In this episode of the Good Steward Law and Wealth Podcast, host Ledry Jennings breaks down recent changes to IRA inheritance rules introduced by the SECURE Act and explains why inheriting an IRA can be financially detrimental without proper planning. He reviews the original IRA promises—tax‑deductible contributions, tax‑deferred growth, and the lifetime "stretch" for beneficiaries—then details how the SECURE Act altered those promises: the required minimum distribution (RMD) age is now 73, the lifetime stretch was eliminated for most heirs and replaced by a 10‑year distribution rule, and a five‑year rule applies when no beneficiary is designated. Jennings categorizes beneficiaries into three groups—Eligible Designated Beneficiaries (spouses, minor children, disabled or chronically ill, and those within ten years of the decedent’s age) who retain the stretch; Non‑Eligible Designated Beneficiaries (adult children, friends, etc.) who receive a 10‑year window; and Non‑Designated Beneficiaries (estate or no listed beneficiary) who face a five‑year window. He emphasizes the massive tax impact of the 10‑year rule, which can erase 30‑40% of an estate and push heirs into higher tax brackets. The host advises listeners to proactively name appropriate beneficiaries, consider qualified trusts to preserve the 10‑year rule, use spousal rollovers, and convert to Roth IRAs where possible. He previews upcoming episodes covering trusts, spousal strategies, 401(k) rollovers, and Roth IRA advantages. The episode concludes with a call to action to contact Good Steward Law for personalized planning.
Welcome to the Good Steward Law and Wealth Podcast, where host Ledly Jennings explores law and finance to help listeners become better stewards of their wealth. Each episode covers the latest trends and strategies in estate planning, elder law, investment, and wealth management. Tune in for the knowledge and tools for financial success and security.
Welcome back to the Good Steward Law and Wealth Podcast. Excited to be here today because today we are going to talk about IRAs. And the title of this episode is going to be, "You Do Not Want to Inherit an IRA." Somewhat of a catchy title, but there's been some recent law changes since it was enacted in 2019 called the SECURE Act, and it's been clarified and adjusted a little bit since then. But that law change has really affected how IRAs are inherited. So it's important to talk about now that the law's been clarified and we've kind of settled in, it's important that people know the changes that came with that law. So what is an IRA? It's an individual retirement account. Many people know about that because a lot of wealth is accumulated in IRAs right now throughout the United States. You contribute to that account with tax benefits, so you get deductions when you contribute, And then it grows. They call it a tax-advantaged account. When you take it out, it is taxable then, but you get benefits when you put money into an IRA. So kind of the old rule, the government made us, you know, 3 promises whenever we switched from pension plan being most people's retirement. It became more where people should save for themselves. So the government made 3 promises. They said if you save for retirement, you can get deductions along the way. So as you put in money, it helps you tax-wise on the back end. The second promise was in retirement, you would pay that tax back gradually over time. So once you start withdrawing your funds that you worked your life to save for, gradually throughout your life, you would pay that tax back. And the third promise was any funds you didn't use, you could leave to your beneficiaries. And they could also gradually pay that tax back throughout their life. That was called a stretch. They could stretch the payments out throughout their life. So it wasn't all taxable at once. But so a lot of people made their life's plans around this promise, you know, 20, 30 years ago, they looked at the laws of the IRA, said, yes, this seems like a good account. I'm going to bank on the benefit tax benefits, the growth, and being able to leave something to my kids. So I'm going to plan my retirement around that. Well, since about 2019, when this new act, the SECURE Act, was enacted, they took back a lot of those promises. So now those, the IRA accounts are not as advantageous as they once were. I'll start with this, that if you do not plan now, your family and your beneficiaries will pay the price eventually. And when we're talking about IRAs, you may not have an IRA now, but most people will, even if they don't now, because company plans like 401(k)s, usually end up in an IRA, whether it's through a rollover, inheritance, you know, when you retire, you have to do something with the account. So a lot of times, if you don't have an IRA now, you will. So it affects everyone. Um, so generally, how do you think about the, um, downsides of an IRA? Well, first we need to talk about RMDs. That is required minimum distributions. Um, with the SECURE Act, that RMD age is now 73. So you, once you reach age 73, you have to take distributions from your IRA. You can take it before that, but once you reach 73, you have to take it. And how that is figured out, they figure out, you know, what you have to take each year, and it's based on a table called the Uniform Life Table. And basically you look at the amount in your account, you looked at your age, and on the table, and it tells you what you have to withdraw every year. The greater your life expectancy or the younger you are, the smaller your RMD will be. So as an example, I looked at the rough table. So you had $400,000 in an IRA, you're 75, your RMD for that year would be about $16,000. So that's just how you ballpark it. And as you get older, your table goes up. Now, why is this important as it concerns inheritance? Because all these distributions are taxable, they're taxed at ordinary income. So anytime you make an RMD, a required minimum distribution, you pay taxes on it. So that's important to remember for later on. But another change that the SECURE Act made, and the big one that we're going to talk about today as it concerns inheritance, is it eliminated the stretch and replaced it with what is called the 10-year rule. So what is a stretch? Well, if you leave your IRA to someone and they inherit it, your beneficiary, previous to this new act, they could stretch those benefits throughout their life. So they could start taking it, you know, at age and stretch it all the way throughout their life based on a table. But what that did is it widened the gap of when you pay taxes. So you could, you know, pay it throughout your life rather than a big tax hit all at once. Because again, this is all taxed as ordinary income when you pull from an IRA. IRA, and what they replaced that stretch with for most beneficiaries is called the 10-year rule. So what that means is you have to withdraw an entire IRA account within 10 years of inheriting it for most people. So think about it like this. If you had, you inherit a million dollar IRA and you don't touch it by year 10, you have to pull that whole million dollars out. So that whole million dollars would be taxable at your tax rate. And most of the time by that big amount, it would, if you're not already in the highest tax bracket, it would bump you there. So let's just say 30%. So that million dollars is going to be taxed and 30% is going to go away. And a lot of clients come to me and their big thing is estate taxes and capital gains tax. They want to say, well, I don't, I worked hard for what I have. I don't want to give the government my inheritance. I want it to go to my kids. Well, one of the biggest ways that they can fail at this is through improper IRA planning because that 30% tax hit is looming out there. So the concept is you have to plan for your IRA and there are ways to plan around this to that it can be most advantageous for your family. And so what the SECURE Act did was it gave levels of beneficiaries and that's what we're going to talk about today is what are the levels of each of these beneficiaries and how do they qualify? So this will get a little technical, but when I think about the levels that, um, the Secure Act set is I think about it in an airplane. We have some beneficiaries that are flying first class, some beneficiaries that are flying coach. Let's start with the first class. So these are the premium beneficiaries. They get the best benefits. They're called eligible designated beneficiaries. Uh, they go by EDBs in the industry now. And who these people are, are certain individuals that are eligible. And that means they are either a spouse, they are a minor child under 21, or they are disabled or chronically ill, or they are less than 10 years younger than you. So within 10 years of a deceased person. So what these people get is they get the stretch. So the stretch has disappeared for most of your beneficiaries, but not for these eligible designated beneficiaries. So if you're a spouse, you can still stretch the IRA payments. And then, you know, minor children, that's easy to know, just under the age of 21. But once they become 21, then they turn into— they lose that beneficial status. So at age 21, then the 10-year stretch starts to apply. So if you give your IRA to a minor, basically they're going to have until age 31 to pull the money out. Now, one thing that the last example, because disabled and chronically ill, you know, there's definitions of how those are defined, but the other one is within 10 years. So if you leave your account to say your brother that is 5 years younger than you, he can still qualify because he's within 10 years of your age. He would still qualify for those benefits. So that is the eligible designated beneficiary. Those are the first-class flyers, especially the spouse. The spouse even has a few more benefits. That we will talk about because they are more flexible. That will be for another episode, and this is the first episode of a series of podcasts on the IRAs, so we're just hitting the high notes here, and we'll go into detail of each type of beneficiary down the road. But the next type of beneficiary is the non-eligible designated beneficiary, so NEDB is what it goes by, and all these great acronyms, they just try to make it confusing But what an NEDB is, is basically any other beneficiary other than the ones that get the special treatment. So these NEDBs are flying in coach. You know, they, they still get some benefits, but not all the benefits. And what benefits do they get? Well, they get the 10-year stretch. So they don't get a full lifetime stretch, but they get 10 years, meaning people that qualify in this category, can stretch their benefits over 10 years. So they can start taking it in year 1, but they have to take it all out by the end of year 10. So they have 10 years to take it out. And this becomes a numbers game for people of when it's most tax beneficial. Maybe at year 1, you're not making much income, so you want to take some of that IRA out, but you may stretch it throughout the 10-year period, or maybe somehow it's going to be beneficial where you don't take anything till year 10. It's just a number that you figure out based on your current tax filing status and what these distributions would do. So you play the tax margin brackets there. You know, if you're in the 22% tax margin, you don't want these distributions to bump you up to the 30%. So you kind of play that game there. But who are these beneficiaries? Well, these are your most common beneficiaries. These are your adult children, grandchildren, friend, really anyone that's, you know, not a spouse or a minor. And that is most common of what I leave IRAs to. Most of the time when I do an estate plan for an IRA, we leave it— the first beneficiary is the spouse because they get the full stretch and all the benefits. But if something happens to the spouse, most people want it then to go to their kids. So then we leave it to their kids and it's qualified as that NEDB where they only get the 10-year stretch.. So that is first class and coach. And then we'll briefly hit on the third category that the Secure Act says, and that is NDB. So non-designated beneficiary. So that just means you didn't designate anyone for the most part. The first two is you designated a beneficiary. It's just either are they eligible or not eligible. This one, you didn't even designate anybody. So the, The worst case is this non-designated beneficiary. They are flying, you know, in the cargo bay. They're not even in coach because they get the 5-year stretch. So they have, most of the time, they have to take it all out in 5 years, which is, you know, not near as good as 10 years and not as good as the lifetime stretch. So these people, this happens if sometimes you forget to designate a beneficiary on your account Or some people got advice to list their estate as an account. So if it goes to an estate, um, or you just didn't list anybody, then it would go through probate, which is the same as an estate. Then that's where these people would come in. Um, so a takeaway from here is make sure you have your beneficiaries listed, make sure your advisors have them listed and they provided you a copy of your beneficiary form so you can verify that you at least have someone listed.. But other than that, talk with your advisor, talk with your attorney to see who should you list as a beneficiary to get the best benefit for your heirs. So those are the 3 categories of beneficiaries under the Secure Act. And the main thing to take away is there's a big tax bomb impending because if you leave your IRA to your beneficiaries, it's going to be taxed coming out., and it could get rid of up to 30 to 40% of your estate just based on their tax rate. So why I said is you want to plan ahead so you don't hurt your beneficiaries, because it hurts them in the long run if they are at a tax bracket, a lower tax bracket, and then you leave them an inheritance that bumps them up to a higher tax bracket. It affects every bit of income they have. So it can have some real negative consequences, not only on your inheritance, but also on your beneficiaries. So the next episodes that we're going to hit on is the next one. We'll talk about trust. Can you leave an IRA to a trust? Just a quick answer here is yes, but that trust has to qualify and meet certain standards to get the 10-year stretch. It will get the 10-year stretch if it's drafted appropriately. So can you leave it to a trust? Yes. We're going to talk about how do you leave it to a spouse and why you would want to do that., and why spouses are the most beneficial beneficiaries. We'll talk on that. We'll talk on how do you get your work plan from your 401k to an IRA. And then we'll talk about the best type of inheritance account there is. Also, you know, spoiler alert, it's a Roth IRA is what I consider one of the best inheritance type accounts. So how do you get your IRA to a Roth IRA or how do you start a Roth IRA? So we're going to hit on all those in our IRA section. But this has been the Good Steward Law and Wealth Podcast. We're glad to have you here where we consider everything a gift, and it's our job to do the best with what we've been given.
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