Let’s first begin with the law that changed it all, The Secure Act of 2019.
Before this law passed, a beneficiary of an IRA account had their lifetime to deplete the account. Which gave them significant control over the taxation on the funds.
However, the Secure Act of 2019 changed the rule, now you must deplete the account by the 10th year after death.
For some this means huge tax consequences, especially if the account had a size-able nest-egg left to withdraw from or you already make a size-able annual income. However, some aren’t subject to the new rule. The rule specifies certain people as “Eligible Designated Beneficiaries”, which include:
- Spousal Beneficiaries.
- Disabled (as defined in the rule) beneficiaries.
- Chronically ill (also defined in the rule, with limited exception) beneficiaries.
- Individuals who are not more than 10 years younger than the descendent.
- Certain minor children (of the original retirement account owner), but only until they reach the age of maturity. After maturity, the new rule will kick in and they will also only have 10 years to deplete the account. They are still ineligible under the minor children exception if they were to inherit an IRA from a grandparent, aunt, uncle, etc.
What can you do?
One strategy is to shift the type of IRA the funds are placed in from pre-tax to after-tax with a Roth conversion. However, this only makes sense if you are in a lower tax bracket than your beneficiaries. With this solution you will still have to deplete the account within 10 years, you just wouldn’t owe taxes on the inherited balance.
Another strategy if you are in a lower tax bracket, is to withdraw the funds and place them into a brokerage account for your beneficiaries.
You can also maximize the 10-year window by taking 1 or 2 size-able distributions during inopportune moments. During a year when your income falls short, take a distribution to make up for the lost income. If you see a “size-able drop” in the market, you could take a distribution and then reinvest those funds elsewhere.
If you have a Health Savings Account, you can take the distributions and put it into your HSA. Just be sure to stay within the contribution limits for your specific account.
All-in-all, talk with your financial advisor to learn how to best curb your tax consequences when you inherit an IRA. Every person has a unique situation and although these tips may work for some, you should really consult with a professional for information specific to you and your situation.
*The information above was taken from an article found on CNBC and from the text of the Secure Act.*
CWM Advisory, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any agency of CWM Advisory, LLC. Examples of analysis performed within this article are only examples. They should not be utilized in real-world analytic products as they are based only on very limited and dated open-source information. Assumptions made within the analysis are not reflective of the position of CWM Advisory, LLC.
