The theme this week on the Retirement Quick Tips Podcast is: Inherited IRAs

Today, I’m talking about a few clever ways to potentially reduce taxes on inherited IRA withdrawals. 

With the SECURE Act accelerating the withdrawals and the taxes paid on IRA withdrawals for non-spouse beneficiaries, some of you may want to make some changes to your estate plan and consider some alternatives in how you deal with IRA assets and who you name as beneficiaries. 

As I mentioned yesterday, the rules on Inherited IRAs were overhauled in 2019, and even though they should be clarified later this year, there are steps you can start taking now to reduce the tax bite on IRA assets you’re planning to pass along to your kids, or if you’re planning to receive IRA assets from your own parents, it’s wise to have a conversation about planning that can be done in light of these new rules. 

In most cases, an estate attorney needs to get involved, so it’s a good excuse to revisit your estate plan. 

That’s because mishandling an inherited IRA could bump you into a much higher tax bracket, and significantly reduce the net amount that you would receive from an inherited IRA, so it’s important that the original account owner - whether that’s you for your own IRA, or mom and dad for an IRA that you plan to inherit from them - it’s important that you do some advanced planning here. 

First of all, its important to understand the exceptions to the 10-year rule for mandatory withdrawals. A disabled or chronically ill person, a child who has not yet reached the age of majority, and lastly, a beneficiary who is not more than ten years younger than the deceased. If a beneficiary checks one of these boxes then the rules could be significantly different. 

Secondly, it might make sense to unequally split different account types among different children, giving IRA assets to children with lower income and a bigger portion of taxable assets like trust accounts to children with higher incomes. [Explain]...

Another consideration here is that Roth conversions become a lot more attractive when viewed in light of these changes, especially from an estate planning and tax minimization standpoint. 

That’s because the 10-year withdrawal rule still applies to Roth IRA assets, but none of those Roth IRA withdrawals will be taxable for Roth IRA beneficiaries. A beautiful thing! 

Those are probably the 3 main considerations, but it’s important to do some advanced planning while the original account owner is still alive to ensure that the tax drag on inherited assets is minimized. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast.  

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