Podcast Episode - Ask Suze & KT Anything: Inherited IRAs


Family, IRA, Podcast, Taxes


August 11, 2022

Listen to Podcast Episode:

On today’s edition of Ask Suze & KT Anything, Suze answers questions about Inherited IRAs.


Podcast Transcript:

00:00:32

KT: August 11th, 2022

00:00:35

Suze: You don't even wait anymore for me to start.

00:00:38

KT: Hi everybody. This is KT, and this is the Ask Suze, this is the KT will ask Suze for you anything podcast, and I'm in a great mood today because today is Colo's birthday.

00:00:53

Suze: How old is he today? 44?

00:00:55

KT: No, 42.

00:00:59

Suze: No, he is going to be 43. I told you

00:01:01

Suze: I just looked it up. He's

00:01:03

Suze: going to be he is today 43. You just don't want him to grow up on you.

00:01:09

KT: Oh right he was born in '79. And then Travis was born in 1997.

00:01:14

Suze: Well, we're not getting into Travis now.

00:01:15

KT: No, 7-9-9-7 is for me to remember Colo's birthday.

00:01:19

Suze: Travis just for all of you to know right is her favorite

00:01:24

KT: Angel nephew. You know there's a story behind it, which I'll share some day, but not today. But anyways. We have so many presents for him, but he can't have them yet.

00:01:39

Suze: Yes. But after. We do he’s the only one that we buy presents for.

00:01:45

KT: Well we buy him things that he needs like

00:01:49

Suze: shoes, sneakers

00:01:52

KT: shorts because he

00:01:53

Suze: cuts his shorts with the knife that he carries in his pockets.  

00:01:56

KT: I bought him a huge package of disposable razors, he uses

00:02:03

Suze: I thought you were going to say disposable diapers and he's not that old.

00:02:05

KT: Oh no, no. He doesn't need that.

00:02:07

KT: Disposable razors he wanted. I don't know why he used to shave with a straight edge, and I think it takes a really long time and he probably, maybe he's finding it just too time consuming. Okay. Today is a complicated day.

00:02:23

Suze: Wait a second. So we asked him, what do you want for dinner tonight

00:02:27

Suze: and you know what he said? We said we'll make you anything!

00:02:29

KT: Anything. I thought he was going to say a big rib eye steak because he's the only steak eater now in the family. Meat eater.

00:02:36

Suze: Meat eater. And guess what he asked for, he only wants one thing.

00:02:41

KT: A pepperoni pizza.

00:02:47

KT: And I don't eat, I don't eat pizza nor does Suze anymore because it's gluten and we don't eat pepperoni.

00:02:53

Suze: No, I don't eat pepperoni, but I don't eat any dairy.  

00:02:56

KT: I’ll have a bite of that pizza but without the pepperoni.

00:02:58

Suze: I will want to have a bite of that pizza, but I don't eat any dairy.

00:03:02

KT: Suze's really gotten boring but we still love her. And now she's going to start one of the most complicated topics of them all.

00:03:11

Suze: KT, this is perfect for you.

00:03:14

KT: Do not make a quizzie today.

00:03:17

Suze: You have a quizzie. Because this is on inherited IRAs.

00:03:23

KT: Is it more complicated than like Roth?

00:03:26

Suze: I have to tell you it is.

00:03:27

KT: Then what am I doing? I'm just going to ask questions.

00:03:32

Suze: That's crazy. What else do you do?

00:03:33

KT: No quizzies. Let me ease into it.

00:03:36

Suze: What does that mean? You're only going to ask questions. What else do you do? 

00:03:40

KT: Give advice.

00:03:42

KT: When you get a little slow, I step it up, step it up with some advice.

00:03:47

Suze: You are just as feisty as could be this morning. How come?

00:03:50

KT: I'm telling you, I need another cup of coffee. Okay let's do it.

00:03:54

Suze: She just got another haircut by the way a little bit ago. It's real cute. And she keeps itching her head.

00:04:01

KT: It's because he puts product in and I didn't wash it out yet, but it's very short but it'll last me until, probably Labor Day weekend.

00:04:10

Suze: Which is in two weeks. Anyway. So before we begin I just want

00:04:14

Suze: everybody to know, this podcast is mainly for people who have inherited an IRA from the year 2020 and on. If you did it before then, you don't have to worry about it. The old rules are still in place.

00:04:30

KT: You can listen, but it just doesn't apply to you.

00:04:33

Suze: And you should feel lucky that it doesn’t.

00:04:35

KT: Yeah it's complicated but we're going to make it as easy to understand as possible. That's why I'm here.

00:04:43

KT: That’s why I'm here. I'm going to keep Suze on the straight and narrow. And not let her get give a deep dive.

00:04:53

KT: Okay. Are we ready?

00:04:55

Suze: Ready.

00:04:56

KT: Suze here's the first question. If a spouse inherits a traditional IRA or 401k, is it advisable to keep that money separate from their own, or is it best to combine with their own traditional IRA or 401K so there is just one of that type of account?

00:05:19

Suze: What would you tell them, KT?

00:05:21

KT: No. You can't do that.

00:05:23

Suze: Why not?

00:05:24

KT: Because I think that it's different. Yours is yours, and you inherited this.

00:05:28

Suze: Never mind. Let me just answer it for everybody. All right. Because when I did do the inherited retirement accounts, I really didn't address spouses in detail. KT, I'd like you to give me a little bit of time,

00:05:42

Suze: to really tell them what they need to know. Okay? So this isn't a fast podcast. This is a detailed podcast today. Are you willing to let me do that?

00:05:55

KT: Go for it. Yes, of course. I want you to tell

00:05:58

KT: everyone what they need to know, and not anything else. And not a minute more.

00:06:03

Suze: Alright, so if you are a spouse and you inherited a traditional retirement account, meaning that taxes have never been paid on it, you actually have three choices.

00:06:18

Suze: The first choice is, that you could remain a beneficiary of the IRA that you inherited. Which means you just leave everything as it is and you have what is known as a beneficiary IRA. Now the question is why would you do this?

00:06:37

Suze: Because required minimum distributions will be based on the age of your deceased spouse. So let's just say your deceased spouse was younger than you. 00:06:50

Suze: They were maybe 65 when they died, and you're actually 70 or 72 or even older.

00:06:56

Suze: If you did this were you remained as a beneficiary IRA, then the RMDs from this account would be based on your deceased spouse's age, and you could if you wanted to wait till they would have turned 72, you wouldn't have to withdraw money from this at all till then. Did that make sense KT?

00:07:20

KT: It did. What’s the second choice?

00:07:21

Suze: No, it's not the second choice. The next question KT you would want to ask,

00:07:27

Suze: would be why would you not want to do this first choice where you remain a beneficiary of the IRA? Listen closely. If your spouse was older than you then they let's say they were already 72 or older and they're already taking RMDs, which are what KT?

00:07:46

KT: Required minimum distribution.

00:07:48

Suze: Right. And let's just say you were 65 and you don't want

00:07:53

Suze: you don't want to have to take RMDs. Then you would have to continue to take RMDs based on their life expectancy. So let's say you didn't need the money or you didn't want to take it right now. You wouldn't want to do a beneficiary IRA. Now the second choice you have is to become the owner of the IRA, and this is something that only spouses can do.

00:08:20

Suze: Now why would you want to do this? Because future RMDs will be based on your life expectancy, and you won't have to begin them until you're 72. So let's say you're younger than your deceased spouse. And

00:08:35

Suze: and you don't need the income and you want to postpone taking money out of the IRA as long as possible. Which would be at the age of when you turn 72, then you would want to become the owner of the IRA, why would you not want to do this? Simply because you are younger than 59 a half, and you want to take money out of the IRA to live on.

00:09:04

Suze: So if you do this and you take money out, you'll have to pay ordinary income tax on it, but you won't have to pay a 10% penalty tax. So all of you might want to listen to that again to make sure you understand the difference. Third. You can roll over the inherited IRA into an existing IRA.

00:09:29

Suze: So now why would you do this? Because you're over 59 a half, you have an IRA in your name that you like, and you just want everything in one place. And why would you not want to do this? For if you are younger than 59 a half, you will pay a 10% penalty tax and ordinary income tax If you need to access this money before you turn 59 a half.

00:09:57

Suze: So that's actually all they need to know. But those are the three different ways, and you should all make sure you understand the difference.

00:10:05

KT: Which one do you like the most?

00:10:07

Suze: It depends KT on the age of the person, the age of the spouse that died, do they have income needs, do they not? So they need to know, the spouse needs to know the difference between those three.

00:10:20

KT: Okay, the next one. Next question is Suze, thanks for the great info.

00:10:28

KT: I'm wondering if there's any difference in the mandatory withdrawal rules if a trust was the beneficiary. What do you think?

00:10:42

Suze: This isn't funny this topic. Why are you making me laugh?

00:10:46

KT: I don't know. But your eyes are running, you're laughing. Can you wipe your eyes? She's laughing at me, trying to get a cup of coffee.

00:10:56

Suze: I’m trying to get through this serious topic of inherited IRAs.

00:10:58

Suze: Anyway, KT, this is also a little bit of a long answer but it's

00:11:04

KT: a good question. Are the mandatory withdrawal ineffective and trust is the beneficiary? I heard that. Okay, go for it.

00:11:13

Suze: All right now.

00:11:14

Suze: So the answer to that question is that in many cases, a trust has to withdraw everything in at least five years. You don't usually have the 10 years that you have to take, that you have to take it out. Even if you're taking required minimum distributions. However, the trust really has to be set up correctly. It has to be what's known as something called like a see-through trust, or a look through trust.

00:11:44

Suze: Right? And a copy of the trust must be provided to the trust administrator no later than October 31st following the death of the owner, and I can go on and on. Then it goes into a conduit trust or an accumulation trust, so here's the bottom line everybody. If you are going to leave

00:12:02

Suze: a trust as your beneficiary, you better check with an estate lawyer that the trust is set up exactly the way it needs to be, so that it can go on for 10 years, rather than just five years.

00:12:21

KT: Is mine like that?

00:12:23

Suze: We don't have a trust as our beneficiary.

00:12:28

Suze: I hate to tell you I'm your beneficiary.

00:12:30

KT: But I have a trust isn't my IRA in my trust?

00:12:36

Suze: No. You know the answer to this question. You cannot own an IRA in a trust because why? What does IRA stands for?

00:12:46

KT: Individual Retirement Account.

00:12:49

Suze: Shake your head.

00:12:51

KT: Alright, okay. Next question.

00:12:54

KT: I'm 64. I just inherited an IRA. Can it be donated... I like this question. Can it be donated to charity to avoid paying taxes? And will that qualify for an RMD?

00:13:09

Suze: Well KT, I think in this situation,

00:13:12

Suze: I think what this person is talking about is something known as a qualified charitable distribution. I don't think this person means they want to give the entire inherited IRA to charity because they asked about the RMD. So that means they probably just wanted to give a specific amount of money in one year to offset the taxes of the RMD.

00:13:38

Suze: Now a qualified charitable distribution, which is known as a QCD,

00:13:46

Suze: Is this this is where if you are at least 70.5 years of age, you can then give some of the money up to a maximum of $100,000 a year as a charitable deduction. So to some charity. Okay?

00:14:05

Suze: So you can do that. Will it also qualify for the RMD? Yep. It will. But you just need to know, you have to be 70.5 years of age or older to do this, and the maximum you can do per year is $100,000. Next one, KT.

00:14:27

KT: Can I move an

00:14:29

KT: inherited Roth IRA from my mom into my own Roth ira?

00:14:34

Suze: No you cannot. Next question, KT.

00:14:36

KT: I inherited a Roth IRA. Do I have to take RMDs like a traditional IRA under the Secure Act?

00:14:46

Suze: No, you don't. However, you do have to wipe it clean within 10 years. So most

00:14:52

Suze: people who have a Roth IRA, that they've inherited because when they take it out it's tax free to them, they usually leave it in there as long as possible. Remember Roth IRAs do not have RMDs . So you get out of them, even when it's an inherited IRA.

00:15:10

KT: That's another good reason for the roth.

00:15:12

Suze: Oh my God there's so many good reasons for your Roth baby.

00:15:16

KT: So Suze. This next question is an interesting one. My wife is the beneficiary of a traditional IRA, owned by her sister who died this year. Did I hear you say that because my wife is not more than 10 years younger than her deceased sister, that she does not have to take it out in 10 years?

00:15:39

Suze: What do you think KT?

00:15:41

KT: Yeah, you did say that and it's true.

00:15:43

Suze: That's my girl. So KT and everybody else... besides a spouse having special privileges, there's something known as eligible designated beneficiaries. Or what's called EGBs.

00:15:59

Suze: So let's just say that you have a minor child, or a beneficiary that is no more than 10 years younger than the person who left them the IRA. Or the beneficiary is either chronically ill or disabled. They get to follow the rules prior to 2020. So they can stretch it out over their lifetime. However,

00:16:25

Suze: you have to know this everybody. If you have a minor child, it's got to be your child. It can't be a grandchild. So this will only apply to the deceased IRA owner's children if they are the beneficiaries

00:16:42

Suze: of the IRA. Okay go on.

00:17:06

KT: So this next question, I do not have any traditional IRAs. I do a backdoor Roth every year. However, I just inherited a traditional IRA. Will this count towards the pro rata rule?

00:17:20

Suze: No it will not. Alright. And for those

00:17:24

Suze: of you who don't know what the pro rata rule is, rada. Alright. For those of you who don't know what that is, listen to a past podcast that if you're ever thinking about doing a backdoor Roth IRA, you better know about the pro rata rule. Okay go on.

00:17:40

KT: So Suze, the next question is from RJ. I thought that if the deceased person had not yet taken an RMD if they were less than 72 years old, the person who inherited the IRA does not need to take an RMD each year, but needs to empty the account

00:17:59

KT: In 10 years. Is that correct?

00:18:02

Suze: That is correct RJ, you did good.

00:18:05

KT: However, if the deceased person’s

00:18:08

Suze: Is this still from RJ again? Yeah.

00:18:11

KT: Yeah he keeps going. Ready? Part two of RJ. However, if the deceased person started taking an RMD,

00:18:22

KT: the person who inherited the IRA must also take an RMD each year, assuming based on the life expectancy of the person who inherited the IRA. Am I correct?

00:18:34

Suze: Yes, that's also correct RJ. However, it's only correct if the interpretation

00:18:42

Suze: of the secure act from February 2022 this year holds. if they change it by the end of this year, then that might not be correct. So everybody let's wait till the end of this year to see really how inherited IRA's work. Next question.

00:19:03

KT: So I'm a little confused. He keeps talking about life expectancy.

00:19:07

Suze: So

00:19:08

KT: Who knows how long we're going to live?

00:19:10

Suze: The IRS. They have what's called life expectancy tables. And what's

00:19:17

KT: crazy. You want to hear what you

00:19:19

Suze: wanna hear what's even crazier? Is that prior to 2022, they had what's called the old life expectancy table. So if somebody died in 2020, and you needed to figure out their RMD,

00:19:37

Suze: the way that it would be done is you would look at what the balance of the IRA was at the end of December 31st,2020. You would then look up

00:19:52

Suze: what the life expectancy would be on the old life expectancy table. And they would tell you, based on whatever age you happen to be, and they would tell you what that would be and then you would be able to figure out you would take that number and divide it into

00:20:09

Suze: the amount of money that was left there and you have to do that every year. However, in 2022 they have what's called a new life expectancy table. So you all better check with the CPA because I'm telling you it is incredibly complicated to

00:20:26

Suze: figure out how much money you actually should be withdrawing, especially if somebody died in 2020.

00:20:35

KT: The other

00:20:36

Suze: thing everybody should know really KT, is that spouses who roll over an IRA into their own account,

00:20:43

Suze: They should use the IRS uniform lifetime table to calculate their RMD. If the spouse becomes the owner of the IRA, Then they use the IRS single life expectancy table. And if the spouse

00:20:58

Suze: remains as a beneficiary of the IRA, the IRS single life expectancy table is also used but for the deceased age. So that's used for the calculation. So that's another thing that you should all know if you are a spouse, right? But non-spouse beneficiaries always use the IRS single life table, and you can just look them up.

00:21:22

Suze: Was that your last question?

00:21:23

KT: There's just one more here. One more to end it with that. And it's kind of a good question. If my father did not designate a beneficiary on his IRA, what the heck happens?

00:21:36

Suze: Then they have to take it out once they figure out who the beneficiaries are going to be because it goes to the estate maybe at a will. But it's then going to have to be taken out KT in a five year period of time.

00:21:49

KT: Everybody you've got to get

00:21:51

KT: all of this. Um What you want to do with your money straight.

00:21:55

Suze: It's really has

00:21:56

KT: There are a lot of blended families out there that really,

00:21:59

Suze: you got to get this together.

00:22:01

KT: You've got to really look into this and just get it down on paper and organize it.

00:22:06

Suze: All right so KT, we're done only because do you have any more for me?

00:22:10

KT: No. That's enough Suze. Enough information.

00:22:14

KT: But I'm glad I asked you about, you know this um life expectancy business and who figures that out.

 00:22:21

Suze: KT, you're not getting out of this without a quizzie.

00:22:23

KT: Okay. Go for it. Make it easy.

00:22:26

Suze: This one's from Michelle Pola. Alright. And Michelle, you know, has many questions but basically here are two questions for your quizzie.

00:22:39

Suze: How much, now think about everything we just talked about... KT is sitting here swatting at a fly or a little bug.

00:22:46

KT: It's like a little fruit fly. Okay go ahead. Ask me Michelle's question.

00:22:49

Suze: Is it aggravating you?

00:22:50

KT: No, go for it. Michelle. What do you want to know?

00:22:54

Suze: I wanna know why she's swatting all over the place here. Alright. How much do I have to withdraw from my father's inherited IRA? Is the RMD my father was withdrawing when he was alive the same RMD for inherited accounts?

00:23:13

KT: Yeah. I think so.

00:23:17

KT: Is that wrong?

00:23:18

Suze: It is so wrong. Have you not been listening to me?

00:23:21

KT: Listen to it? But I thought you just keep going. It's like 10%. But I thought you just keep going.

00:23:27

Suze: No. It's based on the beneficiaries age. Not on the father's age.

00:23:34

Suze: Right, we're talking about

00:23:35

KT: because she's younger than

00:23:37

Suze: It’s not a spouse account.

00:23:39

KT: I didn't get that Michelle. That it was your daddy.

00:23:43

Suze: All right. You better listen to me.

00:23:45

KT: I wasn't paying attention. I was figuring that was just your spouse. And if it was the spouse, you continue it. Right?

00:23:52

Suze: That depends on their age.

00:23:54

KT: Alright.

00:23:57

KT: Younger or older.

00:23:59

Suze: Next. Michelle wants to know, can she put a traditional inherited IRA, can she convert it and put it into her Roth?

00:24:09

KT: Yes.

00:24:11

Suze: Positive?

00:24:12

KT: Yes.

00:24:14

KT: That was one of the three choices right up front.

00:24:17

Suze: No, it wasn't. You are dreaming, girlfriend. You cannot put an inherited IRA into a roth, unless, see you aren't listening. Now, if a spouse takes ownership of the inherited IRA, the spouse can then do a conversion to a Roth if they want to.

00:24:42

Suze: KT.

00:24:43

KT: Her father’s

00:24:44

Suze: You're killing me here. 00:24:46

Suze: You're killing me here. Is she killing all of you?

00:24:49

Suze: It's too late. You got to - you didn't even come close to a Ding Ding Ding. Alright. Everybody,

00:24:56

Suze: obviously, we'll be doing more answers to your questions on inherited IRAs. I'm not sure this helped you, but I have a feeling that it may have. Especially if you listen to it over and over again. Nothing else. You can always laugh with KT and me.

00:25:17

KT: And I told Suze

00:25:18

KT: I'm going to definitely die before her. So I don't have to figure this out. You have to figure it out.

00:25:25

Suze: But KT,

00:25:25

KT: you're going to inherit all of mine,

00:25:41

Suze: But who cares? There's really only one thing that we want you to remember when it comes to your money, and what is that Miss. Travis?

00:25:49

KT: Stay safe, strong and secure. And - oh, you want to add four? No. Three. Safe, strong,

00:25:59

Suze: and secure.

00:26:00

KT: Suze's the only one smart in this room today.

00:26:04

KT: In the studio.

00:26:05

Suze: And with that, I'll see you on Sunday. We're gonna have you.

00:26:13

KT: Happy Birthday Colo! We’re going to have a party. Party, party, party. Do you think he's up yet?

00:26:14

Suze: Let's go wake him up. Actually. We never go in his room till he comes

00:26:17

Suze: out.

00:26:18

Suze: We'll just make noise and hopefully he'll come out. Alright everybody, talk to you soon. Bye, bye.

 


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