What to Do If You Have an Inherited IRA (Lawyer Explains)

Transcript:
(00:00) you might have had a loved one that passed on and you’re dealing with their estate and what are the things that they have well one of the great places people have built wealth in America is in their retirement accounts and so you may have an opportunity to inherit [Music] account sometimes the situation arises where you have a retirement account dropped into your lap by a loved one who’s passed away and made you the beneficiary what to do next that’s a big topic yeah this is a big topic and it’s serious you might have had a loved one
(00:50) that passed on and you’re dealing with their estate and what are the things that they have well one of the great places people have built wealth in America is in their retirement accounts and so you may have an opportunity to inherit account and so we want to talk about the options there whether you’re a spouse or a non-spouse beneficiary those are the IRS terms there’s either spouses and everyone else non-spouse beneficiaries okay yeah it used to be like kids or this or that you’re like a stepbrother or whatever theyve the rules
(01:17) have really gotten simpler thank goodness and for those in Utah we’re just talking about the spouse the one spouse okay you only get one forther a shot out there we just lost a few listeners we gained a few I grew up in Utah so I earned the right to give that choke okay um well let’s break it down now sometimes what’s going to happen and we what what we think is the best outcome is for this account to continue on because you get to continue that tax deferral if this is a traditional account that could be inherited or you
(01:44) get to continue the taxfree growth if it’s a Roth account here now the rules like I said for spouse or nonsp spouses are different so we want to talk about those two separately and maybe we hit spouse first yeah and would it be fair to say in those two columns a spouse beneficiary and everyone else then under those columns you have an A and A B a traditional account or a Roth yeah and uh the age of the individual is going to affect those two sub columns but let’s say A or B so I’m a spouse and I inherit my deceased spouse traditional
(02:17) account what would nor the the best thing to do if you’re a spouse inheriting a an account is just you do what’s called a spousal rollover and I like to do this for traditional or Roth because what happens is if you’re the surviving a spouse their Ira if it’s traditional just becomes a traditional IRA in your name no inherited account no 10year rule we’re going to come to that for non-spouse beneficiaries doesn’t matter your age it just comes over and it’s an IRA in your name okay same thing would happen if it was a Roth account
(02:50) that was inherited you inherit and now you have a Roth IRA in your name or if you already have a Roth account that their assets can just get rolled into your existing Roth account so that’s unique to spouses and that’s called the spousal rollover that’s why as a recommendation as estate planning lawyers we like to say when you’re setting up your account list your spouse as the beneficiary first then your trust if you have one that could have your kids for example or you could just have listed your kids if you don’t but we
(03:18) like listenting the spouse first because you have that easy spouse will roll over no probate no trust needed it just directly goes over to your surviving spouse now for those of you that are like whoa whoa whoa beneficiary designation we have a podcast right before this one where we talked about designating your beneficiary so if you bumped into this podcast wondering what do I do I just inherited one please go back and listen to the sister podcast of what should you be doing with your own beneficiary designations to see what happened on the
(03:47) front end okay so let’s say your a spouse you inherit a traditional or a Roth you can roll it into your personal account and continue going on what happens if the spouse that died was already doing rmds required distributions does a surviving spouse have to keep that up at that point okay now the easy answer on this one is if it’s a Roth it doesn’t matter the age of the deceased spouse doesn’t matter whether they’re an rmd or not because roths don’t have rmds so that’s going to come over to you as the surviving spouse
(04:17) don’t worry about rmd you’re good now if this was a traditional account and the beneficiary was the the deceased spouse I should say here was already in rmd you can still inherit is a traditional account and now it’s following your age when you can you’ll have to start taking rmd which is 73 right now now you will have to take rmd in the year of their death so if they passed away in let’s say 2024 and they were in rmd you’d have to do 2024 rmd but let’s say you’re five years younger and you’re only 68 okay you’re not an rmd yet well
(04:53) you’ll inherit that traditional account and you don’t have to worry about rmd now for another five years until you hit 73 okay you get to reset and yes not and stop the rmd madness um this is again for if you are a spouse inheriting a traditional account from a spouse that’s when this special rmd exemption allows you to hit reset and just drop the money into your account and wait until you’re required to take distributions all right so now let’s go over to the other column which is uh everyone else but the spouse
(05:27) inheriting an IRA and we have the traditional column and the Roth column can we do low hanging fruit first can we do Roth that’s the easy one frankly that’s what you want is you want your family members to inherit a WTH they are the creme to La Creme of anything you could ever inherit so let’s say a child inherits your IRA or 401k or a brother or sister and it’s a WTH account well when they get that WTH they’re going to now open What’s called called an inherited Roth account they cannot roll it into their own WTH it’s
(06:03) going to stand alone as its own Roth account and they have 10 years to drain it they can keep investing it they can keep doing whatever they want with it and they don’t have to divide it by 10 and take required distributions every they don’t have to but after nine years 364 days that account’s got to go to zero so what I love about it is they can start taking distributions at any age it’s a tax-free ATM you can keep investing it you can keep building it you can keep growing it and by the 10th year drain it the end so and that so
(06:34) that’s the easy column yeah and some of you might have an inherited IRA sometimes it’s called a beneficiary Ira that you inherited before 2020 the rules were different before 2020 there’s a lot of inherited IAS out there and those scenarios you could have done what’s called a stretch Ira where actually you’re Distributing that account over your life expectancy and if you inherited account at age 40 um that could be over another 40-year window and this is going past 10 years so I’m just saying for those of you that have an
(07:01) existing inherited IRA you’ve had for a few years or longer you might be under a different set of rules for everyone else the rules we’re talking about is what applies here and the Roth is the simplest it’s the best and also it’s freaking tax-free so you know you you don’t have everything right and U now let me ask you a question okay this is a trick question you ready well what happened if the deceased individual let’s say the parent yeah has a Roth IRA and they already started rmds and then I inherit that Roth IRA do I have to take
(07:29) rmds okay there’s no such thing as rmds for Roth IRA oh D I tried to get you okay so you would never have that situation so You’ never have that situation now they could have been just taking distributions they’re not required distributions they could have been living off of that Roth ir and taking money out of it but that’s different than what are called rmds which are the required minimum distributions that apply to traditional IRAs okay so Mom and Dad are now 73 yeah or let’s say dad’s dying he’s 74 years old he already started rmds and
(08:00) now the kids inheriting a traditional IRA this is probably the most complex of all these situations so a child inherits a traditional IRA and the Dad or Mom were already taking rmds what happens then okay in the situation where rmd is already been happening you will inherit the traditional IRA assuming you were the beneficiary and let’s say there was two of you it was like you and your sister were the beneficiaries 5050 well you’ll get half of that account and you’ll get inherited IRA opened up and your spouse gets their half the account
(08:30) and they open up their Ira now you will have a 10-year window of when you take rmd so you have to continue taking it okay so because rmd already started on that traditional account because your parent was overage was 73 year older which is the rmd age right now you have to continue taking rmd but you get a 10-year window to keep investing the account and keep it open at the end of 10 years the whole thing will have to be fully drained but you are taking a little bit every year over that 10year window to start drawing the money out
(08:59) and there’s a formula the irus has in a table on how you figure out how much you got to take depend on the account balance so that’s kind of the bummer the nice thing is we at least get 10 years to keep rolling this thing out not taking a huge tax hit in one year where you got it a traditional IRA and you got to distribute the whole thing in one year and you inherit a $300,000 account split up 5050 you got 150 of it well I got 150k going on my tax return in one year no we can spread this out over 10 years not just for the investment growth
(09:26) but also for the tax set so there’s some benefit to it now let’s say they were not rmd so Dad he’s 65 years old dad dies son and daughter inherit at 5050 um they’re going to get this beneficiary traditional IRA right and they have 10 years to drain it do they have to divide it by 10 do can do they yeah the nice thing is let’s say was that same $300,000 account split into two inherited IAS for brother sister each of you got 150k and and because the parent was not an rmd yet 6 five you don’t have to worry about it until the end of 10 years
(10:03) so that 10e window where you can keep investing the account you don’t have to take everything every year but at year 10 you have to distribute the whole thing so you may want to look forward at a traditional account like maybe I start draining this thing in year eight nine and 10 and break it up so I don’t get a huge tax hit that first year but let’s continue investing it and growing it and using that money rather than sending it to the IRS yeah now some cool notes that son and daughter they don’t have to wait
(10:28) till they’re 59 and a half nothing their age doesn’t matter those that son and daughter could be 22 years old they’re twins they’re 22 years old and they inherit this traditional IRA they’ve got 10 years to drain it they can divide it by 10 they can divide it by two take one of five they get to choose but they can’t roll it over and combine it with another traditional IRA they have to drain it within 10 years and this is where strategy becomes a huge part because they’re going to pay taxes based on the bracket they’re in so we have
(11:00) sometimes use the word chunking where you’re going to chunk at this money because you don’t want to like take it all in the last year and be in the highest bracket let’s spread it out let’s be smart about it and only if we could wish it into a Roth but we can’t convert it to ro can you can’t convert inherited accounts unfortunately so um so you’re kind of stuck with the traditional but like I said this is a great opportunity to still continue investing it look at the end of the cycle here about chunking it over a few
(11:26) years and that’s one of the things that’s unique for self-directing is 10 years is still a good time period to self-direct a retirement account but you do need to be a little strategic about it because you want to make sure you’re invested in something that will be liquid in 10 years okay you don’t want to put it into something like a startup or sometimes even a private fund that may not be liquid at the end of 10 years uh but maybe a rental property or something you can control the sell of or some private note lending or some other
(11:51) Investments are a little more straightforward in terms of liquidity and this is a great um note that Matt just opened up a little rabbit hole if you will is that let’s say dad was fully invested at um maril Lynch and he had a million dooll uh traditional IRA or 401K that he buil up working for Kodak over the years or who knows what IBM and so he’s Kodak even around no they’re not but okay it was on a podcast the other day it was it was on my brain but anyway that’s a whole other story you may have heard of cameras that actually have film
(12:21) or record players that have vinyl that’s another uh conversation okay so now these two kids inherit this million doll traditional IRA or 401k and they’re going to say huh I don’t like just staying at the marilin can I roll it to a self-directed account yes that’s not moving it into another Ira of yours it’s just moving where the IRA is hosted if you will so now you want to say okay Mir Lynch thank you very much sell everything in the account back take it back to USD US Dollars there’s no tax there’s no penalty then
(12:59) you move that money into your into a inherited IRA that can be self-directed your sister may go ah screw that I just want to keep doing ETFs bonds mutual funds whatever you may say I want to self-direct it over the next 10 years you can do that too yeah so changing the account type is not violating the rules yeah let me go over the last thing I want to hit on this topic I don’t have you any other comments on this last thing I want talk about is just the mechanics of doing this so if you have a spouse that passes away or a parent that
(13:29) passes away or other person that you may have been listed as the beneficiary on the account I want to go through the process of how you claim this everybody every company whether this is directed Ira Fidelity Charles Schwab I’m just nameing the three big ones you know um any of those companies you have what’s called a beneficiary claim form where you’re going to say hey I believe I’m the beneficiary on this account and I want to go claim my interest in it now you don’t they can’t authorize any information to you unless you actually
(13:57) are okay but you’ll need to provide a copy of the death certificate to show that this person did pass away and then what happens is they will then communicate back to you and say okay looks like you are a beneficiary do you want to open up an inherited IRA again some companies called a beneficiary Ira it’s the same dang thing and let’s say mom or dad passed away and like Mark said the count was at marilin or it’s at Fidelity you could say yes I do and I want it sent to an inherited IRA at directed Ira um and so that’s the
(14:26) process it’s a beneficiary claim form there’s typically a deser ific required and then you then direct where you want that account set up whether you’re staying at the St institution where your parent was or you’re moving to another company whether it’s directed Ira or another provider so that’s just the mechanics of how it works and the claim process plan on a couple weeks it’s there’s other people involved in this and for deceased accounts every company has their own little department on this we have a a small team here that handles
(14:54) them in RS because you know when you get 20,000 accounts people people do pass away yeah and and I’ll just give you one other fun example here and then uh fun example on inherited and beneficiary IR let’s say let’s say you’ve been telling Dad Dad you’ve been invested in freaking you know birkshire haway and and Apple for 20 years holy crap why that would have been bad over the last 20 years that’s true that’s that would yeah how about Kodak yeah Kodak yeah so dad’s been stuck in the M mutual fund world for whatever years and you’ve been
(15:23) begging dad to buy some Bitcoin and you’re like Dad you should have bought it when it was two grand well whatever and so you’ve been given dad a hard time Dad’s passed away you loved him he was a great mentor and he left you this account now you’re going now I’m going to go buy some some Bitcoin and in 10 years Bitcoin is going to be maybe somewhere good you know that’s what you believe and you’re and we’re not telling you to go buy anything here we’re just telling you invest in what you know and you may say oh my gosh I’m going to go
(15:50) buy cryptocurrency with this inherited IRA you can do that you go open up your inherited IRA at directed Ira which could be an account or you open up an LLC and you can do defi wallets all day long or you may want to just open up an inherited crypto Ira which we have at our office and you can roll that money right in there and have a Gemini uh app right on your phone trading crypto within weeks and now that retirement account is under your control to invest what you know best and that’s the exciting part if that and it there’s no
(16:23) penalty no tax and go for it it’s just incredible so that is a fun I like that that’s fun yeah and because and I think you know of course you’re the directed I podcast we like clients to invest in what they want and they know what they believe in what they’re passionate about what they have a competitive Advantage at you can buy stocks bonds and mutual funds over here if you want people do that but you can also invest in real estate in private companies in crypto and small business and big business those are all assets that your IRA or
(16:50) 401K can own we know so many people are just frustrated with Wall Street or they haven’t had success in the stock market or their mutual funds are like never seen perform despite the stock market going up they’re like but the one I’m invested in never seems to in over 20 or 30 years what the heck’s going on and so we get that frustration that’s where self-directing can come into play and it’s not just for your own accounts it’s for the accounts you inherit too those inherited IAS as well now my last suggestion and this is really really
(17:17) important if you are the beneficiary of a retirement account or a life insurance policy this is a great opportunity to get a comprehensive plan put together have someone walk you through what you’re offer options are this is just a simple podcast hitting some simple general rules and guidelines with some ideas that might get your juices flowing our 12 13 lawyers now doing consultations every day with clients around the country at affordable rates are there for our Main Street business owners Main Street Real Estate Investors
(17:49) book an hour book an opportunity to get your own estate plan done and have a comprehensive consult they will answer all the questions you have regarding everything we talked about today and more because they’re going to tailor to your situation so sit back look at this is a great chance to take a little bit of that money and invest a thousand dollar in your own future what am I going to do moving forward with my own retirement accounts my own real estate how can I take this tax-free life insurance or this Roth IRA invested and
(18:19) buy real estate or invest in another startup down the street that I’m really excited about that’s what that comprehensive consults about the links down below get to kkos lawyers and it’ll really open up a whole new world to you yeah and of course if you need the self-directed account we’re here at directed Ira directed.
(18:35) com you can book a call we’ll go over the situation help you in setting up the inherited IRA as well and uh we’re here for you and of course we want to make sure you guys got invited to the self-directed IRA Summit this is a one-day event the best way to quickly learn how to take control of your retirement using an IRA 401k to invest in assets you know and love like real estate private companies notes not just the stock market and we hold this conference every year you can come in person or attend uh from a virtual format and have a great time associating
(19:06) with others that are in the same Community the same tribe and learn what’s working and how to do it it’s coming up in the very near future the Link’s down below it’ll be in Dallas and again we would welcome you in person we got a rock band on the last night this part is we got a rock band spoiler alert Mark and I may get on stage so we’ll see how that goes but get over to sdas summit.
(19:27) com you can register there we’ll see you in Dallas