Transcript
00;00;00;00 – 00;00;27;10
Mike
We are talking today about inherited Ira. Specifically, you see it on the screen, non spousal. If you are married and your spouse dies, you inherit their IRA. All the rules are the same. Nothing’s changed you. Everything’s fine. This discussion is specific to non spouses. So all kinds of rules have changed here over the last couple of years and we want to make sure that you understand how they work so you don’t get in trouble.
00;00;27;10 – 00;00;48;19
Mike
Right, Phil? Right. Let me just kind of set the stage for what it used to be and then we’ll talk about, you know, the rules have changed twice over the last couple of years. So here’s how it used to work. Let’s imagine that my parents die and they leave me an IRA. And the way I used to work as a child or a non spouse is that I would take the IRA balance.
00;00;48;22 – 00;01;12;07
Mike
Right. I would divide it by how many years I’m supposed to live and then I could withdraw a little bit. IRA required distribution each year based on my life expectancy and I could literally stretch out that those IRA payments over my lifetime. You know I received this is I get I receive the IRA and then I just start taking a year every year.
00;01;12;24 – 00;01;27;15
Mike
Every year I take out a required minimum distribution based on life expectancy. Then along rolls in December of 2019, right before COVID. Phil, what.
00;01;27;15 – 00;01;31;17
Phil
Happened? Well, the Secure Act was passed right before the holidays.
00;01;31;20 – 00;01;35;12
Mike
How did it affect these inherited IRA? What did they say.
00;01;35;12 – 00;01;43;25
Phil
In order to pay for the secure act? Because a secure act did have some benefits to it. They to pay for it. They eliminated this stretch.
00;01;44;00 – 00;01;59;18
Mike
They eliminated the stretch. So here’s what they did. They said this life expectancy, they taking money out over my life expectancy. That’s gone. I can’t do that anymore. Right? Right. How long? What’s my new length? How long do I have to take the money out now?
00;01;59;19 – 00;02;01;18
Phil
Well, they said you have ten years.
00;02;01;18 – 00;02;24;13
Mike
Oh, so somebody dies starting in 2020. Right. Because I said I think they said if someone already passed away, you’re already in this situation. There’s Grandfather Ian. Right. Right. They do that all the time. But they said, hey, somebody new rule. Somebody dies starting in 2020. Now, if I inherit that Ira, I have. What did you say?
00;02;24;13 – 00;02;24;25
Phil
How long?
00;02;24;27 – 00;02;36;09
Mike
Ten years. Ten years. They’re like, bam! Ten years. Not life expectancy. Ten years. And during that ten year, how does it work? Everything has to be out during ten years.
00;02;36;10 – 00;02;40;17
Phil
Well, initially the interpretation was within that ten years, everything had to be out.
00;02;40;17 – 00;02;49;08
Mike
Okay, so within ten years, I take it out. Now, any rules like to have to take some out each year? Do I take it in pieces or can I kind of pick and choose?
00;02;49;09 – 00;02;57;21
Phil
Well, initially it was you can it’s up to you. You had many options. You could wait till the last day before the ten years was up and wait and pull that money.
00;02;57;21 – 00;03;09;29
Mike
Out so I could do anything I wanted right out of the blue. The IRS kind of jumps in, what, a month, a couple of months ago. And they said, we don’t like that. We’re going to change the rules again. What they say.
00;03;09;29 – 00;03;13;25
Phil
Well, the IRS issued a couple of months ago temporary regulations.
00;03;13;25 – 00;03;15;00
Mike
Oh, wait, what? What are they?
00;03;15;01 – 00;03;16;01
Phil
Well, they’re temporary.
00;03;16;04 – 00;03;17;04
Mike
Temporary?
00;03;17;04 – 00;03;22;29
Phil
They’re not final yet. And they said that they’re going to issue final rules by the end of the year.
00;03;22;29 – 00;03;29;00
Mike
But we’ll wait and see. Yeah, we can sure count on them. Okay. So the IRS is really good staying on time.
00;03;29;00 – 00;03;42;13
Phil
But the temporary regulations say now they want you to continue. Those are RMDs. So if you inherited an IRA and it’s subject to armed fees, they want you to continue those RMDs for years, one through nine.
00;03;42;16 – 00;04;03;24
Mike
Okay, wait. Hold. So now they’re saying you have to take something out each year. Right. Is that what they’re saying? Yes. So now fine here in an IRA. I’ve got. Okay. Armed your one, two, three, four, five, six, seven, eight, nine. So basically I’ve got each year there’s money in there. I got to take money out right now.
00;04;03;24 – 00;04;10;03
Mike
I can take out more. I don’t have to leave the money there for the full ten years. Right. But if it’s there, I got something to take out.
00;04;10;10 – 00;04;11;11
Phil
Yeah, you have to take some.
00;04;11;11 – 00;04;14;13
Mike
Is it based on life? The same life expectancy here?
00;04;14;14 – 00;04;24;09
Phil
Well, it’s based on the RMD of the IRA of the person who passed away. So you have to continue those for years, one through nine and then year ten. You have to pull out the balance.
00;04;24;09 – 00;04;48;21
Mike
Oh, my God, this sounds crazy. Okay. What if my mom and dad passed away in 2020? And so my first distribution was supposed to happen in 2021, but I didn’t take one because there were no. The IRS didn’t give me any rules. They said, hey, take it out whenever you want. Suddenly now they’re saying, No, dude, you’re supposed to take out a required distribution.
00;04;49;10 – 00;05;05;08
Mike
I didn’t do it. And I know that if I don’t take out a required distribution, the IRS penalizes me. 50% penalty. That is the biggest penalty in the tax code. And I don’t want to pay that. Am I stuck paying that because I didn’t take it out in 2021?
00;05;05;08 – 00;05;24;04
Phil
Right. I mean, we’re waiting for further clarification from the IRS and we expect them to have some sort of grandfather to allow, you know, a pass on those people who didn’t know they had to take out the money. So we’re waiting to see, but we’re recommending that people in 2022 double up and take that. Okay.
00;05;24;15 – 00;05;47;01
Mike
And so so if my parents passed away in 2020, what you’re saying is, hey, you didn’t take out in a distribution in 2021. Take it out. You’re 2021 distribution this year in 2022. And then here in 2022, take out another distribution for that year. So essentially, like you say, double up. And so at least I’m acting in good faith.
00;05;47;06 – 00;05;55;05
Mike
There is no law anywhere that said this. But now that you’re saying it in good faith, I’ll take out both. And hopefully they won’t penalize me.
00;05;55;06 – 00;06;04;26
Phil
Yeah, I mean, I don’t see how the IRS could penalize you if you didn’t know the rule. You know, rules. So I guess my best hope is that they sure don’t.
00;06;04;27 – 00;06;12;08
Mike
But these are temporary rules. Last question, Phil, what do you think the odds are that they are going to change your mind again when they finalize the rules?
00;06;12;10 – 00;06;28;10
Phil
Well, the IRS has gotten a lot of pushback from people because they flip flopped on this issue. But it’s all about, you know, raising money. Right. Raising revenue and forcing people to take that money out years one through nine. It raises more money for the government.
00;06;28;12 – 00;06;47;27
Mike
In a shocking development, the government wants more of our money. Right. Is that what you’re saying? Right. If you’ve inherited an IRA, make sure you’re taking out distributions. Each year you take out more. Remember, required minimum distribution means the minimum. They’re saying, hey, you can take more and that’s okay. Just make sure you take at least this certain amount.
00;06;48;06 – 00;07;08;14
Mike
And if you’ve received it in 2020 and you had a minimum to take out in 2021, you know, double up this year, what you’re saying. Right. Right. That way you’re probably better safe than sorry. Here’s the last thing I really want to say about this. This is a complex area. It’s not something you really want to tackle on your own if you’ve received an inherited IRA.
00;07;08;23 – 00;07;32;13
Mike
Talk to an expert, someone that can help you. You know, if you’re one of our clients, give us a call. We’ll help you figure out what you should be taking out. If you’re not one of our clients, call your advisor. Or you can always call our firm. Either way, talk to someone. Make sure you’re covering your bases. Because again, the penalty, if you mess it up, it’s like 50% biggest penalty in the tax code.
00;07;32;13 – 00;07;52;10
Mike
You don’t want to pay that number. All right, gang. That’s our episode this week. Hope you enjoy it and we will talk to you again soon.
