IRA to heirs

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Topic Author
bbees
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IRA to heirs

Post by bbees »

The way I understand new IRA rules, an inherited IRA must be spent in 10 years and cannot be stretched out over an heir's lifetime. My heir is not a saver, has an adequate job and 2 small children and is divorced. She is not good with money, has college loan debt and some health problems. I am considering changing beneficiaries on my Vanguard IRA to include 1 or more charitable organizations and my daughter. IRA is about $400,00 presently but I will spend down mostly by RMDs. My age 72. Good idea, bad idea, sorry dad- what are your suggestions?
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goodenyou
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Re: IRA to heirs

Post by goodenyou »

Give it to your grandchildren. Hopefully for education expenses in the future. That's what I would do. You could also pay off her student loans with the money. That would help and she can't squander the money.
"Ignorance more frequently begets confidence than does knowledge" | “Do you know how to make a rain dance work? Dance until it rains”
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JoeRetire
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Re: IRA to heirs

Post by JoeRetire »

bbees wrote: Tue Jun 01, 2021 12:35 pm The way I understand new IRA rules, an inherited IRA must be spent in 10 years and cannot be stretched out over an heir's lifetime. My heir is not a saver, has an adequate job and 2 small children and is divorced. She is not good with money, has college loan debt and some health problems. I am considering changing beneficiaries on my Vanguard IRA to include 1 or more charitable organizations and my daughter. IRA is about $400,00 presently but I will spend down mostly by RMDs. My age 72. Good idea, bad idea, sorry dad- what are your suggestions?
This is a bit confusing. Is your heir your daughter?

If you don't want to have the money go to your current heir (because she is not good with money or whatever the reason) then don't. Change your beneficiary designation and give it to whomever you prefer. I don't see how this has anything to do with new inherited IRA rules.

Assuming this will surprise your heir, you really should tell her about it when you make the change. That will save your executor a lot of headaches.
Just remember: it's not a lie if you believe it.
Makefile
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Re: IRA to heirs

Post by Makefile »

JoeRetire wrote: Tue Jun 01, 2021 12:51 pm If you don't want to have the money go to your current heir (because she is not good with money or whatever the reason) then don't. Change your beneficiary designation and give it to whomever you prefer. I don't see how this has anything to do with new inherited IRA rules.
Well of course the distinction is whether the distribution must be spent or merely withdrawn. I think the interpretation here is that Stretch IRA RMDs were small enough that it even spending the entire RMD, it would have forced the heir to spend only a sustainable amount from the IRA each year. For the 10-year rule, the heir needs to be more sophisticated in how much to take each year, how much to spend and how much to keep as a taxable account, using the inherited IRA money to cover spending so as to do max 401(k) and IRA on their own, etc.

You make a good point though. Stretch IRAs were a pretty advanced strategy even if tossed around on the forum casually. If the heir is not financially sophisticated, who is to say they would have implemented the RMDs correctly under the old rules and not triggered the 5-year rule?
MarkBarb
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Re: IRA to heirs

Post by MarkBarb »

bbees wrote: Tue Jun 01, 2021 12:35 pm The way I understand new IRA rules, an inherited IRA must be spent in 10 years and cannot be stretched out over an heir's lifetime. My heir is not a saver, has an adequate job and 2 small children and is divorced. She is not good with money, has college loan debt and some health problems. I am considering changing beneficiaries on my Vanguard IRA to include 1 or more charitable organizations and my daughter. IRA is about $400,00 presently but I will spend down mostly by RMDs. My age 72. Good idea, bad idea, sorry dad- what are your suggestions?
There is no time limit on when inherited IRA money must be spent. The rule is that, within 10 years, it has to be taken out of the IRA and any deferred taxes have to be paid, but the owner can do whatever they want with the money after that.

It's not clear what you want to do. Do you want your daughter to have the money but not spend it frivolously? In that case, have it go to a trust with restrictions that you think are appropriate. It's very common for people to do this, particularly when they are young. For example, our estate plan calls for our money to go to trusts for our children that are managed by a family friend. The money is still there for the children, but they will have limited control at first and will gradually have more access until they take full control in the 30s.

If you think your daughter is undeserving of the money, then you are free to leave it to whomever you choose.
Lee_WSP
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Re: IRA to heirs

Post by Lee_WSP »

It's your estate plan, you may disinherit your daughter/leave it to whomever you choose.

That said, you may want to read this article by forum member Bruce Steiner.

https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf
delamer
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Re: IRA to heirs

Post by delamer »

MarkBarb wrote: Tue Jun 01, 2021 1:32 pm
bbees wrote: Tue Jun 01, 2021 12:35 pm The way I understand new IRA rules, an inherited IRA must be spent in 10 years and cannot be stretched out over an heir's lifetime. My heir is not a saver, has an adequate job and 2 small children and is divorced. She is not good with money, has college loan debt and some health problems. I am considering changing beneficiaries on my Vanguard IRA to include 1 or more charitable organizations and my daughter. IRA is about $400,00 presently but I will spend down mostly by RMDs. My age 72. Good idea, bad idea, sorry dad- what are your suggestions?
There is no time limit on when inherited IRA money must be spent. The rule is that, within 10 years, it has to be taken out of the IRA and any deferred taxes have to be paid, but the owner can do whatever they want with the money after that.

It's not clear what you want to do. Do you want your daughter to have the money but not spend it frivolously? In that case, have it go to a trust with restrictions that you think are appropriate. It's very common for people to do this, particularly when they are young. For example, our estate plan calls for our money to go to trusts for our children that are managed by a family friend. The money is still there for the children, but they will have limited control at first and will gradually have more access until they take full control in the 30s.

If you think your daughter is undeserving of the money, then you are free to leave it to whomever you choose.
I agree with the trust idea.

Presumably your concern is that your daughter will spend the money frivolously over a short period?

Then limit her access to it.

As others have said, if you want to leave money to charity then do so. But, frankly, your post comes off as if what you really want to do is deprive your daughter of it.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
Topic Author
bbees
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Re: IRA to heirs

Post by bbees »

Thanks Lee for the Bruce Steiner article. I appreciate that, I have a lot of trust in Bruce's comments. I will study that article and see if that is what I want to pursue. A lot of hoops to clear using the trust idea.

I may pay off a portion of her college loan through gifting using my RMDs out of the IRA and leave my daughter with little debt before she is 40 years old, then I may split the inherited IRA between grandkids, daughter and a local charitable organization so none have a lot of taxes to pay on their inheritance amount and it will still be a help.

It is not depriving my daughter so much. A magazine article cited that kids don't reach the age of reason until they are 30, I am still waiting,she is 32.
Lee_WSP
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Re: IRA to heirs

Post by Lee_WSP »

:beer

If you edit the OP with your goals and the challenges we need to overcome, I would be able to give you actual advice rather than simply pointing out that a CRT replicates the stretch IRA. But, it's your life situation and I'm sorry to hear about your disappointment with your daughter's financial choices. It's hard being a parent and watching them make mistakes.
sureshoe
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Re: IRA to heirs

Post by sureshoe »

bbees wrote: Tue Jun 01, 2021 12:35 pm The way I understand new IRA rules, an inherited IRA must be spent in 10 years and cannot be stretched out over an heir's lifetime. My heir is not a saver, has an adequate job and 2 small children and is divorced. She is not good with money, has college loan debt and some health problems. I am considering changing beneficiaries on my Vanguard IRA to include 1 or more charitable organizations and my daughter. IRA is about $400,00 presently but I will spend down mostly by RMDs. My age 72. Good idea, bad idea, sorry dad- what are your suggestions?
My advice is give people money now, while you're alive and you can see them enjoy it. Help lay groundwork. You can google various financial advisers on this.

I personally would hate the thought of dying and leaving a bunch of money to someone. I'd rather spend it now - and lots of advisers give that. Have an honest conversation about what the gifts are you're giving, what the boundaries are, and what (if any) strings are attached.

There are a lot of people who are tight with their money (not saying this about you), don't have great relationships with their heirs, and die - leaving them money they aren't necessarily grateful for.

Not looking to delve into your personal stuff (rhetorical here), do you want to have a better relationship? Can you invest and help? Would it make a difference (without being preachy/etc)? Anyway - that's for you to decide. It's tough when you have a lot of cash and you don't necessarily "trust" the person it might go to.
mhalley
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Re: IRA to heirs

Post by mhalley »

I second the option to setup a charitable remainder trust. This allows you to fulfill your charitable goal, while also protecting the heir from herself. You could leave all of the money to the crt, or half to her, half to the crt, etc.
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Eagle33
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Re: IRA to heirs

Post by Eagle33 »

bbees,
You had the same problem even under the old stretch IRA rules. There was nothing that prevented beneficiary from taking out more than the RMD. Old rules just forced one to take at least the minimum.

Glad the new rules got you to think about your situation and can take action to address it.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
mrscatterbrain
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Re: IRA to heirs

Post by mrscatterbrain »

I’m going to piggyback on the OP’s question here:

Is this a traditional or Roth IRA in question? What are the IRS rules for inherited traditional IRAs vs Roth IRAs?
Lee_WSP
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Re: IRA to heirs

Post by Lee_WSP »

mrscatterbrain wrote: Thu Jun 03, 2021 1:29 pm I’m going to piggyback on the OP’s question here:

Is this a traditional or Roth IRA in question? What are the IRS rules for inherited traditional IRAs vs Roth IRAs?
IMO, this is the most comprehensive easily readible answer to that question:

https://www.kitces.com/blog/secure-act- ... nts-taxes/

The Roth funds are not taxed upon withdrawal as they are pre-paid, whereas trad is taxed upon withdrawal.
illumination
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Re: IRA to heirs

Post by illumination »

As was pointed out, even with a stretch IRA, a person could always go beyond the RMDs anyway and take the whole thing out in a single year.

Personally, if I had a daughter that was struggling financially, I'd want her (and my grandkids) to have it instead of a charity. But there may be more to this story and you have good reasons to feel differently.

Also, by the time you have taken your RMDs over your life span and you pass the IRA, how much is it really going to be worth after taxes? You can set things up like a trust and pay a corporate trustee. I personally don't think its worth it for the amount unless its part of a larger estate.
TravelforFun
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Re: IRA to heirs

Post by TravelforFun »

bbees wrote: Tue Jun 01, 2021 12:35 pm IRA is about $400,00 presently but I will spend down mostly by RMDs. My age 72.
There may be nothing left when you pass and hence, a non-issue.

TravelforFun
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Re: IRA to heirs

Post by 123 »

bbees wrote: Tue Jun 01, 2021 2:33 pm ...A magazine article cited that kids don't reach the age of reason until they are 30...
We have some relatives and family friends that are in their 60's and 70's and it appears they have not reached their age of reason yet. So some people take a little more time. Sometimes we look around and it appears that only we have attained the age of reason.
The closest helping hand is at the end of your own arm.
mrscatterbrain
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Re: IRA to heirs

Post by mrscatterbrain »

Lee_WSP wrote: Thu Jun 03, 2021 2:00 pm
mrscatterbrain wrote: Thu Jun 03, 2021 1:29 pm I’m going to piggyback on the OP’s question here:

Is this a traditional or Roth IRA in question? What are the IRS rules for inherited traditional IRAs vs Roth IRAs?
IMO, this is the most comprehensive easily readible answer to that question:

https://www.kitces.com/blog/secure-act- ... nts-taxes/

The Roth funds are not taxed upon withdraw as they are pre-paid, whereas trad is taxed upon withdrawal.
Thanks, I’ll take a look at the article. My only concern about the Roth is that the earnings have not been taxed, so I was curious if the IRS requires the beneficiary to withdrawal from an inherited Roth IRA at some point so the IRS can take more $$$.
Last edited by mrscatterbrain on Thu Jun 03, 2021 2:30 pm, edited 1 time in total.
Katietsu
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Re: IRA to heirs

Post by Katietsu »

Very few people stretched IRA withdrawals over a lifetime even if allowed. And you have not made it seem like your daughter would have been one to limit here withdrawals to RMDs only so the change in law probably did not affect your situation. And the taxes on an IRA of your size which may be spend down before being inherited, and then could be spread over 10 years, would not necessarily be a large concern.

Is your daughter actually bad with money? Or is she ordinary and you feel you excel at money? A trust can have significant costs for management if a professional is used so you would need to decide if it was warranted in your situation.

It does sound like paying off the student loans now, if you can afford it could be a great choice. You could combine that with using a charitable remainder trust for the IRA proceeds in your will. It could be an easy way to provide for your charitable intent while also providing your daughter with income that could not be spent in a poor way all at once.
Lee_WSP
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Re: IRA to heirs

Post by Lee_WSP »

mrscatterbrain wrote: Thu Jun 03, 2021 2:18 pm
Lee_WSP wrote: Thu Jun 03, 2021 2:00 pm
mrscatterbrain wrote: Thu Jun 03, 2021 1:29 pm I’m going to piggyback on the OP’s question here:

Is this a traditional or Roth IRA in question? What are the IRS rules for inherited traditional IRAs vs Roth IRAs?
IMO, this is the most comprehensive easily readible answer to that question:

https://www.kitces.com/blog/secure-act- ... nts-taxes/

The Roth funds are not taxed upon withdrawal as they are pre-paid, whereas trad is taxed upon withdrawal.
Thanks, I’ll take a look at the article. My only concern about the Roth is that the earnings have not been taxed, so I was curious if the IRS requires the beneficiary to withdrawal from an inherited Roth IRA at some point so the IRS can take more $$$.
I do not understand your question. Roth IRA's are funded with post tax dollars. The growth and withdrawals are tax free as they have been pre paid.
Da5id
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Re: IRA to heirs

Post by Da5id »

mrscatterbrain wrote: Thu Jun 03, 2021 2:18 pm
Lee_WSP wrote: Thu Jun 03, 2021 2:00 pm
mrscatterbrain wrote: Thu Jun 03, 2021 1:29 pm I’m going to piggyback on the OP’s question here:

Is this a traditional or Roth IRA in question? What are the IRS rules for inherited traditional IRAs vs Roth IRAs?
IMO, this is the most comprehensive easily readible answer to that question:

https://www.kitces.com/blog/secure-act- ... nts-taxes/

The Roth funds are not taxed upon withdraw as they are pre-paid, whereas trad is taxed upon withdrawal.
Thanks, I’ll take a look at the article. My only concern about the Roth is that the earnings have not been taxed, so I was curious if the IRS requires the beneficiary to withdrawal from an inherited Roth IRA at some point so the IRS can take more $$$.
The only taxation on an inherited Roth would be if an estate tax were owed (state or federal). But that doesn't depend on withdrawing any amount. Assuming you are a non-designated named beneficiary of the account, you have 10 years under SECURE to withdraw the money on any schedule you like. https://www.schwab.com/resource-center/ ... ur-options is also pretty readable.
mrscatterbrain
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Re: IRA to heirs

Post by mrscatterbrain »

Lee_WSP wrote: Thu Jun 03, 2021 2:29 pm
mrscatterbrain wrote: Thu Jun 03, 2021 2:18 pm
Lee_WSP wrote: Thu Jun 03, 2021 2:00 pm
mrscatterbrain wrote: Thu Jun 03, 2021 1:29 pm I’m going to piggyback on the OP’s question here:

Is this a traditional or Roth IRA in question? What are the IRS rules for inherited traditional IRAs vs Roth IRAs?
IMO, this is the most comprehensive easily readible answer to that question:

https://www.kitces.com/blog/secure-act- ... nts-taxes/

The Roth funds are not taxed upon withdrawal as they are pre-paid, whereas trad is taxed upon withdrawal.
Thanks, I’ll take a look at the article. My only concern about the Roth is that the earnings have not been taxed, so I was curious if the IRS requires the beneficiary to withdrawal from an inherited Roth IRA at some point so the IRS can take more $$$.
I do not understand your question. Roth IRA's are funded with post tax dollars. The growth and withdrawals are tax free as they have been pre paid.
For the original owner of the Roth IRA who contributed after-tax dollars, yes, withdrawals of both principal and earnings are tax free.

However, I am not sure if this tax benefit applies to beneficiaries of inherited Roth IRAs. The IRS may not like the idea of heirs (of millionaires and billionaires, for example) receiving a large Roth IRA inheritance and never paying a penny in taxes on the withdrawals.

It is not inconceivable to me that the IRS may/could require beneficiaries of inherited Roth IRAs to pay tax on earnings, but not principal (already taxed from original account owner).
Da5id
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Re: IRA to heirs

Post by Da5id »

mrscatterbrain wrote: Thu Jun 03, 2021 2:41 pm
Lee_WSP wrote: Thu Jun 03, 2021 2:29 pm
mrscatterbrain wrote: Thu Jun 03, 2021 2:18 pm
Lee_WSP wrote: Thu Jun 03, 2021 2:00 pm
mrscatterbrain wrote: Thu Jun 03, 2021 1:29 pm I’m going to piggyback on the OP’s question here:

Is this a traditional or Roth IRA in question? What are the IRS rules for inherited traditional IRAs vs Roth IRAs?
IMO, this is the most comprehensive easily readible answer to that question:

https://www.kitces.com/blog/secure-act- ... nts-taxes/

The Roth funds are not taxed upon withdrawal as they are pre-paid, whereas trad is taxed upon withdrawal.
Thanks, I’ll take a look at the article. My only concern about the Roth is that the earnings have not been taxed, so I was curious if the IRS requires the beneficiary to withdrawal from an inherited Roth IRA at some point so the IRS can take more $$$.
I do not understand your question. Roth IRA's are funded with post tax dollars. The growth and withdrawals are tax free as they have been pre paid.
For the original owner of the Roth IRA who contributed after-tax dollars, yes, withdrawals of both principal and earnings are tax free.

However, I am not sure if this tax benefit applies to beneficiaries of inherited Roth IRAs. The IRS may not like the idea of heirs (of millionaires and billionaires, for example) receiving a large Roth IRA inheritance and never paying a penny in taxes on the withdrawals.

It is not inconceivable to me that the IRS may/could require beneficiaries of inherited Roth IRAs to pay tax on earnings, but not principal (already taxed from original account owner).
What they may do in the future isn't discussible in bogleheads.

What they do now is not tax it for heirs. SECURE forces it to be withdrawn for many heirs with a time limit, which means after it is invested in taxable investments future interest/capital gains/whatever will be subject to taxation.
Last edited by Da5id on Thu Jun 03, 2021 2:46 pm, edited 1 time in total.
mrscatterbrain
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Re: IRA to heirs

Post by mrscatterbrain »

Da5id wrote: Thu Jun 03, 2021 2:36 pm
mrscatterbrain wrote: Thu Jun 03, 2021 2:18 pm
Lee_WSP wrote: Thu Jun 03, 2021 2:00 pm
mrscatterbrain wrote: Thu Jun 03, 2021 1:29 pm I’m going to piggyback on the OP’s question here:

Is this a traditional or Roth IRA in question? What are the IRS rules for inherited traditional IRAs vs Roth IRAs?
IMO, this is the most comprehensive easily readible answer to that question:

https://www.kitces.com/blog/secure-act- ... nts-taxes/

The Roth funds are not taxed upon withdraw as they are pre-paid, whereas trad is taxed upon withdrawal.
Thanks, I’ll take a look at the article. My only concern about the Roth is that the earnings have not been taxed, so I was curious if the IRS requires the beneficiary to withdrawal from an inherited Roth IRA at some point so the IRS can take more $$$.
The only taxation on an inherited Roth would be if an estate tax were owed (state or federal). But that doesn't depend on withdrawing any amount. Assuming you are a non-designated named beneficiary of the account, you have 10 years under SECURE to withdraw the money on any schedule you like. https://www.schwab.com/resource-center/ ... ur-options is also pretty readable.
Thanks, Da5id. I suppose there’s nothing stopping a beneficiary from rolling an inherited IRA (Roth or traditional) into their own (Roth or traditional) IRA. Then all funds would be withdrawn from the inherited IRA within 10 years and the investments can continue growing in the rollover IRA.
smitcat
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Re: IRA to heirs

Post by smitcat »

mrscatterbrain wrote: Thu Jun 03, 2021 2:41 pm
Lee_WSP wrote: Thu Jun 03, 2021 2:29 pm
mrscatterbrain wrote: Thu Jun 03, 2021 2:18 pm
Lee_WSP wrote: Thu Jun 03, 2021 2:00 pm
mrscatterbrain wrote: Thu Jun 03, 2021 1:29 pm I’m going to piggyback on the OP’s question here:

Is this a traditional or Roth IRA in question? What are the IRS rules for inherited traditional IRAs vs Roth IRAs?
IMO, this is the most comprehensive easily readible answer to that question:

https://www.kitces.com/blog/secure-act- ... nts-taxes/

The Roth funds are not taxed upon withdrawal as they are pre-paid, whereas trad is taxed upon withdrawal.
Thanks, I’ll take a look at the article. My only concern about the Roth is that the earnings have not been taxed, so I was curious if the IRS requires the beneficiary to withdrawal from an inherited Roth IRA at some point so the IRS can take more $$$.
I do not understand your question. Roth IRA's are funded with post tax dollars. The growth and withdrawals are tax free as they have been pre paid.
For the original owner of the Roth IRA who contributed after-tax dollars, yes, withdrawals of both principal and earnings are tax free.

However, I am not sure if this tax benefit applies to beneficiaries of inherited Roth IRAs. The IRS may not like the idea of heirs (of millionaires and billionaires, for example) receiving a large Roth IRA inheritance and never paying a penny in taxes on the withdrawals.

It is not inconceivable to me that the IRS may/could require beneficiaries of inherited Roth IRAs to pay tax on earnings, but not principal (already taxed from original account owner).
"It is not inconceivable to me that the IRS may/could require beneficiaries of inherited Roth IRAs to pay tax on earnings, but not principal (already taxed from original account owner)."
There are no taxes due on inherited Roth accounts whether principal or earnings.
Speculating on potential future politcal events no matter how unlikely are not allowed on this site.
Da5id
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Re: IRA to heirs

Post by Da5id »

mrscatterbrain wrote: Thu Jun 03, 2021 2:45 pm
Da5id wrote: Thu Jun 03, 2021 2:36 pm
mrscatterbrain wrote: Thu Jun 03, 2021 2:18 pm
Lee_WSP wrote: Thu Jun 03, 2021 2:00 pm
mrscatterbrain wrote: Thu Jun 03, 2021 1:29 pm I’m going to piggyback on the OP’s question here:

Is this a traditional or Roth IRA in question? What are the IRS rules for inherited traditional IRAs vs Roth IRAs?
IMO, this is the most comprehensive easily readible answer to that question:

https://www.kitces.com/blog/secure-act- ... nts-taxes/

The Roth funds are not taxed upon withdraw as they are pre-paid, whereas trad is taxed upon withdrawal.
Thanks, I’ll take a look at the article. My only concern about the Roth is that the earnings have not been taxed, so I was curious if the IRS requires the beneficiary to withdrawal from an inherited Roth IRA at some point so the IRS can take more $$$.
The only taxation on an inherited Roth would be if an estate tax were owed (state or federal). But that doesn't depend on withdrawing any amount. Assuming you are a non-designated named beneficiary of the account, you have 10 years under SECURE to withdraw the money on any schedule you like. https://www.schwab.com/resource-center/ ... ur-options is also pretty readable.
Thanks, Da5id. I suppose there’s nothing stopping a beneficiary from rolling an inherited IRA (Roth or traditional) into their own (Roth or traditional) IRA. Then all funds would be withdrawn from the inherited IRA within 10 years and the investments can continue growing in the rollover IRA.
I don't believe that that works, though I'm not an expert. I'm keeping my inherited IRAs segregated from my Traditional/Roth IRAs. Maybe it works for spousal inherited IRAs to co-mingle?
delamer
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Re: IRA to heirs

Post by delamer »

mrscatterbrain wrote: Thu Jun 03, 2021 2:41 pm
Lee_WSP wrote: Thu Jun 03, 2021 2:29 pm
mrscatterbrain wrote: Thu Jun 03, 2021 2:18 pm
Lee_WSP wrote: Thu Jun 03, 2021 2:00 pm
mrscatterbrain wrote: Thu Jun 03, 2021 1:29 pm I’m going to piggyback on the OP’s question here:

Is this a traditional or Roth IRA in question? What are the IRS rules for inherited traditional IRAs vs Roth IRAs?
IMO, this is the most comprehensive easily readible answer to that question:

https://www.kitces.com/blog/secure-act- ... nts-taxes/

The Roth funds are not taxed upon withdrawal as they are pre-paid, whereas trad is taxed upon withdrawal.
Thanks, I’ll take a look at the article. My only concern about the Roth is that the earnings have not been taxed, so I was curious if the IRS requires the beneficiary to withdrawal from an inherited Roth IRA at some point so the IRS can take more $$$.
I do not understand your question. Roth IRA's are funded with post tax dollars. The growth and withdrawals are tax free as they have been pre paid.
For the original owner of the Roth IRA who contributed after-tax dollars, yes, withdrawals of both principal and earnings are tax free.

However, I am not sure if this tax benefit applies to beneficiaries of inherited Roth IRAs. The IRS may not like the idea of heirs (of millionaires and billionaires, for example) receiving a large Roth IRA inheritance and never paying a penny in taxes on the withdrawals.

It is not inconceivable to me that the IRS may/could require beneficiaries of inherited Roth IRAs to pay tax on earnings, but not principal (already taxed from original account owner).
The IRS implements and enforces the laws passed by the Congress and signed by President.

Just like the SECURE Act changed the laws regarding Inherited IRAs, any future changes would have to be made by our eiected officials.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
mrscatterbrain
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Joined: Tue Nov 03, 2020 2:05 pm

Re: IRA to heirs

Post by mrscatterbrain »

smitcat wrote: Thu Jun 03, 2021 2:46 pm Speculating on potential future politcal events no matter how unlikely are not allowed on this site.
Thank you, smitcat. I understand. The intent of my original question was to point out my lack of understanding about Roth IRA inheritance rules, not to speculate. I will try to be more careful with my language and semantics.
delamer
Posts: 11488
Joined: Tue Feb 08, 2011 6:13 pm

Re: IRA to heirs

Post by delamer »

mrscatterbrain wrote: Thu Jun 03, 2021 2:45 pm
Da5id wrote: Thu Jun 03, 2021 2:36 pm
mrscatterbrain wrote: Thu Jun 03, 2021 2:18 pm
Lee_WSP wrote: Thu Jun 03, 2021 2:00 pm
mrscatterbrain wrote: Thu Jun 03, 2021 1:29 pm I’m going to piggyback on the OP’s question here:

Is this a traditional or Roth IRA in question? What are the IRS rules for inherited traditional IRAs vs Roth IRAs?
IMO, this is the most comprehensive easily readible answer to that question:

https://www.kitces.com/blog/secure-act- ... nts-taxes/

The Roth funds are not taxed upon withdraw as they are pre-paid, whereas trad is taxed upon withdrawal.
Thanks, I’ll take a look at the article. My only concern about the Roth is that the earnings have not been taxed, so I was curious if the IRS requires the beneficiary to withdrawal from an inherited Roth IRA at some point so the IRS can take more $$$.
The only taxation on an inherited Roth would be if an estate tax were owed (state or federal). But that doesn't depend on withdrawing any amount. Assuming you are a non-designated named beneficiary of the account, you have 10 years under SECURE to withdraw the money on any schedule you like. https://www.schwab.com/resource-center/ ... ur-options is also pretty readable.
Thanks, Da5id. I suppose there’s nothing stopping a beneficiary from rolling an inherited IRA (Roth or traditional) into their own (Roth or traditional) IRA. Then all funds would be withdrawn from the inherited IRA within 10 years and the investments can continue growing in the rollover IRA.
“An IRA owner cannot combine IRAs they own with IRAs that they have inherited, unless the inherited IRA came from their current spouse.”

Source: https://www.irahelp.com/slottreport/com ... their-rmds
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
mrscatterbrain
Posts: 67
Joined: Tue Nov 03, 2020 2:05 pm

Re: IRA to heirs

Post by mrscatterbrain »

delamer wrote: Thu Jun 03, 2021 2:57 pm
mrscatterbrain wrote: Thu Jun 03, 2021 2:45 pm
Da5id wrote: Thu Jun 03, 2021 2:36 pm
mrscatterbrain wrote: Thu Jun 03, 2021 2:18 pm
Lee_WSP wrote: Thu Jun 03, 2021 2:00 pm

IMO, this is the most comprehensive easily readible answer to that question:

https://www.kitces.com/blog/secure-act- ... nts-taxes/

The Roth funds are not taxed upon withdraw as they are pre-paid, whereas trad is taxed upon withdrawal.
Thanks, I’ll take a look at the article. My only concern about the Roth is that the earnings have not been taxed, so I was curious if the IRS requires the beneficiary to withdrawal from an inherited Roth IRA at some point so the IRS can take more $$$.
The only taxation on an inherited Roth would be if an estate tax were owed (state or federal). But that doesn't depend on withdrawing any amount. Assuming you are a non-designated named beneficiary of the account, you have 10 years under SECURE to withdraw the money on any schedule you like. https://www.schwab.com/resource-center/ ... ur-options is also pretty readable.
Thanks, Da5id. I suppose there’s nothing stopping a beneficiary from rolling an inherited IRA (Roth or traditional) into their own (Roth or traditional) IRA. Then all funds would be withdrawn from the inherited IRA within 10 years and the investments can continue growing in the rollover IRA.
“An IRA owner cannot combine IRAs they own with IRAs that they have inherited, unless the inherited IRA came from their current spouse.”

Source: https://www.irahelp.com/slottreport/com ... their-rmds
Ok, that’s clear. Thank you for the reference.
Topic Author
bbees
Posts: 192
Joined: Sun Jan 24, 2016 12:11 am
Location: Ark

Re: IRA to heirs

Post by bbees »

Thanks to everyone on this subject. It is true I may spend this down to near nothing although my wife and I are primarily living off my pension now and we are taking care of our 2 grandchildren 5 days and nights a week. I think I have a way that will benefit daughter and grandchildren's education expenses and needs when I hang up the bee jacket and hunting rifles.

Consider subject ended, thanks for the input.
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