Share This Episode
Finishing Well Hans Scheil Logo

Inherited IRA? Beneficiary Decisions - Planning

Finishing Well / Hans Scheil
The Truth Network Radio
January 18, 2025 8:30 am

Inherited IRA? Beneficiary Decisions - Planning

Finishing Well / Hans Scheil

On-Demand Podcasts NEW!

This broadcaster has 347 podcast archives available on-demand.

Broadcaster's Links

Keep up-to-date with this broadcaster on social media and their website.


January 18, 2025 8:30 am

Hans and Robby are back again this week with a brand new episode! This week they discuss beneficiary decisions for those that inherit IRAs.

Don’t forget to get your copy of “The Complete Cardinal Guide to Planning for and Living in Retirement” on Amazon or on CardinalGuide.com for free!

You can contact Hans and Cardinal by emailing hans@cardinalguide.com or calling 919-535-8261. Learn more at CardinalGuide.com. Find us on YouTube: Cardinal Advisors.

COVERED TOPICS / TAGS (Click to Search)
YOU MIGHT ALSO LIKE

This is the Truth Network. Welcome to Finishing Well brought to you by CardinalGuide.com with certified financial planner, Hans Scheil, bestselling 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. Welcome to Finishing Well with certified financial planner, Hans Scheil, and today's show is Inherited IRA Beneficiary Decisions. And I love, you know, there's a video along the same line at CardinalGuide.com and Tom opens it with explaining that the reason that they're doing this show and the reason we're doing this radio show is mistakes are made when money moves. And so we want to get to the heart of those mistakes.

And I think one of the original mistakes that we made is we have these kind of decisions when it comes to beneficiaries in the idea of this is important, but not urgent. But in all reality, like God, he has plans. He made those plans way before we were even born. And they were extremely urgent to him.

And they were extremely important as far as our future in Jeremiah 29, 11. You know, he says, I know the plans I have for you, declares the Lord to prosper you and not to harm you. Plans to give you hope for the future. But you see, he made those plans, you know, long before we were even conceived. And so as we begin to do these plans, you know, it fits under the category, not of not urgent, but important. It fits under the very urgent.

When it comes to beneficiary decisions, who's going to receive your IRA, who's going to receive your life insurance, those kind of things. Those are extremely urgent and extremely important because like your own salvation, you know, you don't know what's going to happen. You know, 20 seconds from now, Hans, we got to hone in on not making these mistakes. Well, we do.

And there's a bunch of them that can be made. And, you know, we see it all the time where people come to us and they've already made the mistake. They've already done some things on their own or they've followed the advice of their brother in law or they've followed their instincts and they've made a mistake. And then, you know, it becomes our job to try to unwind the thing.

And rectify it. And with IRAs, once money comes out of an IRA, you can't put it back in there, okay? So and that's the topic of today's show is we're talking about inherited IRAs.

We're talking about when the money moves from your IRA, which you own and then you're deceased, and it moves now to the beneficiary, you know, what are the tax implications and what can you do now to think about those tax implications to set up your beneficiaries' designations in such a way that your beneficiaries are going to receive favorable tax treatment, which means they can keep more of the money. And then the special emphasis that we're going over today is around the surviving spouse. And we're showing things, decisions your spouse is going to need to make about your IRA after you die.

And unfortunately, it's going to be immediately after you die. And we find ourselves many times where we're there with the grieving widow or widower. And pretty quickly in the conversation, we're talking about taxes, which doesn't feel very good. But it is really necessary for the spouse's well-being. Yeah, I think that, you know, one of the things that kind of amazed me when I began to understand more about IRAs is that they don't have joint IRAs. You know, in other words, IRAs belong to one person to the other. That's one area for whatever reason, you know, when they set it up, they did not set it up jointly.

And so all these decisions become necessary. And that's how mistakes can happen, unlike your bank account, you know, that's jointly held. You know, here, your IRA doesn't matter how long you've been married or whatever the situation is, right?

Well, that's correct. And, you know, if you think about it, the pensions, which aren't too much around anymore, but your parents had a pension or your grandparents, and the pension only belong to one person, because it's based on one person's work. So the IRA and many people today, like most people today, have an IRA in the husband's name and an IRA in the wife's name. And so it's just a matter of when we're talking about a spouse beneficiary, we're talking about the person you're married to had an IRA, they died, and now you're the beneficiary and you were their spouse at the time of their death. And so now you're going to get special treatment, where you're going to have the option to get special treatment. And I'm going to tell you what that is. So, okay.

All right. So, and what it really boils down to is, when your spouse dies, you now are filing a single tax return, and you're having to live off of one Social Security check, because their Social Security check goes away or yours does, whichever the smaller one was goes away. So, and then you're going to, it's going to become even more necessary for the surviving spouse to live off of this IRA, and to be able to live off of the rest of their life.

And so, a lot of people, they're familiar a little bit with these new laws that went in with the SECURE Act, and they know about the 10-year rule, because a lot of people will say, oh, I've heard about that, I just have to distribute it over 10 years, whereas I used to be able to do it over a lifetime. And that's true for non-eligible designated beneficiaries, which is most people. So, when you leave your IRA, and one of your children is the beneficiary, they are going to have to spread it over 10 years, or empty the IRA, and pay all the taxes within 10 years. But if you're a spouse, surviving spouse, and the IRA was left to you, you've got more options than that. One of the options is you can delay and recalculate the minimum distributions over the rest of your life. So, this thing won't be emptied in 10 years, it'll still be around, and you can live off of it for the rest of your life.

So, that's an option that's there for the surviving spouse, but you've got to make certain elections right from the beginning. Yeah, and that's where the mistakes can be made, and that's the opportunity for the show, right, is to get that information out there so that we can help you, right, before it's too late, so to speak. Yeah, and when people come in and do financial plans with us, we go over all this stuff, and this is just one factor, is we show people, because you know, you've got two people, they're 65 years old, they're sitting in front of us, they're showing, looking at all their money, they're calculating their retirement income, and many of them, the emphasis is on how much money can I live off of right now.

I mean, how much money can we spend, and how much money can we enjoy, how much money can we give, and based upon all of this. And so, we're going to look at the next 5 or 10 years, but we always have an eye, well, you can have a lot of money right now if you want to risk running out of money. And so, we're always looking at down the road, when you get to be 80, 85, and maybe only one of you is alive, maybe the other one is passed on, what's life going to look like then, and the decisions we make now are going to greatly affect that survivor, and frankly, you don't know which one of the two that's going to be, or you may both live a long life. I mean, we don't really know what's going to happen, but we want to prepare for that spouse beneficiary, and I could just give you an example of somebody that, you know, that I've been working with that is in that situation, is that the lady is, she's 72, and the husband, the man, is 67. So, she's 5 years older than him, and next year is going to be required minimum distributions for her, but she, relative to him, she only has a smaller amount in her IRA.

So, that's one thing we're doing for her, is we're getting ready to start pulling money out of her IRA next year on a minimum distribution. He's the one with what amounts to millions in his IRA. He's been a very good saver, and he's got quite a bit of money in his IRA, and he has a terminal disease.

I mean, he is not going to be with us a year or two from now. It's just, it's pretty much a foregone conclusion, and so we've actually sat down and talked with them about all of this and planned things out so she'll know what to do after he passes on, assuming he goes first. And his IRA does not have minimum distributions. If he were to live to 73, that's when his minimum distributions start, which is seven more years, six more years. But if he dies in one year, and then she inherits the money, she is going to have to start taking minimum distributions because she's going to be 73 out of this very large IRA. And so what we're going to do with her is she's going to make an election to not treat this IRA as her own, but to treat it as an inherited IRA and the surviving spouse, so she can use his age to postpone minimum distributions for another six years. Am I making sense to you? Yeah, I mean, that's absolutely cool.

Understanding the law and then setting things up accordingly. Yeah. Now, if the reverse was true, let's say that he was the one who's 72, and she's the one who's 67, which is more common, and we wanted to delay taking minimum distributions, and we could then, she could treat this IRA as a spouse beneficiary as her own. Retitle it in her name, she could even merge it with her other IRA money, and then she wouldn't have any minimum distributions for six more years. So there's a lot of flexibility around the start date and the age used for minimum distributions in a spousal inherited IRA situation.

Well, we've got to go to a break in a second. We want to remind you, it's a good time to remind you that this show is brought to you by Cardinal Guide, cardinalguide.com, and there you can discover all sorts of cool things. The seven worries tabs, and of those seven worries, of course, one of them is IRAs, and so this show will be there as well as the show notes and the video we talked about right there with the same title about inherited IRA beneficiary decisions. And the neat thing about that is that you get a chance to see the board and more explanations on how all this stuff works, so we hope you'll take advantage of that resource at cardinalguide.com, as well as the Contact Hans and Tom page, where you can get that information on how to call them or email them or whatever you would like to do, and clearly they want to make a custom plan for you for that.

And of course, Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement, it's all there at cardinalguide.com, so we'll be right back with a lot more on inherited IRA beneficiary decisions. 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 Stile and today's show Inherited IRA Beneficiary Decisions. You know, essentially mistakes are made when we move money, and we don't want to make these mistakes, right Hans? Well, yeah. And so, you know, Robbie asked me a question on the break. He just said it seems like you're trying to postpone minimum distributions if you were listening to the first half of the show. You're trying to delay the fact that you've got to start these distributions, and that doesn't sound like me because I'm always encouraging people to start distributing their money earlier so they don't have such large minimum distributions later, a lot of reasons behind that. And so, first of all, when you come to us for advice on this, I'm going to give you advice based upon your own situation. And the example I was using, these people are very well off.

They've been great. And we now have the, we now know that this fellow is going to pass away. And so, and he's willing and able to discuss these kind of things in preparing us to help her when she lives on.

And so, it kind of sounds like I'm talking out of both sides of my mouth. And what I'm really saying is everybody's situation is different. But if you came to us with, you know, or you're a client, and you just come into us, and your spouse has just died, and your spouse that died was younger than you, and a few years away from minimum distributions, we may still give you the same advice as to leave the IRA in his name. And you as an inherited surviving spouse, just because we want to delay the government making us take distributions as long as we can, we may make those distributions anyhow because you need money to live. We just don't like the government making us do that. You also cannot convert to a Roth any, first of all, any minimum distributions or any inherited IRAs.

So, I've got a couple of examples here that we did gave in the video, and let's talk about them a little bit. So, Okay, but wait a minute before you, I apologize, but when you can't convert an inherited IRA to a Roth? No, I did not. You cannot.

Well, that was just a piece of information. No, inherited IRA. No, no conversions. I've had a lot of people try to do that and it's just a no. Now, if you're a surviving spouse and you want to leave the IRA as an inherited IRA because your spouse was younger that died, you can do that, but you can't do conversions. You can't do any Roth conversions out of it.

No, well, that's a piece of the puzzle I was missing. Okay. Yeah, yeah. Now, if you're a surviving spouse, you can leave it as an inherited IRA for now, and then later you can reverse this and you can say, now I want to treat it as my own because he died five years ago and I wanted to leave it as his and inherited, then you don't have to tell them why. You just want to do that, but now that he would have been 73 and having to start minimum distributions, now I want to treat it as mine because I want to do some Roth conversions.

Okay. And by the way, we don't have to treat all the IRAs the same way either. These people I was talking about, they have several different IRAs and they could treat them differently. She could treat them differently after he dies. So this can get pretty complicated. I want our listeners to just get the basic concept is that the IRS gives a lot more leeway to a surviving spouse than they do any other beneficiary. I mean, that would be helpful to just understand that concept. The rationale behind that is the surviving spouse is most likely going to need the money more than any of the people, other beneficiaries. I mean, your surviving spouse is going to need to live off of this.

So we want to make it last as long as we possibly can. Okay? Right.

That's the underlying logic. So if I go into these examples, we have Mary who's 56 and Joe who's 74 and it's Joe's IRA and Joe dies. And so Mary is 56 and Mary would most likely leave this as an inherited IRA because she can make distributions before age 59 and a half. On an inherited IRA, you can distribute money at any age if you're the surviving spouse and not pay the 10% penalty. Okay? So when we have a young spouse who's just lost her husband in inherited IRAs or just, you know, we have a younger man and an older wife who and that younger person, the younger beneficiaries under 59 and a half, we're going to want to treat this as an inherited IRA so they can pull money out without penalty.

Okay? Right. And then under this thing, section 327 is Mary would probably want to do that for four years. But then when she gets to be 60, she can now treat this as her own IRA, retitle it and then she could do Roth conversions and then the RMDs will then start at her age. But she's not going to be 73 or 75 for many, many years. So this gets a little complicated.

I'm not trying to train you to do my job. I just want to give you a sense of the decisions for a spouse and the kind of planning that we do by talking to the people when we spot these differences in ages. Okay? Absolutely.

Yeah. Second example, Thomas is 67. Hillary is 72.

Thomas dies. This is a little bit like the example I gave earlier. Hillary leaves it as an inherited IRA just so she doesn't have to take minimum distributions next year because she's a surviving spouse of an inherited IRA so she can use her own age. And it's under section 327 as a rule that she can use Thomas' age for RMD.

Okay? And if Hillary wants more Roth conversions, she must treat the IRA as her own. And we can make this change.

We can only do it one time. So if we leave it as an inherited IRA but we later want to invoke section 327 and change it to her own IRA, well then once we do that, we can't go back and make it an inherited IRA later. So it all gets around to how they want to take the distributions, how long they want to stretch them out, their need for money now, their desire to do Roth conversions and all of that stuff plays in but there's a lot of options for the surviving spouse. So when you're making these decisions ahead of time, right, then the spouse is getting certainly the information that they may need at the moment when they need it. But one of the big decisions I know or mistakes that can be made we talk about all the time is people don't check their beneficiaries, right?

Oh yeah. I run into that all the time. I run into second marriages where when the people got divorced from their first marriage or their first marriage the spouse passed, they just made their kids which is a logical thing to do that the beneficiaries of their IRA, their adult kids. And then they got remarried at some point later and then they even with their new spouse, they say you leave your IRA to your kids, I'll leave my IRA to my kids and that all sounds fine with these newlyweds in their 60s or 50s or whatever. But then when they come into us, we got a real problem is you both are jointly living out of these IRAs and then one of you dies, that whole IRA of the deceased is going to go to those kids over there. You're not going to have it anymore to live off of.

Now that's a problem. It can be mitigated with life insurance. But a lot of times people that they've been married for a while, they'll change everything around once they talk to us and they'll make the spouse the beneficiary of the IRA which is the right thing to do. And then perhaps they'll make all of the kids the contingent beneficiary. So in other words, after the spouse dies, there's still money left in it, it's going to go to all the kids that both have brought into the marriage. And a lot of times we're going to do that to both IRAs.

Now I'm not going to force that on people, but I'm going to suggest it and maybe even see if one of them kind of bites. These are all things now we're getting into estate planning, which is what we're doing the whole time in retirement planning. So we spent most of the day talking about surviving spouses and the spouse beneficiary and then the decisions that the spouse beneficiary is going to need to make of whether they're going to be an inherited IRA or they're going to treat the IRA as their own IRA. And there's a lot of factors going into this.

So how did we get on spouses? Well, the spouse gets the best treatment of anybody by the IRS is of anybody in any of the whole list of beneficiaries. And Secure Act 2020 and the Secure Act 2.0 of 2023 created three categories or classifications of beneficiaries. Number one is the non-designated beneficiary, which is not people. These are estates, trusts, that kind of thing. The second classification is the non-eligible designated beneficiary, which is most people fall into the second classification, which is going to be your adult kids that inherit your IRA money, a friend, a brother, a sister, that type of thing.

And they're going to fall into the 10 year rule. As often we run out of time before we run out of show, but we want to remind you that the show is brought to you by Cardinal Guide, cardinalguide.com, where you're going to find these seven worry tabs that we talk about all the time. And today's show being under the IRA tab. And if you go there, you're going to find a video right along the same lines of inherited beneficiary decisions and the show notes. You know, all sorts of detailed information of these examples that we talked about today. It's all there at cardinalguide.com as well as the contact Hans or Tom Page and the book, The Complete Cardinal Guide to Planning for and Living in Retirement.

And it's all there at cardinalguide.com. Great show today, Hans. Thank you.

And God bless 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.
Whisper: medium.en / 2025-01-18 10:24:17 / 2025-01-18 10:34:16 / 10

Get The Truth Mobile App and Listen to your Favorite Station Anytime