Craig Wear, CFP® walks through current rules and tax-planning considerations for inherited IRAs in light of changes since the SECURE Act (2019) and recent relief through 2024. He explains the 10-year distribution rule, key exceptions (spouses, beneficiaries under age 21, disabled/chronic illness, age-nearby beneficiaries), the parity between inherited Roth and traditional IRAs (distribution requirement applies to both, but Roth distributions are tax-free), and practical planning steps — including coordinating inherited-IRA distributions with your own Roth-conversion strategy and broader financial plan. He cautions that skipping distributions because penalties were waived may create large future tax bills and stresses consulting a planner for sizable inherited accounts.
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Well, hey, this is Craig again. Welcome back to the YouTube channel. Hope you're getting some great information from a lot of the videos that we like to create around taxes, financial planning, Roth conversion, all those types of subjects that are near and dear to all of our hearts. Do you have an inherited ira? Should you take distributions? That's the big question for today. I want to introduce kind of what we're going to talk about today by just saying, you know, that Congress has recently made a few little changes that could impact your inherited IRA in 2024. So first of all, let's talk about inherited IRAs from historical standpoint. Secure Act 1.0 back in 2019 changed the distribution requirements to now. Instead of it being a certain amount over your lifetime, over the account holder's lifetime. Now it changed it to the 10 year rule, which means that with a few exceptions, you have to have 100% of the account that you inherited distributed within 10 years. Prior to that, as I said, based on the person, the account holder's age and when you received it, you actually took small amounts every year through these required minimum distributions. You just kept up with what their distribution schedule was going to be. There are some exceptions to this ten year rule, this new ten year rule. Some of those exceptions relate to if you're a spouse of the account holder, you can just roll it over to your own and you don't have any required distributions. It just stays in your account and you handle it as if it was all the money that you saved over your lifetime. Children who inherit IRAs that are under age 21 have exceptions in that they have special distribution rules until they reach 21. Disabled or chronically ill people also have some exceptions where they don't have to do it over the 10 year period of time. And if you leave the money to somebody who is within 10 years of your age, then they have some special rules that they can use. Also, and I should say also that the rules are all the same whether it's an inherited Roth IRA or an inherited ira. The big difference obviously is in the Roth and the inherited Roth ira, although the money has to be distributed, it is not taxable. And out of the IRA, obviously it's all tax secure. 1.0 created a ton of confusion when they changed this 10 year rule. There were a lot of things that Congress left out of the bill that they didn't explain. And so they just decided to waive all the penalties for not making distributions anywhere from 2020 to 2024. But just because you don't have to take distributions doesn't necessarily mean that you should wait. If the inherited account that you have is rather large, you're just going to be kicking the can down the road again. Could very likely wind up costing you a lot of money in tax. In fact, pay more tax than what you probably need to. You also have the unknown of what are the new rules going to be? Will they require that you catch up to those 10 years down the road? So they have one of the things that's happened this year is that they've said, okay, again, for 2024, you do not have to take the distribution to count toward the 10 years. So what if they catch up with that and say, hey, we've given you a buy for the last four years, now you have to take it. And that could result in a really large taxable distribution. So when you think about your tax strategy for these inherited IRAs, I'd like you to just think of it in terms of incorporating it with all your other taxable income and including the concept of conversions from your IRA to your Roth of your own. An inherited IRA or Roth IRA cannot be converted to your own account. You cannot convert an inherited IRA to a Roth ira. You cannot convert an inherited IRA to an inherited Roth ira. You cannot convert an inherited IRA at all. It has to stay an inherited ira, and any money you receive out of it is going to be taxed. So normally what we tell people do is get your own account converted first, since that is variable and that is fair game. And then worry about what you do with the inherited IRA afterwards. Sometimes depending on the and it really just depends on the size of the inherited ira, sometimes you just leave the inherited IRA there and realize that it's just taxable income that's going to have to come in. If, on the other hand, it's a very large inherited IRA and you are not the spouse and you don't qualify for some of these exceptions, then you also want to think about now, do I need to go ahead and get the money out of the inherited Iraq sooner rather than later and redistribute it in other ways in my financial life that'll help me better. So although receiving an inherited IRA is a really good thing because it's just kind of free money, it still does have some tax consequences that go with it. So I would just encourage you. If you have the inherited ira, don't assume that you just keep kicking the can or just take these minimum distributions. If you inherited it before for 2019, you want to make sure that you make it part of a comprehensive tax plan, which needs to be part of a comprehensive financial plan that takes into consideration kind of the goals, the objectives, the dreams, the challenges that you may have. And seeking the help of a financial planner that really does financial planning can maybe help you see blind spots that you maybe weren't aware of. So I guess what I would say is if you have the big inherited IRA or an inherited IRA of almost any size, it really would serve you to really think about the big picture. Hopefully I've given you a few little mechanics that help you understand that just because Congress allows you to wait to take a distribution doesn't necessarily mean that it's in your best interest to do that. So I did another video that talks about that there are three 10 year rules regarding the handling of inherited IRAs. We'll put that icon someplace on the page and you can click through to that as well. And there's also another video we did called Roth Conversion Strategies for High Income Earners. You can maybe check that as well. Those are great videos. If you like this kind of information and you think it's helpful to you, click the thumbs up for sure to like the video, but also subscribe to the channel. All those kinds of things help us just continue to create good content and they let us know that we're on the right track, giving you stuff that you really need.
