Changes In The 10 Year Rule For IRAs

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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.

Well, welcome to Finishing Well and with certified financial planners, Tom Griffith and Hans Scheil, two of my favorite people. And in today's show, we're going to be talking about the IRS change to the 10-year rule. And if you know what I mean by that, then you're smarter than me. But nonetheless, by the time you finish this show, you're going to have a good idea. And I think you're going to see how that applies to you. But you know what I was thinking about changing in the rules, I couldn't help but think about the story in Genesis where you might remember Jacob, you know, fell in love with Rachel and he was so excited and his future father-in-law, Laban, made him a deal. You know, let's make a deal. If you work seven years, you know, we're going to get you Rachel. It's going to be raw.

It's going to be just wonderful. And so Jacob does that. And then, you know, Laban changes the rules on him.

Unbeknownst to him, in the middle of the night, he plays the switcheroo. It's quite a story, dysfunctional family, like, oh my goodness. And the next thing Jacob knows, he changes of the rules.

He ends up having to work another seven years. And then there's a lot of shenanigans about the animals that he thinks he's getting ripped off. And so, you know, God provides a way for him to have them breed in front of the striped rods and those kind of things. And so it's fascinating to me, and I think very helpful to note in the story, that while both Laban and Jacob really got distracted by what are the rules of this game and what are we doing exactly, that God had another plan. It's like, we need to have 12 tribes here of Israel that are going to move into the desert. In other words, a whole lot of stuff happens as a result of all these shenanigans.

And God was in control the whole time. And so any time I see where, oh my goodness, somebody chains the rules on me, or, oh, here this comes and whatever, I just think, well, wait a minute, this might be, you know, exactly, in fact, it probably is, what God has in store for us. And so I think, I really do think, that the reason you're listening today is God has this show in store for you so that maybe you can see that these IRS rules are not near as important as what God wants to do with your IRA. And so along those lines, Hans?

Okay. So IRAs, they're in IRAs and plans and pension plans, there's between 30 and 35 trillion untaxed dollars in the accounts of Americans, retirement accounts. And, you know, what it really boils down to is the IRS, or the government, wants their tax money on that retirement money. And when you look at things, is this retirement money that you have in your account, your 401k, your IRA, and you haven't paid tax on it, it's for your retirement. And it's designed to save money, it's a defined contribution, retirement plan. And when you get to retirement, what you're supposed to do is pay that out to yourself over your lifetime, and live off it in retirement and pay the taxes year by year by year. I mean, that's the way the whole thing was set up in the beginning.

And it really hasn't played out that way. And so what's, what's gone on is a lot of people, first of all, people are working longer now, many people are, like you are, Robbie, and like I am, past what is a traditional retirement age. And so they don't really need to make distributions, and they keep adding to it, waiting for a later date. There's people who don't really need the money to live, and they just get by on their Social Security check, or whatever else they've got, or their savings, or they just need a little bit of it. So what's happened is a lot of America is delaying distributions from their IRAs, or essentially keeping the money in an untaxed status. And that's not really good for the government.

And a lot of people don't really care about that. But it's not good for the government. And it's really not good for the people, because what you're developing is a tax bomb that is going to hit somebody at some point. There's just going to be, have a big explosion of taxes. So I'm going to let Tom just describe for a second is what SECURE Act that was passed in 2019 and went into effect the beginning of 2020, and SECURE Act, the first one.

So just talk about that a little bit, Tom. Yeah, so back in, you know, went into effect in 2020, this SECURE Act fundamentally changed how the IRS treats and how you need to treat an inherited IRA, especially if you're a non-spousal beneficiary. So this generally is going to be children of parents or sometimes siblings. But if you're not a spouse, and you inherit an IRA, it used to be that you could spread out those distributions for over your lifetime. We don't need to get into all the details how that's calculated.

If you have questions, call us. What they changed, though, was they said, now if you inherit this money, this IRA money, you have 10 years, and this account has to be emptied by the end of that 10th year. So they really accelerated the distribution rules around IRAs, effectively forcing people to take money out much more quickly, pay a lot more taxes than doing so, which brings in revenue to the government.

So I mean, it serves them because they get their tax revenue there. IRAs were never intended to be a good wealth transfer strategy. They really are not a very good way to pass money to the next generation now with these new rules in place. Yeah, and I think that Robbie was talking when we were preparing for this is he gave us a little definition, is feeding back some of our stuff about required minimum distribution, and what just hearing and understanding that word causes him to do. By all means, when I hear required minimum, oh, well, I just want to do the minimum.

I mean, that's what we're used to thinking when we hear a word like that. But as I began to understand what we've been talking about, honestly, ever since we've been doing the show about this idea is we need to get the money out of those IRAs into a place where it can go to the next generation with a minimal tax, and also as a way to get income out for us that isn't overly taxed, which all requires a strategy on getting the money out. So a minimum is not a good plan to begin with. Well, yeah, it's the IRS's plan. I ask a lot of people coming in the door, what's your plan for distribution? What's your plan for your IRA? And they said, well, I really don't have one. And I said, well, you're on the government's plan then. So you do have a plan.

It's made by the government. And the government has just said, you can only leave your money accumulating in your IRA so long, or your 401k. And then at a certain age, you're going to have to start taking out this percent.

Every year, it's very complicated, but it's all based upon the minimum. And so with inherited IRAs, there's just a lot of people that would be passing away, and they'd have a bunch of money in their IRA. I think that was the case with your father, Robbie. And so he just, he took the minimum, he really didn't need the money to live. And he was really doing a good thing.

And then he left it to you all. And, you know, when that goes on, then the beneficiaries used to be able to back when your father died, they could stretch that out over their whole lifetime. And these are people in their 50s and 60s, who might live another, you know, 25, 30 years. And that's exactly what a number of them were doing.

And then you had the other people who didn't pay attention to any of this. And I bet some of your siblings that just said, how much money is there? How much is the tax? We calculate it, and they say, send me a check. And so a lot of this required minimum distribution for beneficiaries doesn't apply to people that want the money right now. They're going to take it anyhow, and they're going to satisfy all this stuff. So when you are listening to us here, and you're thinking, well, I didn't inherit an IRA, how does this apply to me?

You have the opportunity yourself. And with our advice, if you want it, to set up your IRAs and your money, generally speaking, in such a way that your kids won't have to make these decisions. And possibly they can receive, you know, their inheritance without a tax on it. And if they do get it on a tax on it, we can show them, or we can plan now, the best way to distribute the money that will more than comply with these laws.

Yeah, that's the operating idea, is the minimum is clearly just the minimum, and it's pretty beneficial in most cases to way exceed that minimum, and a good strategy anyway. So them changing the rules on it or waiving it is certainly not really beneficial to most people. Yeah, and so let's talk a little bit about sort of what prompted us to do this show, is the IRS came out with a notice here in 2023 that stated for these small group of people who have inherited an IRA in 2020, 2021, 22, and 23, that they are waiving this required minimum distribution for inherited IRAs for 2023. There's been a lot of back and forth. They haven't been real clear on what the rules are.

They've came out and provided us guidance last year that a lot of people didn't know. And so they're essentially providing relief because it's been a change or has been not real clear what to do. But what the rule says, what the notice said, was that we will waive RMDs for inherited IRAs that were received during that short period of time for 2023. But just like Rob, you and Hans have been talking about, that's waiving the minimum that you have to take out.

So if you've missed it, they're not going to penalize you for missing it. But if you know about it, it's still probably better to go ahead and take out even more than the minimum anyways, because we want to spread those distributions evenly over that 10-year period to lower the overall tax impact of these IRAs. Yeah, well, the 10-year rule, without this add-on RMD thing, just says this, take any money you want, any year you want, take it all out in year one, take it all out in year five, take half of it here, half of it there.

But the only thing that was in the 10-year rule from the beginning was the account had to be emptied and all the taxes paid on all distributions by the end of the 10th year. So you had this one group of people that were just waiting because they didn't need the money, and that's what their advisors were telling them. And then when we get on the second part of the hour, we're going to talk about this other thing that they added between Secure Act 1.0 and Secure Act 2.0. And again, we don't want to throw a bunch of details, but we just want to show how confusing this stuff is.

And then the messaging that comes out leads people to conclusions that just aren't correct. Yeah, and also, in the second part of the show, we're going to describe, there's a lot of folks that none of this even, you know, as far as espousals and all sorts of people that don't, you know, that this doesn't apply to. So we need to make sure that that all gets clear, and we'll clear all that up. As always, we want to remind you that the show is brought to you by cardinalguide.com. If you go to cardinalguide.com, there you'll see this sign that says, seven worries tab, one of which is the IRA. And there you're going to find this show, as well as the YouTube video on the same subject matter, the show notes for that, and how all this stuff works. It's all there at cardinalguide.com, as well as Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. And of course, my favorite thing is just how to contact Hans or Tom is right there at cardinalguide.com. So we'll be right back with another episode of cardinalguide.com. So we'll be right back with a whole lot more on this change in the 10-year rule on IRAs.

We'll be right back. 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. On today's show, we're talking about changes in the 10-year rule for IRAs. And Tom, why don't you take a moment and explain who's involved in this and who isn't involved in it? Yeah, so I think it is important to understand like who falls into these different rules and who doesn't. And so we have this on our website. We have a YouTube show on this.

If you have questions, call us. But I'm going to quickly run through a list of people that do not need to worry about this 10-year rule. So this does not apply to what we've been talking about up till this point. The main one being spouses. Spouses are treated very differently for IRAs than pretty much everybody else. And so if you're a spouse, you don't need to worry about some of these complex rules. There's other rules that apply.

You need to kind of know what they are, but you don't need to worry about having it emptied after 10 years. Minor children. So if you die and have a young child, they don't have to take it. Now when they reach the age of majority, they will have to start at that point. But if they're minor children at the time of death, they don't need to worry about it.

Disabled children. Again, this is a big one because if they had fallen in that 10-year rule, this could really upend some of the planning that was done for them. If you have a disabled child, there's other issues with IRAs.

We've done another show on that. But they don't have to do this 10-year rule. The IRS does adhere to a very strict definition of disabled. So you can't just sort of claim, I'm disabled.

It has to be very apparent and sort of proven that. If you're chronically ill, again, a very strict definition of chronically ill, but you don't have to worry about the 10-year rule. Individuals not more than 10 years younger than the owner of the IRA. That gets a little confusing.

That's often going to be like a sibling. If I leave my IRA to a sibling where our age difference isn't more than 10 years it's 10 years or less, then I don't have, if I'm the one who inherits this, I don't have to do this 10-year rule. But those are kind of a list of, if you fall in those categories, you don't need to worry about this. The actual definition of this is eligible designated beneficiaries.

That's what they classify you as. The next group of people, and this is where this 10-year rule comes into play, are what they consider designated beneficiaries. And this is really what the major changes were too. This would be adult children, grandchildren, even if they're minors. So that's an important one. So you say, oh, the minor children, great. If it's a grandchild who's a minor, that doesn't count. They still have to do the 10 years. If you have a sibling that's more than 10 years younger, that's a problem. One thing I want to point out, we've gotten this question before, a spouse does not need to be the 10-year rule. That is different.

If you're a spouse, you're just under your own rules. You can be more than 10 years. But if you're a sibling, aunt, uncle, niece, nephew, cousin, whatever it is, if it's more than 10 years, you fall under this 10-year rule. The other point that I don't know that we made super clear is the IRS, so they released the SECURE Act, like Hans was saying. They said that by the end of the 10th year, it has to be emptied. After the fact, the IRS released another notice that says, oh, by the way, if the owner of the IRA had already started RMDs, I've got a lot of abbreviations there, but if they had already started taking money out, they were required to take money out of their IRAs, and then they passed away, you have to continue as the beneficiary, you have to continue taking RMDs out based off a different calculation.

So you have to do that over that 10-year period. So that was news to really everybody. It was not expected, but they released that guidance. And then these subsequent notices, really what they released recently that caused this video said, well, we'll waive it for this year, 23. They had previously waived it for 21 and 22 because of this uncertainty. So they've waived those RMDs. But again, just because they waived it does not mean you shouldn't go ahead and start taking money out anyways, but you're not going to be penalized if you make it. Well, I mean, once they pass the 10-year rule, this extra RMD that starts in year one, that they've waived for three years, you probably ought to be taking that anyhow or more than that. I mean, one simple way to meet the 10-year rule, meet the RMD in the first 10 years rule, is just to, you can get a payout annuity that's going to send you a check for 120 months. I mean, we just, and it's going to have principal and interest, and the account value is going to be exactly zero at the end of 10 years. And you're going to get an equal amount in each year that you're going to have to pay taxes on. So that's a, I mean, there's, there's. So in other words, what you're saying, Hans, is if, you know, say I had inherited $100,000 from my dad, I could buy this annuity, and essentially it would handle the whole thing for me as well as give me some interest, right? Yeah. And it would give you an even level payment, either once a year or once a month, and that payment would include some principal and some interest, and it would, because it's an IRA, it doesn't matter, you don't need to separate the two, and it would be exactly equal zero at the end of the 10th year, okay?

So it would totally comply with the law. You'd never need to look at it again, and you're just going to get a check every, every month, and then you're going to get a 1099 at the end of the year, and you're going to spread the tax liability evenly over the next 10 years. Now, there are people we wouldn't recommend this for. Let's say that somebody just inherited, there's 60, and they're going to work till 65, and their income is high now. Let's just say they make $120,000 a year, and they make that, and they're going to make that for the next five years, and then once they retire, they're going to have a significant income reduction. Well, people like that, we might recommend that they take nothing for five years and take advantage of this, and then, then pay it out evenly during the sixth, seventh, eighth, ninth, and tenth years. So, and then their check would be more. So we could structure something to meet a person's individual situation, and then also make sure it meets the rules and the law, and then you're done with it. So that's really what we're recommending for people is that you spread the thing out over the 10 year.

I have another example of someone that I was working with that we were recommending them. We said take the minimum, but now that they've waived this RMD for the last three years, they haven't taken any out up to this point, but they were 68 when they inherited this account. They were almost to age 70 and a half. They really wanted to use this account to do the QCDs, do the giving to the church or to another charity. As soon as you hit 70 and a half, you were able to do QCDs out of inherited IRAs. So for them, we were keeping the, we were just taking the bare minimum we had to, since they waived it, we didn't have to take any, delaying taking them out, and then their goal was once I hit 70 and a half, I'm going to start giving large amounts to the church as a way to satisfy the 10 year rule because that still has to be emptied by the end of the 10th year. But we can do it, not have to pay taxes on it and be charitably inclined. So there are strategies and reasons you might not want to take it out or just take the minimum and not take more, but it's very specific to everyone's situation. Unfortunately, too many people just take the minimum and they're just deferring this problem where the 10th year they're going to have a huge lump sum come in that's going to be a tax bomb then, right? Instead of doing it now, we just push it out 10 years and we have it there. And so we really need to have a strategy, or you need to have a strategy of what to do with this IRA once you inherit it.

And if you're the owner of an IRA, if it's your IRA, you need to be thinking of what repercussions you're leaving your children with if you don't do some planning now to prevent them having a large issue in the future. Right. That's one of the key really ingredients of the show is that, of course, a lot of folks haven't inherited one, probably won't, but many, many, many folks have them and figuring this out so that your beneficiaries will have the best possible opportunity to be able to use these funds, even the QCD ideas. It's critical, right, Hans?

Well, it is. And we had another person call in here just this morning and totally didn't know anything about this early RMD because her parent, who was the deceased, had already started RMD. So she's been supposed to take an RMD every year for a couple of years, but then it's been later waived and she didn't know a thing about it. And she had gone to a big, large bank that she and the financial advisor in there and he had told her two years ago, well, just leave it in there until the end of the 10th year and then just take it all out then and you can just have a tax deferred. And she just relied on that, didn't even know about this regulation.

She watched one of our older videos and then we started talking to her about this. This is complicated. Mistakes are very costly. You've got to comply with the stuff with the IRS. And we were able to help her out and be logical about the distribution of this money over the next, I guess it's seven years or eight years for her.

So get advice, get help with this. I think that's very important. And it's very easy to assume, like they're handling my investments. They know these rules, but unfortunately a lot of people do not.

I mean, these are very specific rules. This is why Hans and I go to these ed slot meetings twice a year that are, you know, several days long where we really study the tax laws around these IRAs. A lot of people don't know this and they just, they knew that there was a change. They knew that that 10-year rule came into effect. I think most people know that by now, but a lot of them haven't kept up with these IRS regulations that have come out and notices.

So it's not a new law that's passed, but the IRS is providing guidance of how to interpret the law. And it's important to know that stuff. And if you have an IRA or if you've inherited an IRA in the last several years, you know, give us a call. We can help walk you through what the rules are, what you're required to do, and maybe what you should be doing. And those oftentimes are different answers.

Well, there you go. We are out of time again, but we always want to let you know that the show is brought to you by cardinalguide.com. And there you're going to find all sorts of unbelievable resources under the seven worries tabs. Today's show is under the IRA tab where you're going to find a YouTube video on this very subject, as well as the show notes and tons and tons and tons of stuff on IRAs, all there at cardinalguide.com. Of course, Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement.

But my favorite part is it's just easy. It shows you how to get in contact with Tom, how to get in contact with Hans. It's right there again at cardinalguide.com. Thanks, guys. Great show. God bless you.

Thank 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' 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 Whale radio show on the website and send us a word. Once again, that's cardinalguide.com. Cardinalguide.com. This is the Truth Network.