Many seniors end up consolidating their retirement funds into IRAs, either Roth or Traditional, in their golden years. Employer-sponsored plans easily roll over into IRAs, making it easier to maintain the favored tax status, manage the investments, and calculate and take required minimum distributions. Furthermore, IRAs pass via beneficiary designation outside of the will and other probate assets, making them a useful tool in wealth transfer.
While a spouse may inherit an IRA and treat it as if it were their own, non-spouse beneficiaries are subject to different rules. Prior to the 2019 SECURE Act, owners of non-spousal inherited IRAs could take required distributions over their lifetime; therefore, a 30-year-old who inherited an IRA from a grandparent could easily extend the RMDs over nearly 50 years. Now, the SECURE Act requires accounts inherited Jan. 1, 2020, and after to be fully withdrawn by Dec. 31 of the 10th year following the original account owner’s death.
When the Act was first passed, annual RMDs were not required to be taken from inherited accounts. However, IRS Publication 590-B illustrated RMDs taken in years one through nine. First remember the IRS does not make tax laws; Congress does through the Internal Revenue Code (IRC). The IRS only interprets how the IRC applies in various situations. So, IRS publications are subject to revision. Not surprisingly, the IRS recently updated Pub 590-B on May 13, 2021, to reflect the original assumption that no RMDs were required, but the inherited account would still have to be fully withdrawn by the 10th year. In the case of a Traditional IRA, taxes are due when funds are withdrawn from the IRA. Investors can only put off paying taxes for so long.
As an IRA owner, it comes down to what your intentions are for your assets when you die. Do you want your assets to benefit multiple generations? Do you want to pay any tax due now, or do you want to pass the tax burden on to your heirs? Determining your long-term goals for your wealth first will allow you and your financial adviser to develop a plan for wealth transfer.
While financial publications are generally quick to offer articles on alternatives to Stretch IRAs, i.e., allowing an IRA to be passed to multiple generations, the solution that works for your family is very dependent on your long-term goals for the money, how much is in the IRA, at what age the original IRA owner dies, and the tax situation of the beneficiaries.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta’s longest running, most respected financial talk radio show “Money Talks” airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a Certified Financial Planner™ professional.