King & Wood, P.A.

What are the Rules for Inheriting an IRA?

“Know what to expect if you inherit an IRA and how to establish a plan for taking distributions.”

Inherited Individual Retirement Accounts (IRAs) are created when the funds in an IRA or employer-sponsored retirement plans are inherited after the original owner dies. The beneficiary may not make any additional contributions to the account and must comply with a series of rules regarding the inherited account or face an expensive tax situation. A recent article from U.S. News & World Report, “What Is the Inherited IRA 10-Year Rule?” explains the basics beneficiaries need to know.

What is the Inherited 10-Year Rule? The rule applies to those who inherit an IRA on or after January 1, 2020. In most situations, all funds must be withdrawn within ten years of the previous owner’s death, but there are exceptions depending on your age and relationship with the deceased. Spouses who inherit an IRA have options, as do beneficiaries who meet certain criteria.

The inherited IRA 10-year rule was part of the SECURE Act. Before then, a non-spouse beneficiary could take required minimum distributions (RMDs) based on the heir’s life expectancy. Following the SECURE Act, funds from an inherited IRA must be withdrawn over ten years. This eliminated the ability of the beneficiary to keep the retirement account funded for the rest of their life and gain the advantages of the long-term tax-free growth of the IRA.

Does the 10-year rule apply to you? The exceptions to the 10-year rule are:

• The IRA owner’s surviving spouse
• The IRA owner’s minor child
• An individual who is not more than 10 years younger than the IRA owner
• A disabled or chronically ill person, as determined by IRS rules.

If a minor child inherits the IRA, the 10-year clock starts ticking once they reach the legal age of adulthood.

Heirs may take the entire amount from the IRA, but it will be taxable as regular income.

For spouses, there are decisions to make. The surviving spouse may open and transfer the assets into an inherited IRA and then withdraw funds during the 10-year timeframe. If the decedent was taking RMDs from a traditional IRA at the time of their passing, the spouse would need to take the RMD during the year of death if it wasn’t already taken. Otherwise, the spouse can wait until they reach the required age to take RMDs from the account.

If funds are taken from your own IRA before 59 ½, there is a 10% penalty plus taxes on the withdrawals. However, a surviving spouse under age 59 ½ could open an inherited IRA and start taking distributions.

There are strategies to optimize the 10-year rule. One strategy is for the owner to name a Charitable Remainder Trust as a beneficiary for your IRA. A CRT is an irrevocable trust that generates an income stream for the beneficiary with the remainder of the assets after the trust term. The trust term can be longer than the 10-year inherited IRA limit, allowing the beneficiary to stretch tax benefits longer.

An estate planning attorney can help you navigate the complex rules about inherited IRAs and determine how to use traditional and Roth IRAs to manage your tax liability.

Reference: U.S. News & World Report (Dec. 18, 2023) “What Is the Inherited IRA 10-Year Rule?”

What You Should Know about Inherited IRA

“Navigating the often complex world of inherited individual retirement accounts (IRAs) can be daunting, especially in the wake of losing a loved one.”

Inheriting an Inherited IRA can be even more complicated than the already complex world of inherited Individual Retirement Accounts (IRAs). Understanding the rules and regulations about inheriting an inherited IRA is critical to avoid major tax pitfalls, according to a recent article from yahoo! finance, “What Happens When I inherit an Annuity?”

After the passage of the SECURE Act, the rules concerning inherited IRAs became quite restrictive. Working with an estate planning attorney knowledgeable about IRAs can be the difference between a healthy inheritance or an unexpected huge tax liability.

An inherited IRA is an IRA left to a beneficiary following the death of the original account owner. The beneficiary who inherits the IRA can pass it to a successor beneficiary upon death. This creates the “inheriting an inherited IRA” scenario.

If the line of succession is not set up correctly, there is the potential for inherited assets to go through probate for a judge to rule on the rightful owner.

The original beneficiary is the first person to inherit the IRA. Once they have inherited the account, they may name their successor beneficiary. There are rules for the original beneficiary and the successor beneficiary.

The SECURE Act changed the timeline for inherited IRAs. It eliminated the “stretch” IRA strategy, which allowed beneficiaries to take distributions over their lifetime, stretching out the tax-deferred growth of the IRA over decades. Now, most non-spouse beneficiaries must withdraw all assets from an inherited IRA within ten (10) years of the original account holder’s death. This change presents new implications with regard to taxes, especially if the beneficiary is in their peak earning years.

Inheriting an inherited IRA can involve complex tax rules and pitfalls. There are timelines for taking required withdrawals and zero flexibility for mistakes.

You’ll also need to be sure the inheritance is documented correctly to avoid potential probate.

The rules differ for spouses inheriting an IRA since they shared assets with their deceased spouse. The SECURE Act allows spouses to treat the IRA as their own, providing more flexibility in distributions and potential tax implications.

Understanding the concept of Year of Death Required Distributions is essential. Let’s say the original owner was over a certain age at death. In this situation, a Required Minimum Distribution (RMD) may need to be taken in the year of death, which could impact the heir’s taxes for that year.

Knowing potential tax breaks related to inherited IRAs will also help with financial management. Non-spouse beneficiaries can deduct the estate tax paid on IRA assets when calculating their income tax.

These are complex issues requiring the help of an experienced estate planning attorney. Ideally, the conversation about what happens when you inherit an inherited IRA should occur while creating or revising your estate plan.

Reference: yahoo! finance (Sep. 5, 2023) “What Happens When I inherit an Annuity?”

A Roth Conversion Can Benefit Retirement Plan

“Under the Secure Act, most Roth IRA beneficiaries must empty the account 10 years after the original owner's death. Unlike with traditional IRAs, however, they need not take distributions in years one through nine.”

Before 2020, leaving a traditional IRA to younger beneficiaries created dual tax breaks. The original owner reduced taxable income by making pretax contributions during their lifetime, and beneficiaries could stretch the benefits of tax deferral over their lifetime. All that ended with the SECURE Act, but there are some options, as explained in the article “Why a Roth Conversion is a Powerful Estate Planning Tool” from Think Advisor.

After the SECURE Act, beneficiaries who don’t qualify as “eligible designated beneficiaries” or EDBs must empty the inherited IRA account within ten years. If the original owner had already begun taking minimum required distributions, the beneficiary must also take annual RMDs during the ten-year distribution period.

Someone who inherits a traditional IRA must now pay taxes on the entire account balance within ten years of the original account owner’s death. This can be a sizable tax burden, especially if the beneficiary is in their peak earning years.

Roth beneficiaries who don’t qualify as EBDs must empty the account within the same ten-year distribution period applying to traditional IRA accounts. However, Roths have a decisive advantage during the original owner’s lifetime: no RMD rules.

The original owner will always be deemed to have died before their required beginning date because a Roth account can never go into pay status since there is no required beginning date for distributions. Therefore, the Roth IRA beneficiary can wait until the tenth year to empty the account, allowing the funds to grow tax-free without worrying about the tax hit in Year 10.

When the beneficiary eventually takes distributions, the original contributions are nontaxable because the original owner paid taxes on Roth contributions during their lifetime. If the five-year rule is satisfied—at least five years have passed since the original owner made their first contribution or conversion to the account—earnings will also be tax and penalty-free to beneficiaries.

Roth accounts benefit the original owner because they offer a tax-free source of income during retirement. However, they’re also a valuable tax-free gift for account beneficiaries.

Reference: Think Advisor (Sep. 1, 2023) “Why a Roth Conversion is a Powerful Estate Planning Tool”

Is It Possible to Split an IRA?

“Like most assets, you can inherit an individual retirement account (IRA) after the owner’s death. For spouses, inheriting an IRA is a relatively straightforward process.”

If you and a sibling have inherited an IRA, there are several options, says a recent article from yahoo! finance, appropriately titled “My Sibling and I Inherited an IRA. How Do We Split It?” The choices are different than when a spouse inherits an IRA. Making a mistake could be costly, so work with an estate planning attorney familiar with the process.

An IRA is a tax-advantaged retirement account owned and managed by an individual. It’s different from 401(k) accounts, managed through employers. The rules about inheriting an IRA are more complicated than any other form of investment because of the IRA’s tax status. The traditional IRA is known as a “pre-tax” portfolio. This is because you don’t pay taxes on the money invested into the account. You pay taxes on the account’s growth when making withdrawals.

Starting at age 72 or 73, you must take money out of the IRA every year. These are called Required Minimum Distributions (RMDs) and are required by law. The amount depends on your age and the amount in the account. If you inherit an IRA, distributions from the account will still be required.

From a policy perspective, these withdrawals are required to generate tax revenue. Otherwise, people would have “eternal” IRAs, which would continue to grow tax-free for decades and generations.

When siblings inherit an IRA, the first question is whether or not the siblings are “eligible designated beneficiaries.” A beneficiary is a person named in the account to receive it after the owner’s death.  The beneficiary then inherits the account directly. Under the SECURE Act, starting in 2020, certain categories count as “eligible designated beneficiaries.” This includes the spouse, any minor children, disabled or chronically ill individuals and anyone not more than ten years younger than the account owner. Adult children over 18 do not qualify as eligible designated beneficiaries.

Adult siblings may transfer the IRA into an Inherited IRA, using a single account they own jointly, or distribute the IRA among multiple inherited IRA accounts that each owns individually. The transfer must occur by December 31 of the year the IRA was inherited. Once the account is transferred, the siblings have ten years to withdraw and pay taxes on all the money in the inherited IRA account.

If the siblings wish to withdraw and use the assets, they may. However, they must pay ordinary income taxes on the assets, which could be considerable. The tax rate is set based on the sibling’s income for the year.

Minor children inheriting an IRA have another option. Their parent or guardian may transfer the IRA into an inherited IRA and take RMDs based on their life expectancy and the account’s value. The distribution must begin on December 31 of the year when they inherited the IRA. The money is taxed as income. Once the minor child reaches legal age, the ten-year rule applies. They must take all of the money out of the account within ten years of achieving their legal age.

Splitting an IRA between siblings requires the knowledge of an estate planning attorney to make informed decisions to protect the assets and minimize taxes.

Reference: yahoo! finance (April 24, 2023) “My Sibling and I Inherited an IRA. How Do We Split It?”

Get These Estate and Tax Items Done Before It’s too Late

“What estate planners need to accomplish for their clients before Tax Day, as well as the regulatory changes they need to be aware of while preparing for the big day.”

This year, tax day falls on April 18 because of the weekend and because the District of Columbia’s Emancipation Day holiday takes place on April 17. Don’t let these extra days go to waste, says a recent article from Investment News, “Top things for estate planners to do before Tax Day 2023.”

Now that the SECURE 2.0 Act has taken effect, there’s much to do before the April 18 deadline. Taxpayers should review their wills and trusts to confirm that their wishes are effectively stated. However, there’s more this year. Asset valuations, family circumstances and changed laws are all reasons to review these documents. While you’re preparing taxes and reviewing net worth statements is also an excellent time to review IRA Required Minimum Distributions (RMDs), and beneficiary designations and make an appointment to review your estate plan in light of current estate planning laws.

Current federal estate, gift and generation-skipping transfer tax exemptions are currently $12,920,000, while the current federal generation-skipping transfer tax exemption is also $12,920,000. This changes dramatically on January 1, 2026, when both numbers will be cut in half. Therefore, planning needs to be done well before the dates when these exemptions shrink.

Wealthy married couples may consider using the Spousal Lifetime Access Trust. This allows the couple to gift their increased exemptions before the reduction in 2026. If the trust is drafted properly, spouses will remain in a similar economic position as long as both spouses are alive and married to each other. The SLAT benefits the donor’s spouse, while also taking advantage of these high exemptions. For example, Betty creates and gifts assets to a SLAT. Depending on the terms of the SLAT, her husband Barney will receive income and possibly principal. While Barney is still alive and married to Betty, their lifestyle remains intact.

When Barney dies, all amounts payable to Barney end and the trust assets pass to the following or remainder beneficiaries named in the document. They may receive the trust assets outright or in further trusts. For example, the assets are held in trust for Betty’s children for their lives, and Betty’s GST is allocated to the SLAT. If the trust is created in this way, the children receive income and principal during their lives, and the trust may continue for Betty’s grandchildren without being taxed in their respective estates.

The IRS has issued guidance stating that, with certain exceptions, most completed gifts made now will not be subject to a clawback if the taxpayer dies after exemptions are reduced.

Various states have their own additional estate, gift and/or inheritance taxes and exemptions.  Your estate planning attorney will be able to explain what state-specific laws apply to your situation.

For families whose wealth is tied up in real estate property, assets can be titled differently to lower taxable estates. For example, transferring a home to a Qualified Personal Residence Trust can remove the asset from the taxpayer’s estate, while only a fraction of the home is counted as a gift. However, after the QPRT term, the grantor must pay rent to keep the home outside their estate.

For commercial property, contributing the property to an entity and then making gifts of partial interests in the entity may be helpful. However, the gifts of a portion of the entity may qualify for discounts for lack of control and marketability.

These are just a few steps to be taken before tax day 2023 and before the high exemption levels revert to pre-JCTA levels. Your estate planning attorney will know which steps are more effective for your family.

Reference: Investment News (Feb. 27, 2023) “Top things for estate planners to do before Tax Day 2023”

Is Extending Required Minimum Distributions a Good Thing?

“The first SECURE Act extended the beginning date for taking required minimum distributions from the year after the account owner reaches age 70½ until they reach age 72. Just three years later, ‘SECURE Act 2.0’ has extended this age to 73, and offers a further provision for extending it again, to age 75, beginning in 2033.”

The question is, are these extensions a good thing, or a trap for people who aren’t up on the latest rules? A key concept is the difference in how couples and singles are taxed. The income level at which singles reach tax bracket thresholds is half that of married people filing jointly, explains a recent article titled “Are Extended RMDs A Gold Mine Or Tax Trap?” from Financial Advisor.

For example, a retired couple reaches 70½ this year. They’ll have an RMD of $89,450 from their combined $2 million plus in IRAs. They also receive $27,700 in interest and dividend income during the year—exactly equal to the standard deduction for a married couple filing jointly. The federal income tax liability would be $10,294 (not including taxes on Social Security benefits).

Let’s say they opt not to withdraw the $89,450 during 2023. Instead, they wait and one of the spouses dies. The surviving spouse then withdraws $89,450 as a widow. The survivor’s federal income tax liability on the same amount becomes $18,192, or almost 77% higher than if both spouses were still living. The “single filer” penalty is an issue.

What’s more, the children of our example are likely to face a higher income tax rate on what’s left in their parents’ IRA when both pass away. They are likely to be in their peak earnings years at that point and have only ten years at most to take the entire payout after their parents die.

Finally, if the married couple takes IRA withdrawals earlier rather than later, they’ll see a step-up in basis for all the after-tax funds they’ve allowed to appreciate for the rest of their lives. This eliminates all income tax on the appreciation. This is an important income tax benefit you don’t get from IRA receipts after the death of the account owner. Perhaps this is what Congress had in mind when it extended the starting date for RMDs not once, but three times.

It could be argued that singles, including surviving spouses, will see IRAs grow more if they put off distribution even longer. However, eventually bigger amounts may push individuals or families into a higher income tax bracket later on, and the undistributed IRA would not get a step-up in income tax basis on the death of the original owners. The undistributed IRA amount also can’t be rolled into a Roth IRA.

Tax brackets strategies can be improved if the couple takes withdrawals before they turn 70 ½, as long as they are retired and not in a high-income tax bracket. By taking increasing RMDs later in life, it’s possible to increase the federal income tax bracket, and risk triggering the single-filer penalty on the widowed spouse.

Estate planning for the SECURE Act means if you haven’t had your estate plan reviewed in the last two or three years, it’s time to make an appointment with an estate planning attorney. These changes in the law may create new opportunities, or your existing estate plan may not be properly structured to address the changes brought about by Congress.

Reference: Financial Advisor (March 1, 2023) “Are Extended RMDs A Gold Mine Or Tax Trap?”

What are RMD Rules for 2023?

“The SECURE 2.0 Act, which was signed into law in December 2022, changes the RMD rules for retirement savers beginning in 2023.”

After a certain age, retirement account owners are required to take minimum distributions from traditional IRAs and 401(k)s. The SECURE 2.0 Act has changed the rules, reports the article “New RMD Rules for 2023” from U.S. News & World Report.

Before the SECURE 2.0 Act, the age to start RMDs was 72 for retirement accounts, including both traditional IRAs and 401(k)s. Now, the RMD age has increased in two steps. Starting in 2023, the RMD age increases to 73, and in 2033, the RMD age will increase to 75. If you were born between 1951 and 1959, you’ll need to start RMDs after age 73. Born after 1960? You can delay RMDs until after age 75.

There are important deadlines, and while you get extra time to take your first RMD, you must take subsequent RMDs every calendar year.

Here’s the twist: remember, RMDs are taxable. If you take your first RMD in 2023 because you celebrate your 72^nd birthday that year, you’ll have some decisions to make. You can take the RMD by December 31, 2024, or delay it to no later than April 1, 2025. But if you delay it to April 2025, you’ll take two RMDs in one tax year.

If your income from Social Security and other sources is more than you need, those higher ages for RMDs have their advantages. Retirement savings accounts may grow tax-free for a longer period of time. The change may also bring savings in Medicare costs. The price of Medicare premiums is tied to income. When retirees take distributions from pre-tax retirement accounts, it increases their income and their premiums. By waiting on withdrawals, income can be lowered, leading to lower Medicare premiums at that time.

However, the delay in taking distributions may also lead to higher taxes during later stages of retirement. If you don’t take funds early, you may find yourself with higher RMDs later, leading to larger tax bills.

Account owners who don’t take an RMD at the right time usually face harsh penalties. Prior to the SECURE 2.0 Act, the tax penalty was 50% on their required amount not withdrawn. Now the penalty is 25%. If the mistake is corrected quickly, the penalty can even decline to 10%, as long as the person can demonstrate the missed RMD was due to an error and reasonable steps are being taken to resolve the issue.

There are changes to qualified charitable distributions as well. Account owners age 70 ½ and older may now make IRA qualified charitable distributions of up to $100,000 per year without owing income tax on the transaction, which can count as their RMD for the year. The qualified charitable distribution limit is now linked to inflation and may increase in future years. A one-time gift of $50,000 may be made directly to an eligible entity through a charitable gift annuity, charitable remainder unitrust or charitable remainder annuity trust.

Based on the SECURE Act 2.0, Roth 401(k) account owners no longer have to take RMDs at all. This aligns the Roth 401(k) with Roth IRAs, which also do not require any distributions in retirement.

Reference: U.S. News & World Report (Feb. 10, 2023) “New RMD Rules for 2023”

Estate, Gift, and Generation Skipping Taxes for 2023

“The Internal Revenue Services has announced the inflation-adjusted figures for estate, gift and generation-skipping transfer (‘GST’) tax exemptions for 2023.”

The new year brings new inflation-adjusted figures for many estate planning exemptions, as reported in the article “2023 Estate, Gift and GST Tax Changes” from mondaq. These should be considered when creating or reviewing estate and tax planning documents.

The annual gift tax exclusion amount is the amount which can be given by any person free of gift tax. This has increased from $16,000 to $17,000 per person, or $34,000 for a married couple.

The federal lifetime gift and tax exemption amount is the total amount an individual can give away during their lifetime or at death free of gift or estate tax. This has increased by $860,000 from $12.06 million to $12.92 million in 2023. A married couple could transfer a combined total of $25.84 million without owing any federal estate tax. The top federal gift and estate tax rate remains at 40%.

The federal Generation Skipping Tax (GST) increases to $12.92 million. This is the tax on transfers to grandchildren or more remote descendants or unrelated individuals who are more than 37 ½ years younger than the person making the gift. The GST tax rate remains a flat 40%.

Unlike the federal estate tax exemption, any GST tax exemption not used on the death of one spouse may not be used by the surviving spouse.

The federal lifetime gift and estate tax exemption was increased by the 2017 Tax Cuts and & Jobs Act and unless Congress acts, the exemption will drop by about a half on January 1, 2026.

If the lower levels of federal estate tax exemption are a concern, now is the time to transfer property to use up all or most of the remaining amount and lock in the higher exemption amount. Treasury Regulations were issued in 2019, the “anti-clawback rule,” which effectively approved this strategy. Gifts designed to lock in the current estate tax exemption can be structured in many ways and funded with a variety of assets. Speak with your estate planning attorney to explore various ways to accomplish this.

The SECURE Act passed in 2019 made substantial changes to the rules governing IRAs and other qualified plans. One of the most notable eliminated the ability of most non-spouse beneficiaries to stretch withdrawals from inherited IRAs or other retirement plans over the beneficiary’s lifetime. Instead, these beneficiaries must withdraw all of the account assets within ten years of the plan participant’s death.

The SECURE 2.0 Act passed in December 2022 as a follow up made further changes to retirement plans. Most notably, those who were born after December 31, 1950 may now defer taking Required Minimum Distributions (RMDs) until age 73, and participants born after December 31, 1958, may defer taking RMDs until age 75.

Estate and tax laws have changed a great deal in recent years, making this an important time to evaluate estate plans made before 2020.

Reference: mondaq (Jan. 12, 2023) “2023 Estate, Gift and GST Tax Changes”

What Happens when You Inherit a Retirement Account?

“There’s almost always a reckoning when the government proffers a tax break. So it is with individual retirement accounts (IRA)s, 401(k)s and similar accounts that investors fund with pre-tax earnings.”

The SECURE Act of 2019 reset the game for IRAs and other tax deferred retirement accounts, says a recent article from Financial Advisor titled “IRAs, Taxes and Inheritance: Planning Becomes a Family Affair.” Prior to SECURE, investors paid ordinary income tax rates on withdrawals, whether they were voluntary or Required Minimum Distributions (RMDs) from these accounts, except for Roths. When individuals stopped working and their income dropped, so did the tax rate on their withdrawals. All was well.

Then the SECURE Act came along, with good intentions. The time period for payouts of IRAs and similar accounts after the death of the account owner changed. Non-spouse beneficiaries now have only 10 years to empty out the accounts, setting themselves up for potentially huge tax bills, possibly when their own incomes are at peak levels. What can be done?

Heirs of individual investors or couples with hefty IRAs and investment accounts are most likely to face consequences of the new tax regulations for RMDs and inheritances from the SECURE Act.

A widowed spouse faces the lower of either their own or the partner’s RMD rate—it’s tied to birth years. However, there is a pitfall: the widowed spouse files a single tax return, which cuts available deductions in half and changes tax brackets. Single or married, consider accelerating IRA withdrawals as soon as taxable income lowers early in retirement. Taking withdrawals from IRAs at this time voluntarily often means the ability to defer and as a result, optimize Social Security benefits to age 70.

For non-spousal beneficiaries of inherited IRAs, there’s no way around that 10-year rule. Their tax rates will depend on income, whether they file single or joint and any deductions available. If a beneficiary dies while the account still owns the assets, those assets may be subject to estate taxes, which are high.

Here’s where tax planning is could help. IRA owners may try to “equalize” inheritances among heirs with tax consequences in mind. For instance, a lower earning child could be the IRA beneficiary, while a higher earning child could receive assets from a brokerage account or Roth IRAs. Alternatively, an IRA owner could establish trusts or make charitable bequests to empty the IRAs before they become part of the estate.

Your estate planning attorney will help you create a road map for distributing IRA and other tax deferred assets based on the tax and timing for beneficiaries or what you want to fund after you pass.

Another strategy, if you don’t expect to exhaust your IRA assets in your lifetime, is to systematically withdraw money early in retirement to fund Roth IRAs, known as a Roth conversion. The advantage is simple: inherited Roth IRAs need to be drawn down in ten years, but the money isn’t taxable to beneficiaries.

Decumulation planning is complicated to do. However, your estate planning attorney will help evaluate your unique situation and create the optimal income sourcing plan for your family based on their assets, including taxable and tax-advantaged accounts, Social Security benefits, pensions, life insurance and annuities.

Reference: Financial Advisor (Sep. 29, 2022) “IRAs, Taxes and Inheritance: Planning Becomes a Family Affair”

The Future of Your IRA and How the SECURE Act Changed the Rules

“The Setting Every Community Up for Retirement Enhancement (Secure) Act upended inherited IRAs for most non-spousal beneficiaries. The 10-year rule for withdrawing from inherited IRAs eliminated the ability to stretch inherited IRAs for these beneficiaries.”

An ongoing series of changes from Congress has estate planning lawyers paying close attention to what’s going on in Washington. The IRS recently proposed more changes to IRAs, details of which are explained in this recent article “The Secure Act Changed Inherited IRA Rules. What’s an Advisor to Do?” from Think Advisor. Every time the laws change, new opportunities and new restrictions are presented.

Having to empty inherited IRAs within 10 years makes the IRA less attractive from an estate planning perspective. If your legacy plan included leaving significant assets through an IRA, there are a number of alternatives to consider. First, take a longer look at your estate through an estate planning, inheritance and tax planning lens. Do you have enough funds to pay for the retirement you planned without the IRA? If not, the next steps may not apply to your situation.

What are your estate planning goals? If married, your spouse is probably the beneficiary on retirement accounts and life insurance policies. If you don’t know who is named as your intended beneficiary, now is the time to check to be sure your beneficiaries are up to date.

Taxes come next, for you, your spouse and any non-spousal heirs. Withdrawals from traditional Roth IRAs are not generally taxable. Will anyone (besides your spouse) receiving the IRA be able to pay the taxes, or will they need to use the assets in the IRA to pay taxes?

The Roth IRA provides an excellent alternative to getting hurt by the SECURE Act’s 10-year restriction on inherited IRAs. Taxes are paid when the account is funded, there are no withdrawal requirements and the accounts are free to grow over any length of time. Money in a traditional IRA may be converted to a Roth IRA, although you will be paying taxes on the conversion.

The Roth IRA conversion has a five-year requirement. Funds must be converted and remain in the account for five years before the more flexible Roth rules apply.

Roth IRAs may be passed to beneficiaries income-tax free. Non-spousal beneficiaries can take withdrawals from Roth IRAs tax-free as long as the five-year rule has been met. The beneficiaries can then use their inheritance as they wish, without the funds being diminished by higher taxes resulting from taking out large sums in a relatively short amount of time.

Roth IRAs are not exempt from federal estate taxes; just as traditional IRAs are not exempt. By making the conversion and paying the taxes upfront, however, you can at least minimize income taxes for heirs, even though you can’t eliminate the federal estate tax.

Rather than do the conversion all at once, consider doing a Roth IRA conversion over time, figuring out with your estate planning attorney the best way to do this to minimize your tax burden and adjust it for years when income is lower.

This flexible strategy with Roth IRAs can be used with all or a portion of the IRA, protecting part of the IRA for the next generation while using part of the funds for retirement. Your estate planning attorney will help you determine the best way to go forward, to meet your current and future needs.

Reference: Think Advisor (June 21, 2022) “The Secure Act Changed Inherited IRA Rules. What’s an Advisor to Do?”