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

Yesterday, I explained Inherited IRAs and how they work, so if you missed that episode, go back and have a listen because it’s the foundation for understanding what I’m covering today and the rest of the week. 

Today, I’m doing a deeper dive into the new Inherited IRA rules that went into effect in 2020, and what you need to know about how these rules might apply to IRA assets that you plan to inherit and/or pass along to your own children or heirs someday. 

Before the SECURE Act was passed that changed the rules, when you inherited an IRA from Mom or Dad, you could take RMDs, which are the required annual withdrawals from a IRA, and stretch those over your remaining life, which significantly reduces the annual amount that you would need to withdraw from the account each year, and most importantly, also reduced the taxes owed by the beneficiaries on those annual required RMDs.

IRA withdrawals are taxed as income, so every dollar withdrawn from an IRA counts towards your income for the year, and so the taxes can be significant, and IRA withdrawals from inherited IRAs can bump beneficiaries into new tax brackets and significantly reduce the net amount of the inheritance that you actually receive once the taxes are paid on those required withdrawals.

What all changed in 2020 after the passage of the SECURE Act is that those withdrawals were no longer allowed to be stretched over your remaining life, but are now limited to 10 years. So if you inherit an IRA worth $500,000, you have 10 years after the original account owner’s death to cash it out and pay the taxes. So for example, let’s say you just let the account sit in cash (which hopefully you wouldn’t!), and the account doesn’t grow at all, you would take out $50,000 per year if you spread out the withdrawals over those 10 years equally.

That $50,000 gets included with your other income, and if you’re already in a higher tax bracket, you could be paying anywhere from 24% to 35% marginal tax rates on those withdrawals, which hurts. There is also a ripple effect from this unexpected higher income in that depending on your income tax situation, it could reduce other tax benefits like deductions and tax credits - especially at lower income levels - that you were used to, and counted on when your income was lower. 

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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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance