Podcast Episode - Ask KT & Suze Anything: Master Class on Pre-Tax Inherited Retirement Accounts - Part II

This episode is part two of the special Suze master class, from Episode 604, about what to do when you inherit a pre-tax retirement account. KT gathered up your questions and you’ll hear Suze answer them.  Plus, the definition of critically ill and disabled as it relates to qualifications of being a beneficiary.

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Podcast Transcript:

Suze: September 5th, 2024. Welcome everybody to the Women and Money podcast as well as everybody smart enough to listen today is Ask KT and Suze Anything but

Suze: hi KT.

KT: Good morning. Everybody. You better have a great cup of coffee and sit down and listen to this with a lot of attention because this is not going to be an easy. No, no. Wait a minute, wait a minute, I've been studying this podcast and these are all the questions that came in after Suze Sunday school last Sunday,

Suze: which drove her

KT: crazy,

Suze: crazy crazy. She said, Suze, I said you have to know this stuff, KT, especially if something ever happens to me. However, let me first, just say before we begin, which is if you have not listened to last Sunday's master class on Inherited pre-tax IRAs, you need to listen to it because otherwise you are not going to understand the questions that have come in. You have to know what is an eligible designated beneficiary, a non eligible designated beneficiary.

Suze: You need to know what RBD means. You need to know all of these things before you can understand the questions that have come in. So we had lots of questions come in. All right, we are, are, are you ready for this, KT?

KT: I'm gonna try my best to clarify and simplify this very complicated conclusion.

Suze: But I just want to say this is a thing

KT: that you, you have to know this

Suze: things. It's like you just do. All right, go.

KT: OK. This is from Rebecca. She said, KT picked me. This is a very short question.

Suze: That's always a key, if you wanna get picked by KT

KT: So Suze, at what age is my child no longer a minor. My 18 year old who is still in school was left to my husband's IRA a few months ago, I was told by my CPA that my son is not an eligible, designated beneficiary because he's no longer a minor. He's 18 years old, Suze. What can I do?

Suze: I know so much confusion, right? Rebecca and everybody else in many states, you're no longer a minor once you become 18 years of age, but when it comes to an inherited IRA. All right. And for the definition to be an eligible designated beneficiary, you're considered a minor until your 21st birthday. The truth of the matter is your son is an eligible, designated beneficiary. So the first thing is, don't listen to your CPA in this case. All right, your CPA is just wrong.

Suze: So, what can your son do? Well, I'm going to make the assumption that your husband or the son's father had not died on or after his RBD date. So therefore he is an eligible, your son is an eligible designated beneficiary where the decedent died prior to the RBD date. Therefore, he's 18 years of age and he can choose to either stretch it or take it out in 10 years. He can choose either one. What I would tell him to do is I would say choose the stretch method and then start taking a little bit out RMDs based on his life expectancy, little amount of money because he may need money later on. But even if you decide to stretch it, he can take out more if he wants to as well. 

Suze: However, he stretches it, but now in three years on his 21st birthday, he is no longer an eligible designated beneficiary. He is now a non eligible, designated beneficiary and normally a non eligible designated beneficiary whose decedent died prior to the RBD date would have to then switch to the 10 year rule period. However, because your son started to stretch it while he was an eligible designated beneficiary, he can continue to stretch it for 10 years until he is 31 years of age. So if it were my son, that's what I would want him to do again, he can take out larger sums if he wants. But why not let him stretch it for as long as he possibly can. That's what I would tell him to do. 

Suze: Very simple between now 18 and until he turns 21 he can just let it sit there in an inherited ira and then in three years, essentially, he will start to take out and stretch the money over his lifetime with RMDs but it has to be emptied 10 years after he has turned 21. Just that simple. All right KT.

KT: OK. Next questions from James. Similar questions, Suze. I'm one of those people who inherited an IRA from someone who died in 2021. And that person had been taking RMDs before they died. So now I need to have to start taking RMDs next year. All right. So that's 2025.

KT: So the question is, do I have till 2035 to have the account clean?

Suze: Yeah, here's the scoop. Everybody, James is talking about that. He inherited an IRA from someone who died in 2021 who had already been taking his required minimum distributions before they died. He hasn't touched the account. He didn't have to because the law wasn't in effect yet because he was supposed to be taking RMDs But until they clarified the law, they postponed it.

Suze: Now the law says starting in 2025 he has to take RMDs and he wants to know. All right, he can take RMDs, but he'll do it for 10 years. And then does he have to clean the account by 2035 10 years from next year? And the answer to that is no, you cannot do that because the clock started the year after death of the person who left you that inherited IRA, which was 2021. So you have only till 2031 to empty the IRA.

KT: Again from Bruce. Same kind of question.

Suze: A lot of questions for men.

Suze: That's interesting. Well, were the women just were like, I'm not dealing with this. All right. Go on.

KT: Bruce said, thank you for the great information on pre-tax inherited retirement accounts. My mom passed away in June 2024 at 97 years old. Like your mommy,

Suze: KT pop quiz pop quiz, right? Mommy died in 2010 at the age of 97. How old would she be now?

KT: So 97 and it's 14 years, 100 and 11.

Suze: That's my ding, ding, ding, ding, ding, no more quizzies for you. All right.

KT: So, let me finish Bruce's question. He said we now understand the rules for pre-tax inherited IRAs. My question are RMDs required over the 10 year rule for after tax. Roth inherited IRAs currently, there's lots of confusion on this issue.

Suze: I don't know why there's confusion on this issue.

Suze: A Roth IRA does not have a required beginning day because no RMDs are required. So if this is a Roth IRA at a brokerage firm, for instance, then you do not have to take RMDs from it. However, you do have to wipe it clean by the end of 2034. So just leave it there, invest it, Bruce.

Suze: And in 10 years from now you have to wipe it clean, but no RMDs have to be taken. All right.

KT: OK. The next question is from Amy. She said my 57 year old sister died unexpectedly in April of 2023.

KT: She left me as the beneficiary of one of her IRAs. I am 11 months younger. I understand I can stretch the distributions over my lifetime. But when do I need to take my first distribution?

Suze: So obviously you haven't taken it yet. So you have to take your first RMDs by December 31st of 2024. All right.

KT: All right. From Maria

KT: Suze. Thank you for diving into this complicated topic. I would have said, why did you have to even dive in there?

KT: All right. She said...

Suze: The real question is why did they even change any of the rules, all right go on

KT: All right. So Maria said, I have a very quick question. In some situations, the IRA can be withdrawn over the decedent's life expectancy.

Suze: You know what a decedent is?

KT: The person that died. But the decedent is dead.

KT: So how do we determine the decedent's life expectancy?

Suze: So, that's a good question. So, here's the thing you have to know is that whatever the age was of the decedent when the decedent died, that is the age that you use to determine their life expectancy even though they're not here anymore. All right. Go on KT.

KT: So this is from Nicholas.

KT: My friend. Was...

Suze: How do you know if they it like that? We'd always say "Neekolas" we're sorry if you don't pronounce it that way.

KT: Ok. So my friend was a 46 year old single mom.

KT: She left a 123,000 IRA to her four year old daughter. Now given I am the guardian, I have no idea what to do. She also had a term insurance policy as well for $250,000. So no money is needed from the IRA.

KT: And even though I'm really great with money, thanks to you, I am now totally confused and free. So what does he do to help? Um, make sure the four year old daughter is safe and secure.

Suze: Obviously, Nicholas because your friend died before her RBD date, which is the date required to start taking your required minimum distributions. And her daughter is a minor that makes her child an eligible designated beneficiary that can stretch the distributions over her life expectancy. However, once the daughter turns 21 she is no longer a minor.

Suze: So she will continue then to take the RMDs based on her life expectancy for 10 more years than at the age of 31. She'll have to wipe whatever is left in there clean. But remember you can take money out for her, the daughter any time during that period. It doesn't matter. All right.

KT: OK. So Suze listen to this one. This is from Gina. She said,

KT: KT, you have to pick me.

Suze: I picked you!

KT: This is a serious one. So Gina says, why? Because I've never heard this question asked before, but more importantly, I really, really need Suze's advice. So Gina has a sad situation here. My older brother was the non eligible, designated beneficiary of an inherited IRA.

KT: The owner of the IRA died in January of 2020. He had not started taking his RMDs. My brother had 10 years to wipe the account clean. Here's where it gets difficult, Suze, Gina said my older brother was recently killed in a car crash and now I am the successor beneficiary of this inherited IRA.

KT: I'm only three years younger than my brother. So here's the question.

KT: Am I now an eligible designated beneficiary? And if I am, can I stretch the account over my life expectancy?

Suze: So interesting question. Remember everybody to be an eligible designated beneficiary, you have to be a minor child of the decedent or a surviving spouse, a disabled person, a chronically ill person or not more than 10 years younger than the decedent or you could be any age older than the decedent, but the decedent isn't the beneficiary. It's the owner of the original IRA. This does not make this person an eligible designated beneficiary number one. So they cannot stretch it over their lifetime. 

Suze: So as a successor beneficiary in this case, and the 10 year rule had been chosen, Gina has to finish the 10 years and then empty the account. So therefore the 10 years started in 2020. So by 2030 Gina, all money in this account has to be gone. And that's just how a successor beneficiary in this case would work.

Suze: KT, what else you got

KT: Ok. So Maureen sent this one and it's simple question. My grandma left her Ira to her estate which is me. She was not taking her RMDs. And my question is, am I a non eligible, designated beneficiary and just have to withdraw the money within 10 years.

Suze: Do you know the answer to that? I actually answered this question on Sunday as an example. Do you know the answer?

KT: Yes.

Suze: What's the answer?

KT: Yes.

KT: Yes. She has to withdraw the money within 10 years.

Suze: Positive.

KT: No, definitely, I'm not positive on this

Suze: Maureen. Here's the scoop and I talked about this on Sunday when somebody leaves their IRA to their estate, then that's called a non designated beneficiary. They did not designate a beneficiary which is a person, they designated an estate, a charity or something like that. Therefore you have to wipe it clean within five years period because she didn't start her RMDs and everything. You have five years to wipe it clean. Not 10.

Suze: What do you think of that, KT?

KT: Oh, that's good. I didn't know that. I didn't know that. No. Five years. 10, I mean, this is a topic that is really, really complicated.

Suze: Stop saying complicated. Wait a minute. You got any more for me.

KT: How long do I have to roll my deceased spouse's IRA into my own?

Suze: There's no time limit. You can do it any time you want. And that's essentially what all these final regulations talked about that it's now open ended. All right.

KT: All right. Again, my spouse died and then this is from Trish. My spouse died and when I went to his employer's HR people to ask if I could just leave the money there and do a stretch. They said their company only allows the 10 year option. Now, that's interesting.

Suze: So let me just say something to all of you before I even answer this. If you have inherited a retirement account, that is at a plan, meaning an employer, your best bet hands down is to just do an inherited IRA with it, roll it out of there, get it out of the employer's hands. So if it's left at the employers like Trish is saying some employers will allow you with an inherited account to do a stretch as well as your choice. 10 years. However, there are many companies that will only allow the 10 year option. And again, the 10 year option is you don't have to take any money out for 10 years. But the end of the 10th year, it all has to come out.

Suze: There is a difference between an IRA and what a plant account will allow you to do in many different circumstances. This is just one of them, everybody, which is why I am suggesting that if you inherit a retirement account that's at an employer's, it's called a planned account, you best just do an inherited IRA rollover with it far better off because again, this is just one of the differences that employers will allow you to do versus what you could do on your own. All right.

KT: Ok, Suze, last Sunday, you said you would tell everyone the definition of critically ill and disabled, but you forgot to tell everyone.

Suze: I did forget about that. I ran out of time.

KT: So tell him now.

Suze: So what you need to know to qualify as disabled. So then you're allowed to become an eligible, designated beneficiary.

Suze: It would be nice if you had social security disability because if you're getting social security disability, that's pretty much a confirmation of it or get your doctor to confirm that you don't have what it takes to engage in what they call substantial gainful activity due to long term and indefinite impairment. So that's essentially what needs to happen for you to be disabled to be chronically ill.

Suze: It would be great if a licensed healthcare professional certified that you are chronically ill and there's a thing called activities of daily living, there are six or seven of them that if you can't do them, then in essence, you're chronically ill. So it has to be confirmed that you cannot do at least two of the daily living activities such as dressing yourself, transferring yourself without assistance. So that's what qualifies just that simple. All right.

KT: All right. Next is from Danny. Suze, can you just as simply as possible?

Suze: I don't think so

KT: as simply as possible. Tell us what happens if the beneficiary dies, what the successor beneficiary can and cannot do. Keep it simple. Keep it simple. KISS.

Suze: The truth of the matter is KT, I cannot keep it simple. That's another podcast. Seriously all unto itself because a lot of it has to do with, was it before the Secure Act after the Secure Act? It is so complicated. No, I can't keep it simple. But one day I will do, I'm off this topic now for a while. Just so you all know everybody. But one day I will do an entire podcast just on that topic. So complicated. Oh my God.

Suze: This, this is the type of a podcast along with last week's podcast that is really a master class in inherited pre-tax retirement accounts. This is the type of podcast that I want you to mark you take down the number. What number this podcast is last Sunday's podcast. You take notes, you go over it again and again and if this doesn't apply to you right now. All right. But trust me one day, the...

KT: Keep the date so you can go back and listen to these rules and hopefully they won't change.

Suze: But even if it doesn't apply to you right now, one day it will.

Suze: So even though your head may be spinning, if you go over this enough and long enough, you will understand exactly what I'm talking about.

KT: Ok. This next one's from Joyce. She said my deceased spouse had multiple retirement accounts.

KT: He had named our trust as the beneficiary and now I'm the trustee of our trust. So here's the question.

KT: His employer is requesting, I give them the actual trust documents, but the brokerage firm is not. So what's up, Suze?

Suze: So what's up is, do you remember KT a few seconds ago? I said it's very different if you have an inherited IRA or you roll over an inherited IRA at a brokerage firm. Versus if it's at a plan, which means at an employer, many, many differences in employer plan, which is a 401k 403b or TSP, they are going to require documentation. An IRA does not at a brokerage firm. 

Suze: Also, I have to say now that I'm thinking about this. If you are chronically ill or disabled, a planned retirement account, your employer is gonna require documentation that you are in fact disabled or chronically ill again at a brokerage firm or wherever it is outside. When you roll it, they do not. 

Suze: So then I am going to reiterate if you really want to make your life easy. If you inherit A 401k 403b TSP, do not leave it at the place of employment. Do a roll over with it.

Suze: You now know the essential information or the answers to these questions that came in. I'm sure KT chose many of them because they are complicated. They're not really just simple. Can I do this? Can I do that? Which last Sunday's podcast would absolutely tell you what you can and cannot do this podcast today was a technical one, but one that the majority of you will need to know because almost every single thing that KT asked via these emails, you will come up against these situations. So, KT until this Sunday,

Suze: I know KT, if you could only, can see her face...

KT: Can you make Sunday like a really nice school.

Suze: Well, we'll see what happens if the markets keep crashing like they're crashing. I'm not sure what it's gonna be. But anyway, what do you want to tell people? Right.

Suze: So there's

KT: only one thing you need to remember and that is this

KT: people first,

Suze: whether they're alive or dead,

KT: then money

Suze: Yes. Whether it's a Roth IRA, a retirement account, no matter what you have to know about it. That's right. And if you do everything that we've told you, you stay safe, stay healthy. You will be what? Unstoppable. Bye bye, everybody.