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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. Darrell Bock Welcome to Finishing Well with certified financial Hans Scheil, and today's show, Inherited IRA, Be Smart About Income Tax. And so, you know, I was thinking about the idea of inherited, and certainly your inheritance is a big deal. And, you know, in Proverbs 22, 1, you know, when you're thinking about, you know, what people may inherit from you, one of the things they inherit if you're in your family is your name. And it says, in Proverbs 22, a good name is rather to be chosen than great riches and loving favor rather than silver and gold. And, you know, when you're thinking about as you live for Christ, it's interesting to me that you begin to inherit his name. In other words, as you live for him rather than live for yourself, then people see the love, people see the joy, the patience, the kindness, all those things, and all of a sudden you have this amazing inheritance that comes with one just really good decision, and that is simply to, you know, follow Jesus and live in his word. And so in today's show, in my opinion, is another opportunity to finish well and to look at how you may use that same strategy from my standpoint in finishing well by looking at things like, oh, my goodness, I've got an IRA, and that's going to be inherited, or I'm setting up an IRA, and that's going to be inherited.
And what would that look like if I'm not doing it for myself? What would that look like if I was setting it up as an inheritance or, you know, if someday, you know, my kids were to get it? And that's what we're going to talk about, right, Hans?
Hans Schuyler That's exactly what we're going to talk about. And so you have this thing called the SECURE Act that was passed in 2019. It took effect in 2020. And it was a big, long thing setting up every community for retirement security or something. But what it did is it set the government up to collect more taxes on IRAs quicker after people pass away.
I don't mean to be a cynic about that. But so it started, the SECURE Act started in 2020. And then the SECURE Act 2.0 came out in 2022. And it cleaned up some of the stuff in the SECURE Act that wasn't practical. And we've studied it all along.
Here we are in 2024. And during this time, I've had numerous people call me that just inherited an IRA. And they watched a video on YouTube, or they listened to me or, you know, and so they call me up, I've just inherited this money, what do I do? And so we're going to talk a little bit about the rules and how they apply in terms of you just inherited an IRA from your most of the time, it's from your parents, or a parent, the surviving parent.
Sometimes it's a brother and sister, who perhaps didn't have any children, and they're leaving it to you. So, you know, really, it just boils down to you've got a whole lot of options. And we study this stuff.
And so we're going to go over it today. The first thing that you need to determine is whether this is a traditional IRA, or it's a pre tax IRA, or it's a Roth IRA. And, you know, with a with a Roth, the taxes have already been paid by the person who died. And with a traditional IRA, or 401k, but most of the time, their IRAs by the time that people pass away, the taxes haven't been paid. And so it's going to be turned into an inherited IRA. And you've got to determine under a schedule that the government says, is how quickly am I required to pull this money out and pay the taxes. So the first thing is you need to decide, is it a traditional or a Roth?
Or is it some of both? The next thing is which type of beneficiary are you? And you say, well, types of beneficiary, I'm the beneficiary, right. And so there's three types, you could be a non designated beneficiary, you could be a non eligible designated beneficiary, or you could be an eligible designated beneficiary. How's that for clarity and simplicity? Nobody's trying to write all these down. Yeah, yeah, you could be any of the above. So, so and actually, you couldn't be number one, a non designated beneficiary.
These are not people. So the government makes a distinction. If you leave your IRA to your estate, or you leave it to a trust, that's not a properly set up look through trust, is you know, you're, you're, you're, you're leaving it to a non designated beneficiary that has the worst RMD rules are the toughest RMD rules. So those of you that just tried to take a shortcut and think, well, I'll just name the estate. And I'll just throw my IRA into the estate, and let the estate and my will figure it out.
Not a good idea. But you're going to get less favorable treatment. And the RMD is you're going to have to completely empty the IRA within five years, if it's left to the estate or to a trust. Yeah, if it's left to a trust, you're going to have to pay the income taxes, if it's not a Roth, at trust tax rates, which are, you know, are higher than individual tax rates.
So we're not going to do a show on that today. So first one is the non designated beneficiary. These are not people. And if we're talking about your own IRA, and you've named the estate, you may want to get with me and we're going to do a change of beneficiary, we're going to get actual people put on there, so that they're going to avoid probate, and they're going to get more favorable terms of disbursement when you pass away. Okay, absolutely. Now the second category is what they call the non eligible designated beneficiary. And that means, it just means when we get to the third one, we're going to go over the eligible. It's just it's pretty much everybody unless you're in a special classification.
And by being, you know, it's grandchildren, adult children, some look through trust, your brother, your sister, it's just everybody unless you fall under the special class of people that we're going to talk about in a second. And what changed under the SECURE Act is you have to empty the account by the end of year 10, after death. So, and that used to be, you know, like if your parent passed away at 88, and you were 60, you used to be able to stretch the minimum distributions out over your lifetime. So if you had a life expectancy at 60, your life expectancy was like 85 or 88, you could take little bits of money out of there all the way to 88. And then it had to be emptied by 88.
Now under the 10 year rule, if you're 60, by the time you're 70, and the end of that year, the account has to be totally empty, and the taxes have to be paid. Okay. And that's the biggest classification. That's the most people that come in to see us. And that's the people that come in to see us. Now, unfortunately, you're not done yet.
Because if your IRA owner died after they started RMDs, which would mean they died after 73 or 73 or after, then you're going to also have to take some RMDs during years one through nine. They're small, but they're there. And this is where they added a whole bunch of confusion to the thing. And so I'm just going to tell you is, I'm as close as your phone or, you know, getting in touch with us at cardinalguide.com. I'll be happy to help any of you sort through this stuff.
So it's pretty easy for us. It's difficult for somebody that's just lost somebody and they're trying to make sense of these rules. So the second one, these are people. And it's probably going to be you if you inherit from your parents, which is a lot of the people that come in. Now let's talk about the third category, which is the eligible designated beneficiary. So the IRS carved out, or the tax writers carved out a special group of people.
And there's a list that they're still going to let them stretch the minimum distributions out over their lifetime. And who those people are, number one, it's the surviving spouse. So the surviving spouse gets the best terms of distributing an inherited IRA of anybody on any of the list.
Okay. So there's a bunch of stuff that this goes to the surviving spouse that nobody else gets. That's the first one on the list. The next one is the minor children of an account owner. So if somebody passes away, and you know, they're 45 years old, and they have two children, they're 18, or in some states, 21, those two children and their beneficiaries on the account, then they're going to be an eligible designated beneficiary.
And they're able to use a lifetime stretch. So and the one that's most common that we use is the disabled individual. So people have these special needs children, and they're retired, they're into us for financial planning. And the whole focus of their financial planning is after they're gone, or they're in a nursing home, or they're unable to take care of this adult child that they've taken care of since birth, they want to leave a certain amount of money to the kid in trust, because they don't want them to lose their government benefits.
And, you know, so we're in the middle of working with some of these right now. And so there's special rules that go with IRAs. And what I would just tell you is, you're going to need to call us if this is your situation in planning, because if you just leave them as a beneficiary, all this money is going to come at them, even over a number of years, and they're going to get kicked out of their government benefits.
The next one is chronically ill individuals. So if one of your children is a beneficiary, or if you yourself are chronically ill, and you've inherited from your sister or brother or parents or aunt, you've inherited IRA money, you have a more favorable, if you're chronically ill, more favorable distribution strategy. And then another one that's come up a lot lately is individuals not more than 10 years younger than the IRA owner. And where this comes up is with brothers and sisters.
Okay, with brothers and sisters, you know, you're typically going to be not more than 10 years younger. So you can then stretch it over your lifetime. So I'm going to throw it back to you, Robbie. Yeah, you know, hopefully, if you listen to the second half of this show, you're going to hear there's a really easy way to forego all that for your inheritance. We're going to get into that, as well as a lot of things that are at cardinalguide.com. So if you go to cardinalguide.com, you're going to see the Seven of Worries tab. And of course, today, we're going to be talking about IRAs, which is at that, and you're going to find a wonderful video with all sorts of show notes, show notes about today's show as well that give you the details, of course, make this whole thing a whole lot easier. That's what we're praying you'll be able to do for your inheritance. And again, that's all at cardinalguide.com, as well as the contact information to get up with Hans, or, of course, his book, The Complete Cardinal Guide to Planning for and Living in Retirement.
We'll be right back with a whole lot more. Investment Advisory Services offered through Brookstone Capital Management, LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.
Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well with Certified Financial Planner, Hans Scheil, and today's show, Inherited IRA, Be Smart About Income Tax. And so, boy, Hans, take it from there.
Yeah. So, I mean, the first half of the show, we identified what is a non-designated beneficiary, which is they're not people, non-eligible designated beneficiary, and then an eligible designated beneficiary, which is just a bunch of mumbo jumbo. I mean, I had to listen to this in lecture format going to ed slot about 10 times before, and then I had to teach it to people before I really got it.
And I don't expect you people to just, you know, like learn this to where you could spit it back to me on a test. You know, and as Robbie said at the end of the section is you can always give us a call. I mean, we've made ourselves experts on all aspects of IRAs, and we've done that through our association, Tom and I, with ed slot and being his elite advisors, which just means we go to school on IRAs with him twice a year for the very purpose of just helping people.
And it fits in real well with our practice. And so, this whole show is designed for two types of people this knowledge about beneficiaries helps us with. One is the people that are gonna inherit an IRA from probably their parents, but not this could be from their brother or sister just could be from anybody, they're going to be, you are the beneficiary. Maybe you've got one of these right now.
And you just tuned in. So that's the one crowd, which is the people that are going to inherit. And then you have the people like me, that are planning out their estate and figuring out how they're going to leave their money to their kids and to their spouse. And then when people come to us for financial planning, I mean, we're going to do estate planning just as part of that. And then when we get to the IRAs, we're going to help them plan out how they leave their money to their kids. And it's obvious that the Roth is a better option to pass on than the traditional because the traditional is a, you know, your kids are going to have to pay taxes on it. And to minimize those taxes, your kids are going to have to make smart decisions, which is delaying the payment out over several years.
And it's just my experience in dealing with the beneficiaries themselves. Some of them are all ears about all their options of stretching it out and minimizing the taxes. I noticed I said some. Other ones just want to know how much is in there.
When do I get it? And I'm kind of saying, I'm backing them up. I'm saying a little bit, you know, well, just hold on a minute because you're going to have to pay taxes. Well, how much is in there? You know, there's $264,000. And so if I wanted to get all that, when could I get it? And I said probably about a week from now. But hold on a minute, you're going to pay about $80,000 in taxes, $90,000.
I don't know. I'm just making these numbers up. But some of them just look at me and say, send me a check.
I'm all in. And a whole lifetime of work and a gigantic tax bill hit somebody. So when you're planning out how your IRAs are going to pass, then, you know, it's simple for me to say, put it all in Roth, and then that way they won't have to pay any taxes. Well, that's still not maybe the best strategy. I'm just saying that that's going to be the best for your kids.
And we really want to go through this. And they just, what's new out of this is the 10-year rule. And it's just basically the IRS is going to get their tax money after 10 years. And they may get it all in the first year if your kids draw it all out and pay the taxes. But if they want to spread it out evenly over the 10 years, sometimes I have beneficiaries that come to me and they're 62 and still working and they're going to retire at 65. Well, we can take nothing or just the bare minimum during the years they're working and then spread it out over, as soon as they retire, they're going to be in a much lower tax bracket. And then we can spread it out over the remaining seven years or something.
So there's a little bit of latitude, and that's where we do planning around this. And we plan their own retirement. Now, there's this other category of eligible designated beneficiaries, yet it's very smart to see if you qualify under one of those. I'll give you an example, which we've talked about this case study before, a guy that inherited millions from his sister, and he didn't even know she had it that much. And about 7 million of it was in an IRA. And he had to withdraw about 4 million and pay the taxes on 4 million, which was about 1.4 million, 4 million, just to get it the money to pay all the expenses of the estate and pay off the other beneficiaries, because there were other people that got smaller amounts of money. And he had to pay an estate that has estate taxes, he had to pay an estate tax bill, but then he was still left with 3 million in there. And he thought his financial advisor told him he was under the 10-year rule, which is what he told everybody. And I explained to him, because he inherited from his sister, he's not more than 10 years younger than her, he can delay it over 21 years, his life expectancy. And that makes a huge difference on his tax and on his retirement, because he's going to get checks until he's like 86. And he's really happy with that.
So, and there's all kinds of things that go on. I mean, we have another guy who inherited from his, I think his parents, and it was eight years left on the 10-year rule. So, he decided to put it in an annuity that pays him an equal amount every year, or he gets to get it by the month, for eight years.
I think he's 65 now. So, he's got checks till 73, a monthly check. And then he also took the non-qualified or non-IRA money that he inherited, put it into the same product, and now he's getting a mostly tax-free check for eight years for the same amount. And then we took his own IRA and put it in a delayed annuity that as soon as those two stop in eight years, those payments, because if 73 comes around pretty quick, I get no more money out of this thing. And his own IRA is going to start kicking out monthly payments to him that are going to go on as long as it is, if he just doesn't touch it till 73. So, there's a lot of things we can do around this in financial planning if you inherit an IRA to just make the payout fortunate for you.
Yeah, you know, again, it's so simple. If you make it a Roth, then obviously the person doesn't have any of the mumbo-jumbo you talked about that they have to deal with. But if they have the other one, then obviously it'd be a good time to contact Hans to help you figure out which is the best strategy based on your income, your needs for the money, and those kind of things. Because so many people, as you always talk about, Hans, the minute they see they've inherited an IRA, which is unfortunately what happened with some of my brothers and sisters, they cash it out, not really realizing what they're running into. Oh, yeah, I mean, if you compare the taxes, you inherit $200,000, you cash it in just right then and there, you can just add 200 grand to your otherwise income for that year. And so you're going to be up in the 30 some percent tax bracket, plus the state, you know, 60, 70, 80 grand of that is just going to disappear. And then what's left is going to be right there in your fingertips. And you know, a lot of people have gone in three, four, five years. And the smarter thing to do is to take the 200,000, put an interest factor in there, and just get yourself just get a check sent to you every month for 120 months or 10 years. I mean, it's real simple.
And the thing is exactly empty at the end of the year, and it just spreads it evenly, so that you don't have this big tax bomb hitting you all at once. So I want to talk about the special needs people. We have several these people where, you know, I just had dinner with the special needs son, I don't really want to refer to him as the special needs son, because he's not that he has a real name, which I don't want to say on the radio. But we'll just call him Joseph, for this purposes, but I had dinner with him and his parents. And they're doing all their financial planning with us.
And it's a little bit tricky. They already have a special needs trust. They understand that they had that before I met them. But then most of their money is in an IRA still. And they've, they've, they've got their they're retired now, and it's all planned out. And so we've got some life insurance on dad and mom, that's going to go into the special needs trust. So that's tax free money, of course, and then that'll be in the special needs trust. Now, he did learn that when they have earnings inside of a trust, the tax rates on that are going to be not so pretty.
And that was news to him, but at least they won't be counting against their son. I mean, let's just he's 30. Now, let's say that when they're both gone, he's 50.
Well, then he's got a lot of life left in him, possibly. And so what we've done is we've set up a see through trust, that's still a special needs trust. And we're going to put in a lot of Roth, IRA money into that with him as the beneficiary. And we're doing Roth because there's no taxes on a Roth. And it can be spread because he's a eligible designated beneficiary can be spread over his lifetime. So it's going to make more like 20 grand a year, coming to him, tax free every year for the rest of his life. So we've set up provision and all that and the beneficiaries of the raw portion that they've already converted. And then their plan is to spend the rest of the money on themselves. And so we use annuities to make sure they don't run out of money if they live a long time.
We didn't put all the money in annuities, but we've we've used a lot of annuities with these people, just to guarantee their lifestyle into the future. Yeah, that's, you know, again, it gives you another reason why it's important to realize that this show is brought to you by cardinalguide.com. If you go to cardinalguide.com, my favorite aspect is you can see the contact Hans page, because you have specialist issues like that, that's a great time to get some real help. And that really mean it is so near and dear to Hans's heart to help you with that. Again, the show is brought to you by cardinalguide.com, where you're going to find the seven worries tab. And today's show, of course, is, you know, we're talking about IRA inheritance. And there is, of course, a video along these lines, show notes, all that stuff's at cardinalguide.com. And of course, Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement.
Great show, Hans. Thank you, and God bless you. Thank you. 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.
