Inherited IRA Rules and Tax Strategy
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- Опубліковано 23 сер 2024
- The inherited IRA has changed due to the SECURE ACT. As of January 1, 2020, if you inherit an IRA or 401k or other tax deferred account, the government is going to make you withdraw the money in 10 years. In this video, you'll learn how it works for a spouse and non-spouse.
This video is intended solely for education and is not financial or tax advice
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But if you’re already maxing out your contributions into your 401K, you can’t contribute the $10,000. If you contribute $10,000 less in salary to the 401K, and replace it with the IRA $10,000, then your salary taxable income is no longer taxed deferred. You’re paying $10,000 more in taxable income. It is not a wash.
Sane thoughts here. Not sure why he didn’t address this
100% correct
Can’t you then just open up a Traditional IRA and invest most of the $10k into that? Current limits are $7k for those under 50 and $8k for those 50 years old and older.
increasing 401k contributions absolutely makes sense if you can do it, but the 401K etc contributions are capped. In my case I'm already contributing the maximum allowable amount, so that's not going to work for me..
23k is the max 401k this year in 24
One more thing, you will eventually have to pay tax on that inherited money - when you reach age 72 or thereabouts. But presumably it will be a lower tax bracket, if your retirement income level ends up lower than the income level during the 10 years following your inheritance event
@bigpoppa4094 true. If you're over 50, you can go as much as 30,500; and depending on your income you may be able to make another 8,000 tax-deferred contribution to a personal IRA.
Good advice for anyone 1. With a job at a large enough company that offers a 401k 2. Not maxing out their 401k already 3. Didn’t inherit an IRA worth more than $230,000.
Wow, this sounds like a plan. I didn't know what to do with my mom and dads inherited IRA. Now I know a way I can invest it without double taxation. Thanks
Awesome! Glad I could help.
Check with your CPA . The rules have changed and may require you to take mandatory minimum distributions if you are a non spouse and the person you inherited from was required to take yearly distributions ( 72 + ).
Thank you so so much! Love not only the straightforward explanation, but also the really tangible game plan at the end.
I've been considering this strategy as my dad passed on June 10th, and they said he had a 401k that wasn't inside his Trust. I may have about $30k total for that, and I would pump up my 457b at work to compensate for the extra income. I would likely then just put that into my bank account and use it to live on, while I get the benefit of more savings into my retirement account.
Also, if you have a Health Savings Account, you can cross up to $4600 per year from an inherited IRA into the HSA. HSA's are tax deferred going in and tax-free on withdrawals for qualified medical expenses (which you can stockpile from previous years.) And you don't need to be earning income to contribute to a HSA, you only need to be on a high-deductible health insurance plan. If you are otherwise self-sufficient and you can take part-time work to earn as little as $7,000, you can also cross that amount from the inherited IRA into a traditional IRA.
Solid out of the box thinking Allen! Great ideas!
If you already have an HSA that was started previously, but currently no longer have a high deductible insurance, can you still transfer the money in from the inherited IRA? Thanks
@@NatashaShapiro I am now in the same boat since I started Medicare. Short answer: NO. Contributions to HSA's are predicated on having a qualifying high-deductible insurance plan. You don't have to draw-down the HSA - you can just stockpile medical expenses from past years and use the HSA as a source of as-needed tax-free income.
What do you mean "cross" the inherited IRA into the HSA? You put already taxed money in and it reduces your income amount.
@@kadimullins7267 By "cross" I mean take a distribution of $4600 from a tax-deferred inherited ira and make a $4600 contribution to a hsa. The ira distribution would ordinarily be taxed as ordinary income but the hsa contribution reduces taxable income by the same amount.
Fair idea but others have commented they are capped in the 401k. Rather the hack is just putting the after tax dollars back into a Roth IRA (and spouse, back door if over income limit) and keep the as much as you took out in inherited IRA (up to 7k at least for Roth) back into a tax free retirement account where earnings are shielded from tax
I already thought of that myself.
This is very clever and the most ingenious handling of an Inherited IRA iv'e come across. In the future this could be an option for myself, but my own situation is unique leaving with me some questions. Having been a caretaker most of this year, the pandemic, and working freelance to begin with I have almost no income to file this year. With that likely to change in 2022 and the years following I am wondering if I should withdraw a considerable amount for 2021 considering I expect to be in the lowest tax bracket this year. I am also thinking this as I already have a fairly sizable Roth and being in my 20s. I say that only to suggest that deferring is possibly not as beneficial regardless of the tax benefits as leveraging my inheritance into more assessable investments. Any thoughts would be welcomed. I will be telling my siblings about this though. Appreciate it.
Gee, I wish you would have received a response because that is exactly the position I find myself in.
Solid advice. Thanks for teaching me something new.
What if you spend the $10K on a side business. Maybe for example doing $10k worth of repairs or upgrades in a investment property or buying $10k worth of equipment for a business. Wouldn't this write off offset the gain in income?
This was an ah-ha moment for me! Makes total sense. I was curious though, if you do this, you would need to be very disciplined in not spending that money right away since your paycheck will now be smaller. Right?
This is the best idea I've heard so far concerning the secure act and the inherited Ira new rules. Question at the 10 year mark do you have to 0 out the inherited Ira or do you just have to remove the initial principle.
My understanding is it has to be at zero in 10 years
I just saw this! The entire balance needs to be zero at the end of the 10 years.
Great out of the box thinking. I would Definitely do this but my parents had no money :(
Thank you Mike.
Let me to you something I have been scratching my head trying to figure out what I was going to do with my parent 403b I didn't want to take the lump sum and end up paying taxes on it, so coming to this video just gave me the idea I was looking for
What if you keep withdrawing $10,000 a year but the account earns it back and at the end of 9 years you still have $100,000??? Rich people problems
Lol…Good problem to have.
People that are single and not married are being bullied dude. That ticks me off man.
Hi! What would be the strategy if you are already maxing out your IRA accounts? Thanks!
Very smart way to avoid tax. Thank you.
I have a question for you. I am retired now. There are a few years in which I had non deductible IRA contributions. How these contributions are treated differently from the ones for which I took the deductions from my incomes?
Thanks in advance.
what type of paperwork, and wordings should a beneficiary get from a financial institution for a spouse who inherited an IRA? Say, he or she wants to roll-it over to his or her own IRA account, will she or he get taxed for the whole amount by the IRS? Say, the inherited IRA is 1 million? Thanks!
I learned something today. Thanks
My sister left me as beneficiary on her Vanguard traditional retirement account. But she owed Medical and care home expenses.....is it protected because she named me as the beneficiary or will they take that money?
I have a Roth 401k so this would not work for me in any tax savings since Roth is After-tax dollars. Plus, the contributions to a 401k are distributed via the EMPLOYER not by me. The suggestion in this video makes zero sense to me. You also did not mention that inherited IRA’s have an RMD based on the beneficiary’s life expectancy, so withdrawals are forced by this number. Larger amounts can be taken, but there is that minimum. I know all of this because my mom died 3 months ago 😢
This is only good advice for people who dont max out their 401k already ($22,500)
It sounds like someone in the basement keeps beating on a base drum.
Great video !! How about this scenario: 40 y/o non-working spouse withdraws $6,000 per year from an inherited IRA, pays the tax from outside funds, and contributes the $6,000 to a Roth IRA ? Will that work ? Thanks.
Really hope you get an answer to this. Great question.
I believe You have to be working to contribute to an IRA/401
I didn't even know I could do this. The IRS will probably whack me anyway since date of death was 1 year and 2 months ago
My dad he passed away he was 86 year old & my mom she is 50 she is the beneficiary traditional IRA what she need to do or wha it's more better for her help please 😔.
Very smart!
I already max out all of my retirement accounts so this is a no go 😢
But once you retire you will have to pay taxes on the 100k worth of contributions ,no? If you are using a traditional IRA to do this.
This would apply if you were wanting to not have to have this to 0 in 10 years right?
Would you be taxed if you just liquidated the IRA amount and placed it in your checking account instead of putting it in an estate IRA account?
I get this idea, but what if I really can't afford to allocate any of my current income to anymore retirement. I'm literally operating on paycheck to paycheck. I fear my inheritance is going to just cause me debt by time taxes, etc. come out of everything.
Hey everyone, I recently received my inheritance, and I'm trying to figure out the best way to invest it. Any suggestions?
So take your $ out of your paycheck and offset it with the withdrawal? If I'm already maxing out my 401k, this is more of a "way to look at it" rather than a strategy right?
Or should I then take our 19,500 per year since that's what's deducted?
Thanks for the video!!
Thank you
What if your retired and you have to take 14000 dollars out per year and you dont want to take the money cause you dont need it?.
What if you’re already maxing out your 401k contributions? Is there any way to rollover an inherited annuity into a self directed retirement account?
My Dad left me and my brother his IRA to split. We are both greater than 10 years younger than his passing age. Does that mean we have the same rules as a spouse? I initially thought we had the 10 years to empty the account but need to look into this more from your initial spouse scenario and look at your other videos.
I could be wrong but the rules are slightly different for Inherited Roth IRA, correct? Is there still a RMD, not taxed with Roth IRA since it was paid already up front.
I thought there was a maximum you could contribute annually to your retirement?
☆☆☆☆☆ 1:51 this information is wrong. The IRS today says if the person who owned the IRA was 72 or older and was already getting required yearly distributions the one who inherited has to yearly take mandatory minimum distributions each year 1-9 and drain the account in year ten. ☆☆☆☆☆ this rule is for non spouse and others deemed by the IRS as excluded. For most this rule is in effect.
Hey Raymond, thanks for commenting! So if they are 72 or older and pass away, you will need to make sure the RMD for the year they pass is taken, then from there, you do get to pick and choose how much you take out up to year 10, but that account does have to be empty after 10 years.
@@EricWPowell my Mother died in 2020 and she had already taken her RMD for that year and I was told I had 10 years to empty the account as I desired without any mandatory minimum distributions. I took 0 that year and 0 last year. Fidelity sent me a letter explaining rules had changed and I was required to take minimum distributions this year through 2029 and empty the accoun before eoy 2030 to avoid penalties. On my account statement they even gave me a RMD unsatisfied dollar amount .Are you saying inherited IRA holders do not have to take RMD's? Thank you
Sorry to hear about your mom's passing. So, this is a bit more complex than a UA-cam comment section lol, but it looks like Fidelity is erring on the side of caution relating to the proposed IRS ruling on their own rule (clearly it is so confusing nobody really knows). That said when the video was made it was not intended to be inaccurate and everyone seemed to be under the interpretation (even Fidelity) that you had a full ten years and didn't have to continue the RMD. Below are two article links, one that says you can't and one that argues the IRS was wrong by trying to do this. Then I also have the link to the IRS document outlining this and the fact they never eluded to having to continue the RMD - which seems to be the "big deal" on this. I think this calls for a video lol!
I appreciate the solid discussion!
This article breaks down the proposed IRS ruling: www.investmentnews.com/the-new-irs-10-year-rmd-rule-isnt-what-we-thought-it-was-218987#:~:text=The%20IRS%20says%20no.,that%20the%20beneficiary%20continue%20RMDs.
This one is an argument against the IRS (and know that all custodians are scrambling if they push this since nobody knew what the IRS intended)
www.sifma.org/wp-content/uploads/2022/05/SIFMA-Comment-on-SECURE-RMD-Proposal-2022.pdf
Here is the actual breakdown from the IRS and the link to the IRS data where this came from:
www.irs.gov/pub/irs-pdf/p590b.pdf
10-year rule. The 10-year rule requires the IRA beneficiaries who are not taking life expectancy payments to
withdraw the entire balance of the IRA by December 31 of
the year containing the 10th anniversary of the owner’s
death. For example, if the owner died in 2021, the beneficiary would have to fully distribute the IRA by December
31, 2031. The beneficiary is allowed, but not required, to
take distributions prior to that date.
The 10-year rule applies if (1) the beneficiary is an eligible designated beneficiary who elects the 10-year rule, if
the owner died before reaching his or her required beginning date; or (2) the beneficiary is a designated beneficiary who is not an eligible designated beneficiary, regardless of whether the owner died before reaching his or her
required beginning date.
@@EricWPowell I'm overwhelmed by your detailed response. I understand when you posted the original video the Secure Act read exactly as you presented and everyone was planning according to the directions of the Act. I thought by the action of Fidelity on my statement I am required to take the (a) minimum distribution each year. When I called them my only question was when starting this year withdrawals does my 10 year clock reset and they said no. Thinking back on the conversation they said there wouldn't be any " make-up " RMD's or any penalties from not withdrawing in 2021. I don't think they said there are required withdrawals either. I believe I just assumed that because of the wording on my statement. I did take a withdrawal already this year. Thank you again for your knowledge and links.
Hey Raymond, the new ruling is officially out! Looks like RMDs are waived for last year and this year, but next year they have to pick back up. Here is a great article about this. www.irahelp.com/slottreport/irs-waives-50-penalty-missed-2021-and-2022-rmds-within-10-year-period
Can you roll and inherited IRA into you Roth account
My dad passed in 2021, I have not withdrawn anything yet. My question is when I do withdrawal - how much percentage wise should I have withheld for federal and state?
Eric- Is it a bad idea to take the money from the inherited IRA and pay the taxes on it when you withdraw the money from that account and then reinvest that money into a work sponsored ROTH 401k plan?
following
It can be done if you have income through work to cover the contribution …the catch is if you are withdrawing from a tax deferred inherited IRA, you will have to pay taxes on the withdrawal since your money is going to go into an after tax employer plan (Roth 401k). I see that you were aware of having to pay the tax. I’d suggest financial planning to try to take the withdrawals in the most tax efficient manor. As for the deposit, you can’t take it out of the inherited and directly put it into the Roth, but you could up your contribution from your employer paycheck and use the inherited money to offset the needed income.
@@EricWPowell I like the idea of increasing contributions into a Roth 401K (If your employer has the Roth option). It's an indirect way of doing a Roth conversion.
What if you're 66 and retired. This strategy doesn't help. Can I transfer this into a Trust ? or do I dissolve the INH IRA and take the lump sum hit ?
Can it be transferred into a trust instead?
I think I understand, but if I am already putting the max in my work 401K (and wouldn’t be able to add outside funds to that anyway) what can I do? You can defer more in a separate IRA in this case. ?
What if I’m maximizing my 401k and Ira now and I can’t put more into it?
First kudos to you👍if you're contributing $23,000 to t-401(k) and $7,000 to t-IRA. If married have spouse do the same.
So if my mom passed when I was 12 and now that I turned 18 am I still alright or do I have to pay taxes
Do the same rules apply for a 403B or 401K?
What about the gains within the inherited IRA, does that also have to be withdrawn from the account so the balance is zero? Or… is it just the amount that was originally inherited that has to be taken out? Thanks
The entire account has to be depleted based on the new law for inherited IRAs.
What if the amount I have to take out is much larger every year to get it all out in ten years. Like around 35k per year? I can't invest my entire years earnings into a 401k can I? Isn't there a limit to how much I can invest?
Well, now it's MANDATORY to take a RMD every year of the 10 years. No choice but to take it now- Non-Spouse Inherited IRA.
What general strategy do you think is good for someone young who is an adult but doesn't have a job (school) and doesn't have a 401K or IRA?
This may not end up relevant to what you’re looking for, but I still want to say I’d suggest checking out ‘Investing Simplified - Professor G’ channel anyway
I missing something on the video...at work do I put money into the ROTH 401K or a percentage out of the regular 401K? I thought I hear you saying the tax deferred account but at the end of the vid I hear something else
To offset income that is from withdrawals from an inherited IRA, you would need to contribute to the regular 401k.
I'm a housewife. 😒
Gay. You're still going to have to pay taxes on it in order to actually use any of it.
Solid advice. Thanks for teaching me something new.