TRANSCRIPT
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#52 - I Have Inherited an IRA—Now What?
5 Steps to Avoid Costly Mistakes
Eric Blake: On today's show, we're gonna discuss what happens when you inherit an IRA. More importantly, what steps can you take to avoid costly mistakes and make the most of this financial legacy? Welcome to another episode of the Simply Retirement Podcast, where we want to educate and empower women to live your retirement.
On your terms, I'm your host, Eric Blake. Now whether you have inherited an IRA from a spouse, a parent, or another loved one, the financial and emotional implications can be significant. And unfortunately, many beneficiaries unknowingly make costly mistakes. Whether that's being, that's triggering avoidable taxes, or even missing required distributions.
So today I wanna break down and walk you through the top five things you should do if you've recently inherited an IRA account. Or if you expect an inherit an IRA at some point in the future. Joining me once again is Wendy McConnell. Wendy, how are you? I'm good. How are you? I am very well. So I'm gonna tell you right off the bat, th this is your job on this episode is to keep me out of the weeds.
I, this stuff is very easy for me to nerd out on. 'cause I really, I'm one of those weirdos that enjoys this stuff, enjoys talking about taxes and secure act and. Yeah. All this kind of fun stuff, but we hate
Wendy McConnell: that in a financial advisory.
Eric Blake: I know. So that's I, you pay me to do it so you don't have to.
That's way it works.
Wendy McConnell: I will do my best to keep you on track.
Eric Blake: All right back on episode 50, we talked about this big pending wealth transfer, a significant amount of which is going to be going to women. Okay, so it's an estimated, depending on what numbers you're looking at, somewhere between 30 to $34 trillion potentially could be passing to women over the next five years.
Okay? By 2030. And of that we know that a significant amount of that will be in the form of retirement assets and more specifically IRAs, individual retirement accounts. So obviously then it's really important to understand the implications of this. So before we get into those five things that you should do, I do have a couple of just brief caveats that I wanna make sure we get out there first.
And that's the first thing really, there's, the first thing you should do is determine whether you're a spouse or nons, spousal beneficiary. But that should be pretty straightforward, right? You either know you're a spouse or you're not. Yes. But it is important, right? Because that determines some of what your options are gonna be.
And we'll touch on that as we go through it. But that is step one is am I spouse? Am I not a spouse? The next thing is we have to decide if you, maybe, if you've already inherited an IRA in the past. Did it happen before January 1st, 2020? So that is when the secure act actually went into effect, and you may have heard the term, but the Secure Act changed the IRA beneficiary game all completely.
And the reason that's important is prior to that, if you happen to inherit an IRA, whether you were a spouse or maybe you were a daughter, you're just a family member, you had the option of what was called a stretch, IRA, you could take distributions over your lifetime.
Wendy McConnell: Okay,
Eric Blake: but that basically went away for nons spousal beneficiaries and a few other categories as well.
But thinking about, again, we can, again, really one of those things we can go into deep into the weeds on. So spouses still have potential for taking lifetime distributions, but for the most part, nons spousal beneficiaries no longer have that ability. They now have what's called the 10 year rule. And again, we're gonna touch on this, but that's the two things I would say right off the bat.
And before we get to these five critical things to do, are you a spouse? Are you not a spouse? Have you already inherited an IRA and did that take place before January, 2020? And we're gonna touch on a few of these little key areas that if you have already inherited an IRA in the past, there's things you want to know because if you, maybe the secure Act didn't apply to you and you inherited that IRA, but if something happens to you and then somebody else, I inherits your inherited IRA.
It would apply to them. So it's important to understand what what, how all this fits together. And we're gonna go through this as we hit those. Again, those fee five key things that you should do if you are going to inherit an IRA or have already inherited one. Okay. All that make sense about as clear as mud?
Wendy McConnell: Yes. I just actually inherited an IRA, so a lot of this makes sense to me. So hopefully we'll be able to, figure out where any problems might lie.
Eric Blake: Absolutely. I'd also say just a couple of, one more touch thing I'll touch on with the Secure Act is that all also created a number of other scenarios that really probably go beyond the scope of a podcast episode.
Things like eligible and non-eligible beneficiaries designated or non-designated beneficiaries. So if you think one of those potentially fits your situation, one of the things I would definitely encourage you to do is talk about it with your financial advisor, talk about it with your tax advisor.
Because those are again, really areas that you need to understand your specific scenario to make sure you're making the right decisions. Okay. Alright. Which leads us to step one. How about that? So work with an experienced financial advisor or a tax professional I. Preferably both. Preferably you have your tax planner, your tax advisor, and your financial planner working together because that's really critical when you're critical when you're making these decisions.
Because again, if the financial advisor recommends one thing and all of a sudden it results in a higher tax liability, and that financial advisor lets the tax pro tell you about it. Probably not a good thing. That's word. That's one thing CPAs hate is being thrown under the bus. 'cause they will then turn around and throw you as a financial advisor, they'll throw you right back under it.
Wendy McConnell: That wasn't my fault. That was his fault.
Eric Blake: That's right. He, you ended up with this begged tax bill and he didn't even tell you about it. What is he doing?
Wendy McConnell: Yeah, you don't want that. But it does happen.
Eric Blake: It does happen. But that is key is to have both of those professionals working together to make sure you understand what's going on.
Because one of the things you wanna look at. Is the expert in this field or the financial advisor who has experience here is looking at, making sure you avoid required distribution mistakes and penalties, and making sure also that you think about a tax efficient withdrawal plan. When we talk about required distributions, inherited IRAs, if you've got a required minimum distribution, you could always take out more.
We'll talk about withdrawal strategies here in just a bit, but that's one of the things to be aware of is there could be tax reasons to actually take more out than what you're required to. And that's where again, where a financial professional who's experienced in these issues can be helpful.
Wendy McConnell: So let me ask a question, and you may be, answering this later on, but if I in her and I inherit an IRA and a traditional IRA and I withdraw funds from that, I will be required to pay taxes on that money.
Is that correct?
Eric Blake: If it is a traditional IRA,
Wendy McConnell: okay,
Eric Blake: so taxes have never been paid on it. It's still pre-taxed. Yes. When you start taking those distributions out, they are going to be taxable to you. And again, that's really where proactive tax planning before an IRA is inherited can also be really important before it passes on to that next beneficiary.
Because, you think about, we sent out a we're actually in the middle of this right now where we do a tax summary letter. Clients send us their tax, send us their tax return. I go through about a 30 step process of reviewing that tax return and saying, here's some of the key areas that I see.
Some of the thing key things that we wanna be aware of, and we actually say one of those things is taxation of IRA assets. What happens if these pass to your children, to your adult children, in most cases? So let's think about it if you are maybe in your seventies or eighties and now your kids are in their maybe forties or fifties.
They're in, they might be in their highest earning years where you being retired might be in a lower tax bracket.
So if they were to inherit those assets and now they're, as you said, you're, they're taking money out, but they're now at that high tax bracket, that means Uncle Sam is getting potentially way more than would've been necessary otherwise without proper planning.
Okay, so
Wendy McConnell: the parents in this situation would be more beneficial for them to transfer it or withdraw it or put it somewhere where the taxes will be being so withdrawing
Eric Blake: more than, do you know if they're, if you're recalling what we call filling tax brackets. So let's say maybe they're in the 12% of the 22% tax bracket and they've got some room.
Maybe they're, they're lower in the 22% tax bracket. Maybe they could convert 10,000. 20,000 is just an example to say, now that money's being converted. We've taken it out of the pre-tax bucket. Yes, we paid some taxes, but now it's in a Roth IRA and we'll grow tax free. Okay. Or you might just take it out.
There's different ways you can do it, but again, it really is, you want to base it on your specific situation.
Wendy McConnell: Okay.
Eric Blake: And that's the other thing I was gonna suggest is go back and listen to episode six and we talk about working with a financial professional that has experience in IRA distribution issues withdrawal, retirement withdrawals.
Episode six is where I talk about the 10 questions you can ask your financial advisor to say, are you experienced, what are you doing to stay on top of tax laws and tax changes? How do, how well do you understand what I'm trying to deal with here? If I as have, I've inherited an IRA. So that's, again, that's step one, is again, work with an experienced financial professional or, and or your tax professional, hopefully both working together.
Wendy McConnell: Okay. Got it.
Eric Blake: All right, so number two. Next thing is we wanna understand what type of IRA are you inheriting? So in most cases, you're thinking about, okay, we've got a traditional IRA or a Roth IRA. The implications are gonna be different, but you also have situations where, again, back to that spouse, non-spouse question.
You say, what type of IRA am I receiving? Am I a spouse, am I non-spouse? And then that will give you a indication of what your options are gonna be. And just for an example, I think I've shared this story a couple of, maybe even a couple of other past episodes, but this, again, it stresses the importance of why this, how critical these decisions are, and understanding what your options are.
Where we had a client who she was only 58, husband was 62, he passes away. He had just started his social security benefits, but because she was 58, she couldn't start, she couldn't receive survivor benefits from Social Security, so in her case, because he had a 401k. She could have technically taken money out of the 401k and used that money to live on, but it would've impacted her tax situation pretty significantly.
We talked about that on a couple of episodes as well. That mandatory 20% tax withholding if you take money directly out of a 401k. So because she was a spouse. Our option for her was to say let's roll that to an inherited IRA, in which case, and because it's an inherited account, she can actually access those dollars before 59 and a half.
So again, she was 58 at the time, had she just rolled that money to her own IRA, which a spouse can do. She would not have had access to those dollars.
Wendy McConnell: Okay. I got it. Didn't got that
Eric Blake: 59 and a half rule. So in her case, she was actually able to a, take those dollars out, make sure she had enough money to cover health insurance and some of the other expenses that she was gonna be dealing with again, because she had no real other sources of income.
So in her case, that was a critical decision on what options that she need to think about under, again, pretty critical circumstances. So then you look at also traditional IRA versus Roth IRAs. So traditional IRAs, they both fall under, if you're a nons spousal beneficiary, for example, they both have that 10 year rule, meaning you've gotta fully liquidate that account by the end of the 10th year following the original owner's death.
Okay? But the difference is with Roth IRAs because there is no required distributions. They don't have required distributions for Roth IRA accounts you could really decide to get to. Should I just let that money grow for that full 10 years and then take it out? Because again, it's tax free. Back to your question earlier about if I take money out of this, IRA out of a traditional IRA, do I have to pay tax on it?
The answer is yes, but the Roth IRA, it's a hundred percent tax free.
Wendy McConnell: Okay.
Eric Blake: So you won't be aware of that.
Wendy McConnell: It should stay where it is.
Eric Blake: It can. So it doesn't mean it has to, but it has to stay. You want to keep it in inherited status. Okay? You wanna keep it in inherited status. And then again, that's, again, we're getting into these little weedy type things.
So you got, if you're a non-spouse, you have to leave it as inherited status. If you're a spouse, again, you might consider whether it makes sense to roll it to your own Roth account. And that's saying, again, that gets back to whether your spouse, non-spouse as to what your options may be. Okay. So what is
Wendy McConnell: the benefit of keeping it as an inherited account?
Eric Blake: The Roth. So the benefit, if you're talking about the Roth, the benefit to keeping that as an inherited account is it allows you to allow it to keep that money growing tax free over a that 10 year period. Okay. Versus saying, okay, I couldn't really, I can't roll. If I'm a non-spousal beneficiary, I can't roll an inherited account into my own account.
Wendy McConnell: Okay.
Eric Blake: So, basically the only option is I just take the money out altogether, take a full distribution, or continue to allow that money to grow over that 10 years tax free.
Wendy McConnell: So that's the better option. Let it grow.
Eric Blake: In most cases, it is, again, just very individualized. Okay. You wanna make sure you're understanding your exact situation.
But when it comes to Roth accounts, tax free is always good.
Wendy McConnell: Yes. That's the ultimate, exactly.
Eric Blake: And again, back to, I'll touch on that one issue I talked about at the beginning around secure act versus non-secure act. So if you happen to inherit an IRA before January of 2020, that's where again, you wanna understand what rules apply to you.
Do you still have that option to stretch out distributions over your lifetime versus being limited to that 10 year distribution timeframe?
Wendy McConnell: Okay. Got it.
Eric Blake: Alright, so then we go. Next thing is determining, number three is determining whether you will have required distributions. And again, non-spousal beneficiaries, generally they're gonna be subject to that 10 year role, and technically that is considered a required distribution.
Now, here's where it gets really tricky. So if you inherit the money from a, the original owner and they were not yet old enough to have their own required distributions, then you don't have to take required distributions out within the 10 years, but you still have to fully liquidate it by the end of the 10th year.
Wendy McConnell: Okay?
Eric Blake: Here's where it really becomes costly if you don't understand the rules, because it is a required distribution. If you didn't realize that after 10 years you had to fully distribute the account, you actually could be penalized as much as 25% of the amount that you did not take. That's if you neglect to do it at all.
If you didn't do it at all, that's 20, potentially 25%. Now they have, again, another piece of the secure act is it's 25% and if you take care of it in a co, in a reasonable time, yes, you can have it reduced from 25 to 10, but 10% is still 10%. If it's a sizable account, a 10% penalty is obviously still pretty significant in many cases.
Wendy McConnell: And if you don't realize until the 10th year and you have to take it all out at once, that's a big tax liability, correct? Yeah,
Eric Blake: but that's where the penalty comes in. Okay. So technically it's a penalty on the, in addition to the taxes, right? So not only might you have to pay the big tax bill on, on taking that money out after the 10 years, but then you might have an additional penalty on top of all that.
Wendy McConnell: Okay. So just the fact that you would have to take, you would have to pay the taxes on the full amount is bad enough in itself, but then if you're late, then you there's penalties. Gotcha.
Eric Blake: And that's, again, that's really what the planning comes in to say, okay, yes, I, maybe I don't have to take out, but usually just a simple example of maybe a hundred thousand dollars that you inherited a hundred thousand dollars IRA.
You start thinking about if I don't have to take anything again, I get, definitely have to take out that full amount by the end of the 10th year, but what is that a hundred thousand dollars worth by that time? Now, if it depends on your investment strategy, which actually we're gonna touch on, but let's say that a hundred thousand is now worth 150,000.
If I didn't have to take any money out and I just waited till you year 10, now I'm taking $150,000 out of whatever tax bracket I'm in. So that, again, that's where that tax planning really becomes critical. And again, those mistakes of costing yourself significantly. So does it make sense to say I don't have to take it out, but what if I did take 10,000 out per year over that 10 years?
Take that a hundred thousand to space it out. Yeah. That's where the planning really comes in. And then again, if you have missed any of the required distributions. That's where, again, that additional 25% penalty as high as 25%, 10% if you take care of it within a reasonable amount of time. But again, nobody wants to pay more than they have to.
Again, it's the idea you, we don't want to give Uncle Sam a tip. We'll pay our share. But not a tip.
Wendy McConnell: No, I think he owes me a tip
Eric Blake: maybe. So we need to look into that.
But so let's see. Make sure I covered all the topics here. Yeah, so back to the other point. So if the deceased, the person you inherited the money from, if they had started taking required distributions, then you will also have a required minimum distribution each of those 10 years, right?
So you'll have to take out at least something. Again, always remember the minimum, that term minimum, there's always a minimum distribution, but you can take more if it makes sense. So that's key. Now, here's where the you run into this issue of the IRS having to make good on promises that politicians make.
So since 2019 when the Secure Original, secure Act was actually voted into law, I. We just got final regulations, final guidance in 2024 on how all this stuff was really gonna work. Do I really have to take required distributions if the original owner had started their required distributions, or can I delay those, and all these different things.
So we really only got the final guidance on this in 2024, and in fact, they actually waived required distributions from inherited accounts. Through 2024. So 2025 is actually the first year you have to take a required distribution if you're due to take one.
Wendy McConnell: Okay. That's a bonus. But
Eric Blake: here's the big, here's the big issue.
It does not extend your 10 years.
Wendy McConnell: Oh,
Eric Blake: okay. So if you said, Hey, I don't have they're not gonna make me take it, so I'm just not going to. You still gotta fully liquidate by the 10th year following the year of death.
Wendy McConnell: So if I haven't taken any money out in the first four years,
Eric Blake: yep.
Wendy McConnell: I still have to for the next six years, take all of it out over the next six years.
Eric Blake: Yeah. Or again, you could wait till that final year. And depending on the circumstances and what type of account it is it a Roth account? Is it a traditional account? But yeah, so that, that's where I think people, I've heard this a few different times of saying did that extend my 10 years?
The answer to that is no. So even though Uncle Sam said, Hey, you don't have to take this money out, even though you technically, you were supposed to for these four last four years, 2025 is the first year. You may have to take a requirement, but you still are under that same 10 year window. So you gotta be aware of that.
Wendy McConnell: Okay. It's a lot, Eric. It's a lot. I know. I know. That's a
Eric Blake: qualified professional. That's again, that's step. That was step one. Now, here's one that really does get overlooked, and this is update the investment strategy. So you think about I inherited this account from my father, from my mother, from my grandparents, and you would receive the money, and it's still an inherited account, but the investment strategy never gets updated.
So you gotta think about what your situation is. So whatever their risk tolerance was, whatever their goals were, whatever their investment objectives were, you would hope that they invested based on that. Now, some people are getting more aggressive, some people are more conservative. You wanna be sure that once you've inherited that account, did you adjust the investments based on your specific situation?
If you're gonna have to take money out, how do you, how what's, what do you change about your investment strategy based on the need to take money out over the next 10 years versus saying, okay, that I, if I can let this money grow, maybe I can be more aggressive. What are my goals? If I say, again, there's always that minimum distribution, but what if I want to use the money for something short term?
Say within the next couple years, I want to take money to take the money out and buy a house. You wanna make sure that if they were, maybe they're really aggressive investors and they're still in a bunch of different stocks and maybe aggressive stock funds.
Wendy McConnell: Right?
Eric Blake: And we go through a situation like what we've seen this year and we've seen the market drop, 18%.
You don't want the market to drop 18% when you need the money tomorrow. No.
Wendy McConnell: No.
Eric Blake: So you wanna make sure you adjust the investment strategy based on your specific situation. And again, I'll refer back to another episode we did back on episode three, where we talked about seven essential strategies for success for successful investing in retirement.
Again, whether it's for your own retirement that you've said, yes, I've inherited this money, but I'm gonna wanna make sure it's part of my retirement plan. Or if you decided, did you need something more short term? And just a rule of thumb, for the most part, anything within five years that you might need the money for.
We don't wanna expose that money to stocks.
Because the potential volatility is just too great. That's why we talk a lot about what about our war chest? So if we have clients that are taking money out. To live on at least five years of income is gonna be outta the market altogether. And again, that's what helps us get through these difficult period, like we're going through right now where we see a lot of that volatility or downside downside, potential risk.
How do we get through that without having to sell stocks at the wrong time?
Wendy McConnell: And I think it's important to emphasize, because. For me personally, you know what? It's things that I'm not familiar with, whatever, so I just tend to just put it off and put it off and put it off. And then you might be in a situation.
Exactly where you're talking about is when you realize maybe I should have been doing something before the market took a huge downturn. You could lose a lot of money. I'm just saying. Don't put it off. Talk to somebody. Figure it out.
Eric Blake: That's right. And again, that, and it's the part, the hard part can actually be, and you may have experienced this, the emotional piece of this is I inherited this and this is the way they did it.
I don't wanna change that. But then you run into the worry about some of these, again, these unnecessary taxes or unnecessary costs of doing that. So even though it's, you've inherited it, there's gonna be an emotional component to that. You gotta be step back and take in, try to take an objective view or have an advisor help you take an objective view of how do I make sure this money is most effectively used for me?
Because that's what they, that's what the person that made you beneficiary, that's most likely what they wanted. They wanted if they chose you to be beneficiary because they wanted you to receive this when they were no longer around. So they're not gonna want you to. Unless it's your choice to that money to be dis to disappear within a year or two, right?
No. So making sure you adjust that investment strategy based on what your specific goals are, what your timeframe is, and what you want that money to do for you.
Wendy McConnell: All right?
Eric Blake: All right, so next we've got number five is decide how and when to take distributions. Again, this is really where the smart tax planning is gonna be critical.
So again, understanding, do I want to take distributions over 10 years? Do I wanna take it all as a lump sum for some reason there, there are actually reasons why you might say I might just take it all out in year one. What's the reason? It could be maybe you're went through a job change and or you've taken some time out of the workforce.
Need, need the money tax
Wendy McConnell: you need the what you're saying. Yeah, exactly. You might
Eric Blake: say, Hey, I might go and just take the money out because I'm in a lower tax bracket and then I'm gonna be. Three years from now, five years from now, 10 years from now. But that's, again, that's where the planning comes in. You also want to be aware, and I really look forward to hopefully in the next few episodes, we're gonna talk about the widows penalty that I brought up on a couple of different episodes.
But be aware of what sizable withdrawals might do in situations like that where you take a big lump sum out or you, because you didn't understand the rules, you waited till year 10 and you have to take that big 150,000, $200,000 or more. Distribution and all of a sudden now you've pushed yourself into a higher tax bracket or maybe even you've pushed yourself into a higher Medicare premium with Irma surcharges.
So again, that's where some of these hidden costs, by waiting well, or at least not having a plan can really become critical.
Wendy McConnell: Okay. So who's IRMAA and why is she charging me?
Eric Blake: So IRMAA is when you reach 65 and you are now going to enroll in Medicare, there's a base premium. Which is $185 this year. That's what everybody across the board pays for Medicare Part B.
Okay. So typically Medicare Part A is free Medicare Part B, you pay $185 a month and it gets increased every year based on cost of living. Where there's what's called an Irma threshold income. What is income related monthly adjustment amount. Get that so what happens is if your income goes above a certain level, and there's actually several levels where if you hit one.
It increases your Medicare premium. Okay. It's called an Irma surcharge. So if you go be front above that first threshold, it adds more to your Medicare premiums. You go above that second threshold, it adds more to your Medicare premiums.
Wendy McConnell: Gotcha.
Eric Blake: So, that's where it can actually cost you a. Quite a bit without knowing if you're not planning, if you're not, again, not looking out over the next five to 10 years deciding how am I gonna utilize this inherited account.
So that's things like that, that can happen Where, again, using the spouse example, because that's typically where I see this a lot is where you maybe have, let's call it a million dollars, the WiFi's $500,000. The husband has $500,000. They both are having to take required distributions out.
Husband passes away, which statistically is usually what happens. Now all million dollars is in the wife's name, million dollar IRA. Now she's still taking required distribution, potentially about the same as what they were taking together. But now she's filing married or filing single rather than married, finally jointly.
Wendy McConnell: Okay.
Eric Blake: And also the Irma thresholds are different. The Irma thresholds, the tax brackets, all that's about cut in half.
Wendy McConnell: Okay,
Eric Blake: so now she's taking the same amount they were taking out when they were together, but now she might be paying at a higher tax bracket. She might be increasing her Medicare premiums.
All these different hidden costs that might come into play without really none, because again, not understanding how all this will actually work out.
Wendy McConnell: Okay. This is why you need the professionals.
Eric Blake: That's right. Now the other couple, one, one interesting thing that I don't think a lot of people are aware of is something called a qualified charitable distribution.
So normally this applies to IRAs, but if you've got any type of charitable inclination, there's organizations that are important to you. One of the things you can do, whether it's an IRA, your own IRA, or it's an inherited IRA, you can actually send money directly from the IRA to the charity. That reduces the taxable portion of any required distributions that you have
Wendy McConnell: by that amount, or the amount that the, that you would've paid in taxes.
Eric Blake: Let's see. I'll use an example. Let's say that your required distribution is $10,000 for the year, and there's a organization that you're, that's important to you. We, there's some groups I'm involved with that ladder House Decor, or American Heart Association, whatever might be important to you.
And you say instead of taking all that $10,000 out. And paying tax on it. What I could actually choose to do is say I'm gonna send a thousand dollars directly from IRA. That's a key directly from the IRA to the American Heart Association. So that means my $10,000 required distribution, that would've been taxable at the full 10,000.
Now I've sent a thousand dollars to the organization. Now my taxable portion is only 9,000.
Wendy McConnell: Gotcha. I understand. Yep.
Eric Blake: Now you have to be at least 70 and a half to actually utilize. This particular strategy. Okay. Qualified charitable distributions, you have to be at least 70 and a half again, but whether that's inherited an inherited IRA account or your own IRA, you can use that particular strategy.
Wendy McConnell: Okay.
Eric Blake: I like that. And even, I think it even applies more to inherited accounts because again, if you inherited account that's now requiring you to take money out. Your own IRA with again, the secure act. Now the required distribution age has been bumped to 73 or 75, depending on when you were born.
So the 70 and a half rule, you might not even utilize that for a while. But if you've inherited account when you were 65 and now you're 70 and a half, that might be something you can utilize to help reduce your tax liability. And
Wendy McConnell: the great thing about that too is again, the charity gets the full amount.
There's no taxes deducted for them. Correct?
Eric Blake: Exactly. Yeah. Yeah. So they get the exact six success. They get even more of them. It doesn't matter. Yeah. But that's where, if you say had to reverse of that, let's say, I took my $10,000 out and paid tax on it myself. Maybe I'm in the 10, the 12, I just call it 22% tax bracket.
But then I send the same money to the charity while it costs you 22%. So it's more a thousand, call it about 1200 bucks. Yeah. That it cost me. It cost me the $200 in taxes. They still get the thousand, but now it costs me 1200 to give 'em that a thousand.
Wendy McConnell: Yeah.
Eric Blake: Versus them just getting a thousand and it costing me a thousand.
Wendy McConnell: I like it.
Eric Blake: Yep. Now here's one of the thing in terms of qualified distribution, qualified plans or retirement plan, employer plans. Let's talk about that just for a second. We're talking about some of these distribution strategies. One of the things that we talked about earlier where you can't convert.
Money from an inherited account to my, I can't take money from an inherited Roth account and roll it to my own Roth account. Or I can't take money from an inherited IRA and roll the money to a my own IRA. Those, you can't do that. Okay. However, what you potentially can do, if the plan allows, you can actually do a Roth conversion from, let's say, let's call it a 401k.
'cause that's typically the, when talking about company plans, that's what most people think of. If I've inherited a 401k. I might actually be able to do a Roth conversion of that 401k amount into a Roth IRA, which means you basically have then avoided all the requirements. Again, there is that tax liability, so if you do it's a hundred thousand dollars.
You said, again, using the example of, Hey, maybe I'm gonna low income, I'm gonna low tax bracket this year. Why not do a sizable Roth conversion, convert that a hundred thousand to Roth? And now it's tax free for the rest of my life. I don't have to worry about the required distributions. Yeah, I don't have to worry about the 10 year rule, any of that.
So that is one strategy that you want to be aware of and a lot of people aren't, that if you inherited a, an employer plan, a 401k or similar. That you may have the option of doing an immediate Roth conversion right off the bat rather than having to worry about all the inherited rules and 10 year rules and all that good stuff.
Eric Blake: That'd be nice.
Wendy McConnell: It would.
Eric Blake: Alright. So before, I guess anything else, Wendy, anything you think I need to go back over before I get to a recap of the of the strategies?
Wendy McConnell: No, I think I'm pretty straight with everything, and if I'm straight with it, everybody should be straight with it.
Eric Blake: That's my entire objective right there to make sure you got it.
Wendy McConnell: I think I got it.
Eric Blake: All right, so let's go through the top steps then before we wrap up. First thing again, partner with a qualified tax and professional financial advisor to help you, guide you through these steps. Help you understand what the rules are.
Make sure that they understand what the rules are though too. That's a big piece, is making sure they've got experience with inherited accounts, retirement distributions, the tax laws secure act, make sure they understand all those. Again, I'll refer you back to episode six. Those 10 questions are great, are a great resource to find out for sure whether they've got that experience.
Number two is know what type of an IRA you inherited? Is it a Roth? Is it a traditional IRA? Spousal versus non-spousal, that falls into that number two as well. Understand if and when RMDs are gonna be required distributions. Are they gonna be there or are they not? Do you have to deal with 'em or do you not Make sure.
Number four make sure you align your investments, align the investments with your goals and your time horizon. That's really critical. Last thing is again, make tax smart distribution decisions, including things like Qds, maybe that Roth conversion strategy, if that's something that applies to you.
So that is, again, those five things. If you understand those five things, if you do those, you're gonna be in much better position as you move forward with an inherited account. Last thing I also suggest, and this is a bonus to do, if you will go to www.thesimplyretirementpodcast.com/inheritedIRA.
We've actually got a free checklist that you can utilize that'll help you answer the questions. What issues should I consider when inheriting a traditional or a Roth IRA? It's a checklist that goes through a lot of these items that we just talked about that you can actually have in front of you as you are trying to navigate these decisions.
Wendy McConnell: All right, sounds good.
Eric Blake: Any other thoughts? Anything else you think we need to touch on?
Wendy McConnell: No, I think you've covered it very well, Eric.
Eric Blake: Thank you. Thank you. Again. I it's easy for me to get in the weeds, so I try not to, but I think it's fun.
Wendy McConnell: Hey, I just needed to know who Irma was and you told me who she was.
IRMAA.
Eric Blake: Aunt IRMAA and Uncle Sam. You don't wanna say it.
Wendy McConnell: There you go.
Eric Blake: Thank you so much, Wendy, for joining me once again. To our listeners if you've recently inherited an IRA or you think you may be I inheriting one at some point in the future and you just wanna be prepared, feel free to visit us at www.blakewealthmanagement.com.
If you are interested in us helping you navigate the retirement journey, just click that "Free Assessment" to review our Simply Retirement Roadmap process. That is our process for helping you make an educated and informed decision about working with our firm. For all the links and resources to this episode, you can visit www.thesimplyretirementpodcast.com, including that checklist that'll help you navigate those inherited traditional IRAs or Roth IRAs.
And that is it for today's episode of the Simply Retirement Podcast.
Until next time, please remember, retirement is not the end of the road. It's the start of a new journey.
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