The 10-Year Rule: Protect Your Inherited IRA From Excise Taxes

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The IRS has a clause in its code that allows it to take up to 50% of an inherited IRA. Beneficiaries of the IRA may be required to take RMDs that the original owner of the retirement account had been taking. Because inherited IRAs have tax implications, make sure to talk to your financial advisor about your options to minimize the effects on your taxes.
The 10-year rule may also apply: this means that the beneficiary has to liquidate the funds in an inherited IRA account before 10 years after the death of the original account holder or the IRA may take up to 50% of the IRS in an excise tax. Adult children and non-spouse beneficiaries are subject to the 10-year rule while a surviving spouse, people who are less than ten years younger than the original account holder, disabled persons, or chronically ill individuals may not be subject to the 10-year rule. For minor children, the 10-year rule is triggered as soon as they turn 18.
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Опубликовано:

6 сен 2024

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Комментарии : 21

@seanharperink1939 4 месяца назад

Inherited IRA . My mother-in-law passed went to the bank was told that it was 100% father in law. In month 20 they call my father in law and told him that my mother in law need to start Taking distributions. He was not comfortable talking about this with somebody calling him. He call his bank manager she said that she would look into it and call him back. When she call back she said my wife was 50% owner. She would like to write her part of to him. Problem is the IRS has a 9 month rule. We are now at 22 months because the bank can’t find a way to do this.

@AllGenFinancial 4 месяца назад

Sorry you are having to deal with that. In regard to writing over (disclaiming) your wife's part to your father-in-law, I'm not sure if you are able to do that at this point as there is language in the IRS code regarding the 9-month rule. I would consider consulting an estate/probate attorney to see if there is some type of exception. If the IRA is not very large, you could consider distributing your wife's half, paying the taxes, and then giving the net amount to your father-in-law. He would need to pay taxes on any distributions he takes from his portion as well (but he may be in a lower tax bracket and he may not need to distribute all the assets prior to his passing). If it is a large IRA, then you may want to meet with a CFP or CPA to analyze your tax brackets and look at the distributions over a longer time period. Also, if you give the money to your father-in-law and it is over the gift tax exclusion, you may have to file a gift tax return. Of course, if you have more detailed questions regarding your personal financial situation, feel free to reach out at 407-210-3888, thank you. - Paul

@FaceInstitute 4 месяца назад

Perhaps it should also be mentioned that if it is a Roth IRA, the best strategy may be to have it aggressively invested and sit on it for the ten years (or ladder it down in years 8, 9, and 10 if you are afraid of a crash)

@AllGenFinancial 4 месяца назад

While the 10-year rule does still apply to an inherited Roth IRA, there are different tax consequences since the money has grown tax-free. In terms of the strategy of how to invest it, that's unique to each individual's risk tolerance and could be different for everyone. And of course, we are always willing to chat further with anyone who would like to discuss their particular circumstances. To do so, please feel free to call our office at 407-210-3888 or schedule a time to chat on our website: www.allgenfinancial.com/contact-us/. Thank you. - Jason

@stephenparsons6011 4 месяца назад

The important point is that you need a real plan which provides for always following the IRS rules. One rule covers inherited IRAs which require withdrawals within a certain window of time and each withdrawal is a taxable event. Ignoring the rules will cost you in the form of penalties.

@AllGenFinancial 4 месяца назад

These types of policies can be confusing and that's why it's so valuable to involve a competent CFP and/or CPA early on when dealing with an inherited IRA. Please feel free to call our office at 407-210-3888 or schedule a time to chat on our website www.allgenfinancial.com/contact-us/ if you have any questions. Thank you! - Jason

@tompalmer3084 4 месяца назад

Another thing you should mention is how taking distributions may impact Medicare Part B and Part D premiums. There are thresholds established by Medicare and they are based on one's Modified Adjusted Gross Income, 2 years prior. Those persons in higher earnings categories can be subject to Medicare's IRMAA, thus paying more for their premiums and their spouse's premiums, if they are on Medicare B and D plans also. Prior planning and taking distributions prior to 63 years of age can potentially save money in certain situations. There are other U tube videos on this subject.

@AllGenFinancial 4 месяца назад

Thank you for your comment, Tom. Yes, there are various considerations when it comes to the timing of taking the distributions, including what you mentioned regarding the potential effect on Medicare premiums. We focused on one particular consideration for the sake of keeping the length of the video manageable for viewers. But we will be releasing further videos on different considerations regarding distributions from an inherited IRA, as these are important to a financial plan. And of course, we are always willing to chat further with anyone who would like to discuss their particular circumstances. To do so, please feel free to call our office at 407-210-3888 or schedule a time to chat on our website: www.allgenfinancial.com/contact-us/. Thank you. - Paul

@keithmachado-pp6fv 5 месяцев назад

You also mention that the beneficiary is responsible for making sure the original owner took their RMD in the year of death. If there was probate, I believe the Executor has this responsibility and should not distribute the account to beneficiaries until it is taken care of. Even if no probate, the final RMD is captured on the original owners tax return and if not taken the penalty would be withheld from any refund or added to the payment due from that return. Those funds would come from the estate not the beneficiaries to the extent there are funds available in the estate or a refund due from the final return.

@AllGenFinancial 5 месяцев назад

Thank you for your comment, Keith. Actually, a good thing about inherited IRAs and their beneficiaries is that the whole transfer of monies from the deceased to the beneficiaries avoids probate when the beneficiary designation is established before death. This is why it is important to make sure all accounts that can have a beneficiary (i.e. 401ks, IRAs, etc) are set up properly before death, in order to avoid all the ugliness of probate. In addition, the final RMD (the one after the original owner's death) is actually distributed to the beneficiary or beneficiaries and as such does not become part of the estate but rather is reported on the beneficiary's tax return. I understand that there can be a lot of moving parts when someone passes but I hope this is helpful and of course, we are always willing to have a more detailed conversation with you if you'd like. To do so, please feel free to call our office at 407-210-3888 or schedule a time to chat on our website: www.allgenfinancial.com/contact-us/. Thank you. - Paul

@keithmachado-pp6fv 5 месяцев назад

Thank you for the clarification on the final RMD in the year of death. In 2020, all RMDs were forgiven so we did not have this issue to deal with but good to know for future.

@AllGenFinancial 4 месяца назад

We're glad we could help! Please let us know if you have any additional questions: www.allgenfinancial.com/contact-us/ or 417-210-3888. Thank you! - Paul

@TJ-ik3gn 5 месяцев назад

What happens if you die and you leave your self directed Ira to someone and the Ira consist of contracts for mortgage’s on property and the contract is longer than 10 years?

@AllGenFinancial 5 месяцев назад

Thank you for your question. This depends on who the beneficiary is as the rules are different for spouses/eligible beneficiaries (except minors) and non-eligible beneficiaries. Spouses and eligible beneficiaries (except minor children) can stretch the Inherited IRA and therefore have no issues (other than the mechanics of managing the self-directed IRA) with the inherited IRA. The updated legislation did complicate self-directed IRAs for non-eligible beneficiaries (and minors once of age) as they will have to liquidate as per the 10-year rule which, of course, can be messy and complicated. I hope this helps and, of course, we are always willing to have a more detailed conversation with you if you'd like. To do so, please feel free to call our office at 407-210-3888 or schedule a time to chat on our website: www.allgenfinancial.com/contact-us/. Thank you. - Paul

@terry_willis 4 месяца назад

Question: Regarding non spouse beneficiary who has less than 10 year age difference with deceased, if that beneficiary is over 70-1/2 is he still required to take RMD? or can he wait until 10 years are expired and then take a lump sum distribution?

@AllGenFinancial 4 месяца назад

Great question! In that scenario you would use the life expectancy method. RMDs must start by 12/31 of the year after death. If the original account holder did not take an RMD in the year of death, an RMD must be taken from the account by 12/31 of the year the original account holder died. Your annual distributions are spread over your single life expectancy (determined by your age in the calendar year following the year of death and reevaluated each year) or the deceased account holder's remaining life expectancy, whichever is longer. Please feel free to call our office at 407-210-3888 or schedule a time to chat on our website www.allgenfinancial.com/contact-us/ if you have any questions. Thank you! - Jason

@CentralNH 5 месяцев назад

Does it make a difference I didn't take any out but will be over 59 1/2 when 10 years come to fruition.

@AllGenFinancial 5 месяцев назад

Thank you for your question. I presume you are referring to the typical 10% penalty associated with IRA distributions before the age of 59 1/2. If so, this rule does not apply to inherited IRAs as the 10% penalty is waived for the beneficiaries as distributions are prompted/allowed penalty-free when death is the cause of the distributions. So again, there is no 10% penalty for inherited IRAs regardless of age. I hope this helps and, of course, we are always willing to have a more detailed conversation with you if you'd like. To do so, please feel free to call our office at 407-210-3888 or schedule a time to chat on our website: www.allgenfinancial.com/contact-us/. Thank you. - Paul

@keithmachado-pp6fv 5 месяцев назад

It’s 10 years not 11 as in your example. If the person dies in 2020 it needs to be out by 2030 not 2031. Your example said 2010 to 2021. Plus in 2010 there was no 10 year rule by the way.

@AllGenFinancial 5 месяцев назад

Thank you for your comment, Keith. The actual IRS rule states: "10-year rule: If a beneficiary is subject to the 10-year rule, empty the entire account by the end of the 10th year following the year of the account owner's (or eligible designated beneficiary's) death." (www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary). So, the typical interpretation of this is that you have 10 years starting with the year after death. And yes, you are correct that there was no ten-year rule in 2010. I used that year for illustrative purposes to explain the whole concept of the 10 years following the year of death but for practical purposes, this rule started in 2020 after the legislative change. Thank you. - Paul

@keithmachado-pp6fv 5 месяцев назад

Yes 10 years after death. My dad died in 2020, so I have 10 years starting in 2021 with year 10 being Dec 31,2030 (not 2031).