Stephanie McCullough (00:06):

This is Take Back Retirement, the show that’s redefining retirement for women. Retirement is an old-fashioned cultural concept. We want to reclaim the word so you can make it your own. I’m Stephanie McCullough, financial planner and founder of Sofia Financial, where our mission is to reduce women’s money stress and empower them to make wise holistic decisions so they can get back to living their best lives.

Stephanie McCullough (00:30):

Kevin Gaines is my longtime colleague with deep knowledge in the technical stuff: investments, taxes, retirement plan rules. He’s a little bit nerdy and quantitative, I’m a little bit touchy-feely and qualitative. Together, through conversations and interviews, we aim to give you the information and motivation you need to move forward with confidence. We’re so glad you’re here.

Kevin Gaines (00:55):

I know this accountant who spends a lot of time working with clients on their retirement accounts, and he tells them half in jest, but half serious, put a big note when he hands them their manila folder of all the information on their IRAs. Put a big note on it that says, before you do anything, see Ed.

Kevin Gaines (01:17):

And as he continues the story, several times, the survivors, spouse, children, whatever, come into his office holding this folder with this note still attached. And they said, “Dad, mom said to do nothing before we saw you, talk to you. So, let’s talk.” But why would you do something like that? Today we’re going to explain why.

Stephanie McCullough (01:47):

Coming to you semi-live from the beautiful Westlakes office park in suburban Philadelphia. This is Stephanie McCullough and Kevin Gaines of Sofia Financial and American Financial Management Group. Say hello, Kevin.

Kevin Gaines (01:59):

Hello, Kevin.

Stephanie McCullough (02:00):

What we’re talking about today is if you by chance inherit an IRA individual retirement account or another type of retirement account. So, as you know from previous episodes, see episode 12 on IRAs with guest Sarah Brenner, episode 20 on Roth IRAs, of course, episode 40 on income tax. And yet another one, episode 58 on Secure Act 2.0. Changing the rules. There are lots of rules about retirement accounts. Anytime the government gives you a tax incentive, a tax break to do something, there’s quid pro quos, there’s going to be regulations around that.

Stephanie McCullough (02:38):

So, there are actually quite specific, and as you’ll see, a little bit complicated rules on inheriting a retirement account. Now, you may remember way back when you opened your own IRA or if you signed up for a retirement plan at work, you were asked to fill out a beneficiary form.

Stephanie McCullough (03:00):

Meaning if you were to pass away and there was still money in the account, that person would get the account. These types of assets do not pass by your will. They pass by beneficiary designation. What we’re going to talk about today is what happens when that beneficiary actually inherits it.

Kevin Gaines (03:18):

And not to belabor the point about complication, but twice a year, I go to a two-day conference in which we talk about nothing but retirement accounts.

Stephanie McCullough (03:30):

Rules around retirement accounts.

Kevin Gaines (03:32):

Twice a year. And I’ve been doing this for years and we spend all this time talking about the rules, court cases, changes.

Stephanie McCullough (03:41):

Not the investment options, not planning strategies, the rules.

Kevin Gaines (03:46):

The rules, because there’s a lot of little nuances here, and at least half, if not three quarters of the time, it’s not talking about your retirement account, it’s talking about the retirement account you inherit because you could think it’s crazy with your own money, wait until it’s somebody else’s money, it gets even wackier.

Stephanie McCullough (04:07):

So, one thing that we’ve pointed out before, and I always want to say again, is just to remember that the I in IRA stands for individual. So, these are never joint accounts. They’re owned by one human. If that person passes away, it passes by beneficiary designation to another human or multiple humans or non-humans, which is another topic we’ll get into in a sec.

Stephanie McCullough (04:29):

But the whole reason there’s rules around this is that in the case of a traditional retirement account, traditional 401(k), 403(b), individual retirement account, remember that traditional means that income taxes have not yet been paid on this money.

Stephanie McCullough (04:48):

The person who contributes to this type of account gets a tax deduction for the money that goes in. And the quid pro quo there is when the money comes out of the account, you have to pay your income taxes. And of course, the IRS gets impatient. They want their taxes.

Stephanie McCullough (05:04):

So, there’s something called required minimum distributions when people reach certain ages. And those rules have recently changed, but there is a point at which people must start taking money out of the account. And it doesn’t mean you have to spend it; it just means you have to get it out of that tax-protected wrapper. You’ve got to pay your pound of flesh to the IRS and then next year, do it again.

Kevin Gaines (05:31):

Yeah, Uncle Sam doesn’t give a rat’s ass what you do with the money. He just wants his cut.

Stephanie McCullough (05:39):

Indeed, indeed. So, there’s a couple key points, and just to point out, what we’re going to be talking about is the case in which the original contributor, the original owner of the account has started their required distributions.

Stephanie McCullough (05:56):

Most of the cases that Kevin and I have been working with recently, our clients are inheriting from parents, from aunts and uncles, from older adults who have started their required minimum distribution amounts. If the deceased has not yet started, there’s different rules and we’re going to try to keep it at that and not let Kevin go down that rabbit hole. Longtime listeners know Kevin loves a good tax rabbit hole.

Kevin Gaines (06:22):

And ah, crap.

Stephanie McCullough (06:24):

What’s wrong?

Kevin Gaines (06:25):

I just twisted my ankle in that first rabbit hole that I tried to avoid. Ah, man.

Stephanie McCullough (06:30):

I’m seeing him, he’s sitting at his desk. I’m like, how could you twist your ankle sitting at your desk? He’s being funny.

Kevin Gaines (06:37):

Well, trying to be anyway. So, I really want to make two points first and understand these, one is good, one is bad. The first one, and this gets back to our intro, why Ed had the thing of do nothing, with inherited retirement accounts, think of them as an inverted roach motel. The money can check out, but it can never check back in. You cannot do a 60-day rollover. You cannot do Roth conversions. You cannot say, oh, I didn’t really need this money. Let me put it back in. You can’t do anything like that.

Stephanie McCullough (07:23):

And that matters because?

Kevin Gaines (07:26):

Once you take it out, you got to pay taxes. If you put it back in, then I don’t have to pay the taxes. No, goes out. It is out never to be seen again.

Stephanie McCullough (07:36):

So, you can’t say, whoops, I didn’t mean that. There’s no going back. There’s no undoing your mistake. So, all that to say-

Kevin Gaines (07:42):

There’s no mulligans, there’s no do-overs.

Stephanie McCullough (07:45):

Take a pause, take a breath, talk to some experts before you make a move. So, Kevin, that was point number one. Point number two is more on the positive side, right?

Kevin Gaines (07:54):

Yes. Well, silver lining, if you will, because we’ve talked about if you take money, and you’ve heard this elsewhere, probably, if you take money out of a retirement account before you’re 59 and a half, there’s this 10% penalty.

Stephanie McCullough (08:11):

In addition to your taxes.

Kevin Gaines (08:12):

Well, in addition to the income taxes, yes. It’s in addition to, it’s not instead of. So, little extra pain. Well, there’s certain exemptions, there are some exemptions to that 10% rule that the IRS is well, you don’t have to pay the 10% in this situation. The first situation they list is death. What that means is on an inherited IRA, you never have to worry about the 10% penalty.

Stephanie McCullough (08:40):

No matter what age you are.

Kevin Gaines (08:42):

Right. Which gets us to another point that may help you keep some of this stuff as we get more complicated to keep it straight, the account you inherit as far as the IRS is concerned, it’s not your retirement account. You are just receiving the money from it. It’s still the original owner’s retirement account.

Stephanie McCullough (09:06):

And you’ll see that on a statement. If you have a statement from Vanguard or something, it’ll still have the original owner’s name on it. And it’ll list you as the beneficiary in most cases.

Kevin Gaines (09:17):

Right. Because that original person determines a lot of these rules that we’re going to talk about later. It’s that person’s age, date of birth that is used to determine some of the stuff. So, yeah, it’s always important to keep that straight as well, because it may help you simplify some things for you.

Stephanie McCullough (09:41):

So, an inherited IRA is a separate thing. Separate rules, separate than your regular old IRA. Same with an inherited Roth IRA. We’re not going down that hole today, but that would be separate from your own Roth IRA.

Kevin Gaines (09:54):

Right. So, when you figure out you have to take your own RMDs from your own retirement accounts, this money is excluded from that calculation. It’s got its own calculation. We’ve talked about the backdoor Roth conversions. You say, if you have your own IRA, it gets trickier to do that. This is not part of that calculation either. This is entirely separate from your own money.

Stephanie McCullough (10:21):

Separate category of money, of assets, if you will.

Kevin Gaines (10:25):

Yes.

Stephanie McCullough (10:25):

So, we do want to point out that we’re not giving any advice here. We’re not getting too deep in the weeds, kicking Kevin under the table. We’re going to try to talk concepts, big picture and really as usual, try to give you some of the questions that you want to ask if you find yourself with this type of asset in this type of situation.

Stephanie McCullough (10:45):

So, there’s our disclaimer. So, if you inherit an IRA, there’s a few questions you need to ask about the situation. Question number one, as we mentioned, has the deceased, the original owner of the IRA started their required minimum distributions?

Stephanie McCullough (11:01):

And in all the things we’re going to talk about today, the answer is yes. So, as I mentioned, often our clients are inheriting from an older family member, so they have started their required distributions.

Stephanie McCullough (11:14):

Then question number two is, what is your relationship with that original owner? And really there’s only kind of two things or one thing really that matters here, Kevin, right?

Kevin Gaines (11:27):

Yes. If you are the spouse, this is what we’re saying. Are you spouse? Are you non-spouse? If you are the spouse, good news. You have a lot of flexibility when it comes to inheriting these retirement accounts. The biggest one is you have the ability, contrary to everything we just said, you have the ability to make this your own money.

Kevin Gaines (11:53):

You can say, I no longer want “inherited IRA from spouse FBO me.” You can change all that titling to IRA for me. And then it becomes your own money. You put it in with the rest of your retirement dollars and it’s all treated under whatever rules you’re currently under. So, if you’re taking RMDs, it gets added to the math. If you haven’t, you don’t have to take RMDs yet. It’s your money.

Stephanie McCullough (12:27):

And to be clear-

Kevin Gaines (12:28):

Only spouses can do this.

Stephanie McCullough (12:29):

We’re not saying you should, we’re saying this is an option you have open to you that you should explore. We’re not saying it’s the answer in all cases. We’re not saying it’s a bad move. We’re just saying this is a thing you can do, which non-spouse beneficiaries cannot.

Kevin Gaines (12:46):

And I’ll even point this out. So, if you are under 59 and a half, a lot of spouses who inherit, if they’re under 59 and a half, they will not immediately put it in their own retirement account. They’ll keep it as an inherited IRA, getting back to the previous point, an inherited IRA is exempt from the 10% penalty.

Stephanie McCullough (13:13):

Right.

Kevin Gaines (13:14):

That’s right. You inherit this money and you put it in your own IRA, all of a sudden, it’s no longer inherited money. So, you no longer have-

Stephanie McCullough (13:21):

The exemption.

Kevin Gaines (13:22):

That death exemption.

Stephanie McCullough (13:24):

So, if you need some cash or you think you might need some cash, keeping it as inherited lets you take money out without the 10% penalty. Still taxes of course.

Kevin Gaines (13:34):

Correct.

Stephanie McCullough (13:34):

No 10% penalty. So, you want it as always, you’ve got to look at your own personal situation, all the personal details about what’s going on with you, what else you have, what you need before anything. So, we’re not giving anybody advice, we’re just trying to lay out what the options are.

Kevin Gaines (13:53):

So, that’s what’s happened for a spouse. Now, if you are not a spouse, then you’ve got to go … I’m picturing a little flow chart here, then you’ve got to ask another question and that is, when did the original owner pass away? Because the rules changed in 2020.

Kevin Gaines (14:13):

Yes. And it actually, if you go on our YouTube pages, you can find a series Stephanie and I did.

Stephanie McCullough (14:19):

Thrilling videos.

Kevin Gaines (14:21):

Talking about the Secure Act that was passed at the end of 2019. And going into a lot of the information with that. I’ll save you that effort though, if you are a non-spouse who inherited the IRA prior to January 1, 2020. You’re covered under the old rules, which said you get to use your life expectancy to calculate these mandatory minimum distributions that you have each year. And that’s the only thing you have to worry about is meeting that minimum each year using the tables the IRS gives you.

Stephanie McCullough (15:05):

Right, right. So, maybe just a quick explanation there. We mentioned that you have required minimum distributions. There are tables that the IRS has come up with kind of sort of based on life expectancy at a certain point, calculated by who knows what. But the tables are the tables. You can’t decide you want to use your own life expectancy. So, the tables will tell you-

Kevin Gaines (15:28):

At a certain age, you have to take-

Stephanie McCullough (15:31):

A certain amount.

Kevin Gaines (15:32):

They call it a divisor. But you have to take a certain percent of the account each year.

Stephanie McCullough (15:37):

The account balance. Yeah.

Kevin Gaines (15:37):

And that percent you have to take increases each year as you get older.

Stephanie McCullough (15:41):

There you go. There’s the simple way to say it. So, Kevin, there are a couple different tables. So, just quickly to mention, so people at least have it in their minds. If I’m talking about my very own IRA that it was always mine. I did not inherit it. Which table am I using to figure out my percentage?

Kevin Gaines (16:02):

So, yeah. So, if you look in the back, the 1040 instruction book, they call it tables one, two, and three. Table one is the uniform life table. That’s what you use for your own money. It’s your IRA. You deposited the money, so you’re taking out your money. That’s the table you use.

Stephanie McCullough (16:21):

Now if I inherit an IRA.

Kevin Gaines (16:23):

That’s table three, which is called the single life table. And that has a different percentage for each age than what the uniform life table has.

Stephanie McCullough (16:33):

Because it can’t be simple, people.

Kevin Gaines (16:36):

Because it can’t be simple and just for the hell of it, table two is if it’s your money, but your spouse who’s the sole beneficiary happens to be 10 years younger than you.

Stephanie McCullough (16:45):

More than 10 years. Yeah.

Kevin Gaines (16:47):

More than 10 years.

Stephanie McCullough (16:49):

So, that’s if the deceased passed away before January 1, 2020.

The Secure Act came up with these new rules and they introduced new classes of beneficiaries, which we’re going to try really hard to explain simply.

Kevin Gaines (17:07):

So, there’s three classifications. There’s EDBs, NEDBs and NDBs, what the hell does all that mean? Here we go. Real simple. NDBs, non-designated beneficiaries. That’s if the beneficiary is not human. Is it your estate? Is it a charity? Certain trusts, something like that. It’s basically the beneficiary does not have a heartbeat.

Stephanie McCullough (17:37):

There you go.

Kevin Gaines (17:38):

Your NDBs. Okay, we’re not going to talk about NDBs today.

Stephanie McCullough (17:41):

Yes. Because you, listener, have a heartbeat.

Kevin Gaines (17:46):

Least would be really impressed if you don’t. Anyway. Then there’s EDBs eligible designated beneficiaries that includes spouses and some other people.

Kevin Gaines (18:01):

Lots of siblings; or if you’re disabled.

Kevin Gaines (18:04):

Siblings, if you’re the child of the owner and you’re under 18, if you’re disabled, we’ll put a list in the show notes.

Stephanie McCullough (18:16):

There you go.

Kevin Gaines (18:16):

Going through that list instead of talking about them here.

Stephanie McCullough (18:20):

But the majority of folks are NEDBs, non-eligible designated beneficiaries, which means everybody else that wasn’t listed in the first two categories basically. Right?

Kevin Gaines (18:34):

Yeah. So, you’re an adult and one of your parents dies, gives you the IRA.

Stephanie McCullough (18:43):

Yep. So, they’re subject to this new set of rules, which is so confusing that even the IRS was confused about it for quite a while and actually they’re kind of still confused. Nevertheless, we are living in this regime, so we have to know about it. And it’s called the 10-year rule.

Kevin Gaines (19:01):

So, what this rule says is you inherit this IRA and you’re not an EDB, but you have a heartbeat, the account has to be at zero by the end of the 10th year of you inheriting it.

Stephanie McCullough (19:21):

Must be empty, all money out. All money taxed.

Kevin Gaines (19:26):

Done, gone.

Stephanie McCullough (19:28):

Yes.

Kevin Gaines (19:28):

Now, initially, and this is where the IRS confusion comes into play. Initially that’s what the rule said was it just has to be emptied out in 10 years. Then the IRS came out in the beginning of 2022 and said, you know what, yes it has to be emptied in 10 years, but you still have to take that annual RMD amount, which until then we didn’t think you had to do.

Kevin Gaines (19:52):

But the IRS, because they’re nice people, came out and said, you know what, since we just kind of sprung this on you guys, if you didn’t take the annual RMD for these new inherited IRAs.

Stephanie McCullough (20:10):

Right. So, post January 1, 2020.

Kevin Gaines (20:13):

Right. If you fall under the Secure Act, don’t worry about the one you missed in 2020, 2021, or even 2022. Just going forward, you have to take an annual amount. And then earlier this year, the IRS came out and said, you know what, everybody’s still confused about this. So, 2023 RMDs, eh, forget about them as well.

Kevin Gaines (20:36):

So, even though technically if you inherited an IRA in January 1, 2020, even though according to the IRS regulations, well technically proposed regulations, you should have taken four distributions, if you haven’t taken one at this point the IRS is okay with that.

Stephanie McCullough (20:52):

Yeah, no worries. So, let’s think about that. If you inherit this IRA and you’re subject to the 10-year rule. What you’re required to do is just take out your RMD based on your life expectancy, which might be relatively small, and then in year 10 you’re required to take everything else out.

Stephanie McCullough (21:12):

So, if you just followed those guidelines, you could take out relatively small amounts in years one through nine, and then all the rest of it in year 10, which could, depending on the size of the IRA, could really affect your taxable income in that year, which has implications, Kevin.

Kevin Gaines (21:32):

Right. It’s what if your children are approaching college age.

Stephanie McCullough (21:40):

And you apply for some financial aid.

Kevin Gaines (21:42):

Depending on when these distributions happen, all of a sudden financial aid gets a little confusing, shall we say. Or if you’re approaching your mid-60s, we’re coming up on Medicare. Well as previous episodes we’ve discussed this whole thing of IRMAA that if you earn over a certain amount, you have to pay extra for your Medicare. Oops. Guess what? These IRA distributions, they’re going to put you possibly into that higher brackets to pay the IRMAA charges.

Stephanie McCullough (22:17):

Yeah.

Kevin Gaines (22:18):

And so on and so forth.

Stephanie McCullough (22:20):

So, as always, what we are suggesting is to look at your own situation. For some people it makes more sense to take out the money more or less evenly over the 10 years. But that’s not always the best idea.

Stephanie McCullough (22:35):

We talked to someone a couple weeks ago, Kevin, who believes – I mean I think they inherited this year and they do think that they’re going to be working for about four more years and then they plan to retire. So, they’re earning quite a bit of income in the next four years and then close to nothing. Maybe just social security after that. So, in that case, they probably don’t want to take more than necessary during the working years. Right?

Kevin Gaines (22:59):

Exactly. Or if you’re looking at your own retirement accounts and you’re thinking about doing Roth conversions. Again, coordinate the 10-year role beyond the annual RMD amount, you do have the flexibility of when you’re going to take those extra dollars, if you will.

Kevin Gaines (23:20):

So, look at what you plan on doing and that might be a good excuse to say, oh, well I don’t want to take these dollars until later, or I want to take them sooner.

Stephanie McCullough (23:33):

Right. Remember that the M in RMD is minimum. You can always take more. And as we always advise, work with your team of experts, your accountant who should know your tax picture, your financial advisor who hopefully knows all these rules and understands not just what’s happening this year, but looking forward, and how you stay within the rules and also be as smart as you can on the tax picture.

Stephanie McCullough (23:58):

Now Kevin, what happens if I get to year 11 and I haven’t emptied my inherited IRA under the 10-year rule? Is there a penalty?

Kevin Gaines (24:08):

There is. And go back to our episode about Secure 2.0 and the penalty has changed. It used to be a fairly brutal penalty of 50% of the RMD you didn’t take was how they defined this rule. So, in year 10, if you don’t empty the RMD, since you had to take a hundred percent of whatever that amount is, that 50% penalty could be fairly significant. If you got a million dollars left in that penalty’s $500,000.

Stephanie McCullough (24:41):

That sucks.

Kevin Gaines (24:43):

Under the oath. Fortunately, under Secure 2.0, they changed that penalty from 50% to 25%. And then they even threw in a provision that in some situations can take the penalty down to 10%, but still, let’s say 25%. Again, you don’t empty that last million dollars in year 10. Oh good. It’s only a $250,000 penalty. Not 500,000.

Stephanie McCullough (25:12):

25%. Yeah.

Kevin Gaines (25:14):

So, I mean, it’s still a number, but that’s going to be the cost of not getting this right.

Stephanie McCullough (25:21):

Yeah. So, you’ve got to pay attention. So, if you’re still listening, if you haven’t yet fallen asleep, we’ve got two more quick points that bear mentioning. One is when you inherit an IRA, you want to go ahead and name your own beneficiaries on it. Because you were the beneficiary previously, you got to name someone new. What if you inherit an inherited IRA? What happens then, Kevin?

Kevin Gaines (25:50):

So, it depends. Don’t you love the tax code? The answer for pretty much any question’s always going to be, it depends. If the inherited IRA is owned by an EDB, so let’s pretend dad dies. Mom inherits the IRA, but she does not make it her own. She keeps it as an inherited IRA and you’re the sole beneficiary. You now inherit this. You are an NEDB. You get your own 10-year rule, and you have to empty out the IRA within that period and you’re fine.

Stephanie McCullough (26:32):

Because mom didn’t have a 10-year rule, mom was subject to the lifetime. Right?

Kevin Gaines (26:37):

The life expectancy. Yes.

Stephanie McCullough (26:38):

Life expectancy rules.

Kevin Gaines (26:39):

Yes. So, you step into. Now to complicate things even more.

Stephanie McCullough (26:43):

No.

Kevin Gaines (26:43):

And Stephanie’s-

Stephanie McCullough (26:44):

Don’t do it. Don’t do it.

Kevin Gaines (26:47):

I can’t help myself. There’s got to be at least one rabbit hole.

Stephanie McCullough (26:49):

I can’t hold him back. Okay, go ahead.

Kevin Gaines (26:53):

You don’t get to use your own life expectancy for the calculation of the annual RMDs. You have to use …

Stephanie McCullough (27:00):

Oh, okay.

Kevin Gaines (27:01):

So, whatever her devisor was, you’re still using hers for the years one through nine and then year 10 you have to empty it out.

Stephanie McCullough (27:08):

In which case it’ll be a little bit less disproportionate because mom was older than you.

Kevin Gaines (27:12):

Right. Because you’re taking out more years one through nine. So, year 10 if you only do the minimums would be smaller in theory.

Stephanie McCullough (27:20):

Got it. Okay. So, that’s if dad left to mom, left to child. What if aunt leaves to mom, leaves to me.

Kevin Gaines (27:31):

You don’t get 10 years necessarily anymore.

Stephanie McCullough (27:34):

Because mom in this case was not an EDB.

Kevin Gaines (27:36):

Correct. She was an NEDB. She had her 10-year window.

Stephanie McCullough (27:42):

Right.

Kevin Gaines (27:43):

You now step into her shoes and assume the rest of her window.

Stephanie McCullough (27:49):

In terms of timeframe. Okay.

Kevin Gaines (27:51):

In terms of timeframe. So, if mom had had this inherited IRA for three years, you get it. You have seven years to empty the IRA.

Stephanie McCullough (28:01):

That’s important to know because we don’t want to get stuck with that penalty.

Kevin Gaines (28:04):

You do not get a new 10-year window.

Stephanie McCullough (28:07):

Got it. That’s important. Okay. So, that’s inherited, inherited IRAs. What about Kevin, the year of actual death? So, let’s say parent is deceased in 2023. How do we figure out the 2023 RMD?

Kevin Gaines (28:24):

So, the moment 2023 starts, the IRA owner RMD is established, and that owner has to take it based off of his or her life expectancy.

Stephanie McCullough (28:38):

Even if they’re no longer with us.

Kevin Gaines (28:40):

Even if they’re no longer with us, it gets established on the stroke of midnight, boom. The RMD exists.

Stephanie McCullough (28:47):

The ball comes down. Ryan Seacrest, throw some confetti. Your RMD is established.

Kevin Gaines (28:54):

Now you die and you haven’t taken the RMD yet. The beneficiaries have to take that RMD, but it’s still the deceased person’s-

Stephanie McCullough (29:08):

Calculation.

Kevin Gaines (29:09):

Number, calculation. It gets real simple if there’s only one beneficiary, okay, you have to take that dollar amount, it’s your taxes. It’s not the estate’s responsibility to pay the tax. Because the moment the person dies, it becomes an inherited IRA in the eyes of the IRS. You haven’t done the paperwork, you haven’t established the account, but the moment that person is dead, it becomes an inherited IRA.

Stephanie McCullough (29:33):

Got it.

Kevin Gaines (29:34):

So, the RMD that wasn’t taken during the lifetime, you have the beneficiaries have and whoever got the money has to pay the tax. Here’s where it can get complicated. And-

Stephanie McCullough (29:47):

It’s not complicated already?

Kevin Gaines (29:50):

No, this is nothing. Say you have three beneficiaries. Who takes the dollars? Well, I’ll tell you this. The IRS doesn’t give a damn. They’re going to send you the tax bill if it wasn’t taken. And they’re saying you got three, figure it out. We’re going after all three of you to do this.

Kevin Gaines (30:11):

So, if you do have multiple beneficiaries, you do need to coordinate how this distribution’s going to happen. Whose social security number is it going to get reported under? Typically, you each take a third in this example that there’s three beneficiaries. It doesn’t have to be that way, but that’s normally the easiest way to keep the piece.

Stephanie McCullough (30:34):

But say one sibling was doing something with the money anyway and needed to take it out, if you know that might get you out of paying for an RMD you didn’t need to take. Talk to your family people.

Kevin Gaines (30:48):

Communication, it’s a wonderful thing.

Stephanie McCullough (30:51):

So easy.

Kevin Gaines (30:51):

Most times.

Stephanie McCullough (30:53):

Alright, dear listeners, we’re very happy that you have stuck with us this long. Hopefully we’ve at least opened your eyes to the fact that there are rules around inherited IRAs. There are things you should check on, questions you should ask, and that mistakes really can’t be undone. So, take a minute, look at the rules, talk to your experts. If your experts don’t really know this stuff, maybe find new experts, and proceed with caution.

Kevin Gaines (31:22):

Let me just leave with this final thought. I probably have the exact percentage wrong, but it’s something like 75% of all inherited retirement accounts are emptied out within five years. So, for most people, these things don’t come into play.

Kevin Gaines (31:38):

But if you are that other 25%, this is stuff that you need to be aware of. And just to make it even scarier, each point that we’ve talked about here today, if I could convince Stephanie to do it, could be its own podcast episode because-

Stephanie McCullough (31:58):

Oh God no.

Kevin Gaines (31:59):

Below the surface, the complications and the exceptions and the one-offs can get-

Stephanie McCullough (32:07):

Listeners, I promise I won’t let him do that to you. Maybe he can start his own geeky podcast going into all these things in separate episodes.

Stephanie McCullough (32:17):

In the meantime, we thank you so much for being with us. We’ll talk to you next time. It’s goodbye from me.

Kevin Gaines (32:22):

And it’s goodbye from her.

Stephanie McCullough (32:27):

Be sure to subscribe to the show and please share it with your friends, show notes and more information available at takebackretirement.com. Huge thanks for the original music by the one and only Raymond Loewy through New Math in New York. See you next time.

Voiceover (32:41):

Investment advice offered through Private Advisor Group, LLC, a registered Investment Advisor. Private Advisor Group, American Financial Management Group, and Sofia Financial are separate entities. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. This information is not intended to be substitute for individualized tax advice. Please consult your tax advisor regarding your specific situation.