know, having your children inherit this higher rate, right? Well, yeah, or you could move it into a lower rate, you could move it into a Roth, slowly but surely, and make them the beneficiary of that. And then that way, it won't really matter, pull it out, or leave it there the whole 10 years, because there's no taxes due on Roth IRA, even to the beneficiary.

Or they could do life insurance, and they could pull the money out of the IRA now, or you could pull it out while you're still alive, pay the taxes and little bits, and then use that to pay the premium on life insurance so that your kids will receive a tax-free benefit that you're passing. I mean, there's all kinds of ways to strategize around this, but you know, in order to strategize, you need to know the rules. Right, right. And it's not, as we talked about at the beginning of the show, this is not the simplest thing you've ever came across, but it is a great wake-up call, isn't it? You know, to say, hey, I'm going to inherit an IRA, I need to be thinking about this, or I've got an IRA that I need to deal with, or you know, because like you said, almost everybody's involved in this, one way or another.

Oh, absolutely. And we have annuities now that are specifically designed, or we can design them to work with this law for a beneficiary so that they'll just evenly distribute the money out during the 10-year period, and it will be empty at the 10, and they'll just level the thing out and pay you interest inherent in the deal and the money. So we have annuities that you could come to us and you could just sit down and we'll put together a plan or at least consider it, and then you won't have to worry about this every year, you'll just get a check in the mail, or I guess electronically transferred checks in the mail anymore. So does the annuity company essentially handle the filing for your required minimum distribution, all that stuff?

Well, you don't really have to file anything, because the annuity company would become the custodian of the IRA, and then it would already be set up the payments out of the annuity so that they would satisfy the minimum distribution requirements, and then the thing would already be set up to be empty by the end of the 10th year. So we can set all that up for you. I like that. No brainer distribution. That's exactly what it is. It's just as big as the 10-year rule that you spoke about, or it's not a 10-year rule, but it's the inheritance that you spoke about in the beginning. It's pretty simple. You just give yourself up to the Lord and you're going to inherit all of it, and it's simple. Yeah, and obviously we're all crying out for simple, and you know, these different obviously situations that just keep changing and evolving, you know, as we know that obviously there's a whole bunch of changes, you know, coming to Social Security and Medicare and all that in light of the inflation, and so, you know, I'm sure if you're like me you're thinking, wow, this is more than I can really, you know, grasp. What a great idea to get some help, right, with many counselors plan to succeed?

You might have read that in Proverbs. Well, that's why we want you to go to cardinalguide.com, right? Hans's contact information is there. Tom, what a wonderful resource he is for so many of us.

It's all there at cardinalguide.com, as well as Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. Well, another great show. Thank you so much, Hans. Thank you.

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. 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 Well is designed to provide accurate and authoritative information with regard to the subject covered. 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.