Beneficiary IRA, Inherited IRA, SECURE 2.0 Act

by | Apr 4, 2024 | Videos

Beneficiary IRA, Inherited IRA, SECURE 2.0 Act – Video Episode 375

Key Take-aways:

1. Non-spouse beneficiaries cannot roll inherited retirement accounts into their own IRAs; they must set up a separate inherited or beneficiary IRA.
2. Under the SECURE Act, inherited IRAs must be fully distributed within ten years of inheritance.
3. Beneficiaries are required to take minimum distributions each year, and failure to do so can result in a 25% penalty, reduced from the previous 50% penalty.
4. The rules for inherited IRAs have evolved over time, from immediate lump-sum distributions to the option of “stretch IRAs,” and now to the 10-year distribution requirement.

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Beneficiary IRA, Inherited IRA, SECURE 2.0 Act – Video Episode 375 – Transcript

We receive a lot of feedback on the content we produce – videos, podcasts, blog posts.

We received an interesting comment about beneficiary IRA, inherited IRAs and the SECURE Act.
And I wanted to share this with you because I thought it would make a good video topic.

Someone wrote in and said, “Last year, I inherited my sister’s 401(k). I rolled it into an IRA at a financial institution.”

Now, I’m just going to pause right here and say, to be clear: you cannot take someone else’s retirement account and roll it into your **own** retirement account – unless you are the surviving spouse. If it’s someone else, or you’re named the beneficiary, you can’t merge retirement accounts together.

Even though I think you ought to be able to!

He set up an IRA and rolled it over. Now, some financial institutions will call these a beneficiary IRA.
Some of them will call them “inherited” IRAs; it’s the same thing.

He was told that when he set up this account last year, he “would need to spend it all within ten years.”
That is technically correct.

Then he was also told that he “could take a little out each year as long as the account is drained by the end of the tenth year.”
That is also technically correct.

He recently went back to this financial institution. And someone told him that because of the SECURE Act 2.0, he now has to take a required minimum distribution from the beneficiary IRA each year, or he’s going to face a 25% penalty.

Okay, I’m going to translate: The first person who told him he could take a little bit out each year was talking about a required minimum distribution, and they were right.

That has not changed.

The whole idea is based on your age; you take a required minimum distribution each year.

And then by the tenth year, you have to take out what’s left in the account.

They weren’t wrong when they said that “you take a little bit out each year, and then by the tenth year, the account has to be empty.”

Also, the penalty used to be 50%. Now it’s 25% – if you don’t take out anything, or if you take out too little.

He went on to write, “Hey, I’m only 58. I’m still working. I don’t want to take the money out if I don’t need to.”
Nobody really wants to do this.

The way it used to work – years ago, when I got started in the business, someone would pass away, and I would have to call them up and say, “Hey, you are the beneficiary. Where are we sending the check?”

There was no rollover option; there was no beneficiary IRA. Those things didn’t exist. It was just, “Oh, you’re going to get a check. Be ready to pay taxes when you file your income taxes next year.” That’s how it worked. You got it all at once.

Then they created what they called “stretch IRAs,” where you could roll the money over – as a beneficiary – into an IRA and take it out, over the rest of your life.

Pretty cool.
And I think people in Congress figured out this was not really the way they intended it to be.

So they created this beneficiary IRA, or inherited IRAs. Where all the money now has to be drained within ten years.

You could take it ALL out in the first year; it doesn’t matter.

But by the tenth year, it has to be all gone.

Again, just to remind folks, the only person who can do this—put it in their own IRA and leave it there for the rest of their lives—is a surviving spouse.
Everyone else is going to be subject to these rules.

It’s funny. In our business, sometimes we talk to folks who want to do Roth conversions.

Roth conversions are where you take huge chunks of money from your 401(k) or your IRA; you pay ALL the taxes NOW, so you don’t have to pay taxes in the future.

And sometimes we get folks who want to do these inherited IRAs or beneficiary IRA, where they can stretch everything out – for up to ten years, so they don’t pay taxes.

Sometimes that’s the same person.

The same person who wants to defer on one hand – but pay all the taxes upfront.
It’s a funny business we’re in.

That’s episode 375. Thanks for tuning in.

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