Podcast Episode - Suze School Master Class: Pre-Tax Inherited Retirement Accounts

Suze teaches a special master class about what to do when you inherit a pre-tax retirement account. You’ll learn the different benefits if you're an eligible designated beneficiary and a non-eligible designated beneficiary.  Did the decedent die on or after the required beginning date? Get out your Suze notebooks, because this episode has everything you need to know now.

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Podcast Transcript:

September 1st. Oh my God. September 1st 2024. Welcome everybody to the Women and Money podcast as well as everybody smart enough to listen. Suze O, here and today obviously is Suze School.

But before I begin Suze School, I really have to commemorate today because one year ago today, our very, very good friend, Jimmy Buffett passed away and many of you wrote and said that you were so surprised that you never heard me say anything or talk about it. And honestly, it's because it was too painful, it was too painful to even think about. And as I'm recording this, his daughter, Savannah Buffett and her husband, Josh happened to be here on the island because this was one of Jimmy's absolute favorite place to be. And I would ask Savannah to come on the podcast and say something, but it's still too, too painful for herself as well.

So today is a very incredible day and a day that physically ended a life one year ago, but a memory of a man and his songs and his joy and his parrot heads and his Margaritaville that will go on forever and a day, Jimmy, what can I say? Boyfriend? Um What can I say?

But in that topic as well, I just wanna say that about a week or so ago, a woman by the name of Ruth sent in an email and she said the following said Suze, I'm finding your podcast very depressing because all you do is talk about death. Can't you talk about life or something else or whatever she said.

And I simply wrote her back one little line. That death is a part of living. It just is whether you know it or not and not one of us can escape that.

But what makes death for me so sad is when there hasn't been planning done for it.

So, yeah, I spend a lot of time talking about it, knowing the rules, understanding why you need a will, understanding why a will is never enough. And you also need a living revocable trust, an advanced directive and durable power of attorney for health care and a financial durable power of attorney. Why you need to know many, many things, especially as you get older, how to take money, not only out of a retirement account, but especially if you die and it's not an if it's a win, what's gonna happen to that money that's in your retirement account because probably for the majority of you, the most money that you have, forget your home, the most money, liquid money that you have is in your retirement accounts.

And now that the Secure Act 2.0 has been finalized, the regulations for it. It is essential that you know, that your beneficiaries know the correct way to take money from a retirement account that they have inherited because it is no longer like it used to be. And in 2020 if you died, then or after everything has changed.

So today is going to be the start of part one of the final master class on inheriting pre-tax retirement accounts.

There will be a part two, you'll participate in part two and I'll tell you how in a little bit, but this will be the master class because the final regulations are in. And so anything I've told you about it before, even though it's been correct, this now is absolutely what you need to know.

So, are you ready to take out your Suze notebooks? Which you should absolutely do and get ready for part one of the master class on pre-tax traditional retirement accounts.

All right. So to begin with, I'm going to do a refresher of all the different categories that people who can inherit in IRA. And when I say IRA, I also mean a 401k, a 403bs, TSPs.

But chances are you are going to want to, if somebody has money in a planned retirement account, meaning a 401k 403b or TSP, chances are you are going to absolutely want to take that money and roll it over into an inherited IRA. So if it's ok,

I'm just going to refer to all plans now as an IRA. Ok, so again to pick up where I just left off, I wanna do a refresher of all the different categories that people who inherit an IRA fall into. Especially remember I'm now talking about pre tax retirement accounts.

As you know, when you have a retirement account, you have to designate who you want to receive that retirement account in case you die.

So it is a beneficiary, which is why throughout this, you're going to hear me talk about designated beneficiaries because those are the people that you have designated in most cases as to who is going to get your retirement account.

Next. You need to know that some designated beneficiaries have more privileges than other designated beneficiaries. And therefore, we're gonna have two categories of beneficiaries. The very first one that has more privileges are known as eligible, designated beneficiaries to break those three words down. Very simply, it's your designated beneficiaries that are eligible for more withdrawal privileges than anybody else. Ok.

Now who is qualified as an eligible designated beneficiary?

Number one, a surviving spouse, your surviving spouse has the most privileges of any other beneficiary. You can leave your money to and that a surviving spouse can take over your retirement account as if it was their own. They have all the benefits in the world. So we're not worried about surviving spouses. But the four other categories of an eligible designated beneficiary is a minor child of the decedent, not just any minor child, but it has to be a minor child of the decedent, the owner of the retirement account, very, very important.

The next category is people, doesn't have to be a relative, but any person that you have left as a beneficiary who is less than 10 years younger than the decedent or older than the decedent.

So you have a decedent who named their best friend as a beneficiary. The decedent was 80 years of age when the decedent died. The beneficiary, his best friend is maybe 75 which is less than 10 years younger than the decedent or the decedent is 80 years of age, left his best friend as beneficiary and his best friend is 82 years of age.

It's in those circumstances that that person is an eligible designated beneficiary.

People who are chronically ill and I will get more into that later on as to how do you verify that you are chronically ill and things like that as well as the fourth category you are disabled again later on. I'll tell you all about that.

Those are the people that are eligible, designated beneficiaries, but most people, everyone who is a non spouse most likely, which will be the majority of you are non eligible designated beneficiaries. But these people are not eligible for the benefits that the people I just named are eligible for.

What you need to know. Is that how one withdraws money from a retirement account that they have inherited is determined by your status. You are either an eligible designated beneficiary or you are a non eligible, designated beneficiary.

Makes sense? Ok.

The next factor that you need to know they've made this so difficult, I can't even stand it, but it is now the law. So you have to know this.

Now, there is a second factor that is equally as important that will determine how you must withdraw money from an inherited IRA. And it is this put a pin in that for a second, you all know about required minimum distributions.

You all know that once you turn 73 right now, that's when supposedly you need to start taking out required minimum distributions from your pre-tax retirement IRA.

However, there's also something known as a required beginning date, the RBDs where you are not required to take out your distribution in the year that you turned 73 but you are required to begin those distributions by April 1st of the year after you turned 73. So let's say you turned 73 this year like I did.

Now, it makes tax sense to absolutely take out my required minimum distribution at the end of this year. But that required minimum distribution will be based on the ending balance of my IRA as of December 31st 2023. So I will take out money. Now, however, my required beginning date to take out that required minimum distribution is April 1st of the year after I turned 73. So I really do not have to take out my RMDs until April 1st of 2025. Now, the reason that I don't want to wait is if I postpone my RMD until 2025 I still have to take out another RMD for the year 2025. So it never ever, in most cases makes sense to defer it till April 1st of the year after you have turned 73.

So the question has to be, why do you need to know that? Because when you inherit a pre-tax retirement account, you need to know if the decedent was required to be taking their RMDs. So were they, did they die on or after their RBD date? Their required beginning date? If the answer to that is yes, you fall into a whole different category. If the answer to that question is no, they died before their RBD, then you fall into a different category.

So let's just try to break this down first. I want you to ask yourself two questions.

Are you ineligible, designated beneficiary or not? Yes or no. So, are you a surviving spouse, a minor child of the decedent? Are you less than 10 years younger than the decedent or possibly older than the decedent? Are you chronically ill or are you disabled? Circle yes or no.

Second question.

Did the decedent die before their required beginning date? Remember the required beginning date is April 1st after the year when the decedent turned 73.

Yes or no.

Now listen to me closely here because this is really where it gets interesting.

I am 73. I am choosing to take out my required minimum distribution this year. But my required beginning date is not till April 1st of next year, 2025. If I died this year. If I died in January, February March of next year, even if I took out my RMDs, I died before my required beginning date.

Therefore, if the decedent dies before their required beginning date, even if they had taken out RMDs, then the answer to the question, did the decedent die before the required beginning date matters? So if they did, then you put, yes. If they did not, you put no.

Also remember everybody starting in 2035 RMDs will start at the age of 75. OK.

So if you answered yes to the first question, remember what that first question was. Am I an eligible designated beneficiary if you answered yes to that question.

And if you answered yes to the second question as well, which was, do you remember, did the decedent die before their required beginning date?

If you answered yes to both those questions, then you have the ability to absolutely choose what you want to do with the inherited IRA.

You don't have to worry about all the things that I'm about to talk about. You have the ability to stretch your distributions over your entire life expectancy. If you want to do that, you get to do what you used to be able to do prior to 2020 when the Secure Act came into play.

So you have all these choices, you can stretch your distributions over your entire life expectancy, which is a big deal, especially if you are younger. Now, remember just because you may choose to stretch your distributions based on your life expectancy. If you need more money than that, you can take it out at any time you want.

But you are simply able to do something that the majority of the people inheriting money besides a spouse, obviously can no longer do.

Fabulous, right?

So if you are an eligible designated beneficiary and the decedent died on or before the required beginning date, besides being able to stretch it over your entire lifetime, which again, the majority of you will choose for whatever reason you don't wanna do that, you don't have to, you then just abide by the 10 year rule, which says the money has to be wiped clean in the 10th year after death. If somebody died, that left you, the inherited IRA in the year 2020 it has to be wiped clean by 2030.

If somebody left you an inherited IRA in 2024 this year, it's gotta be wiped clean by 2034. If you choose that method, the great part about being an eligible designated beneficiary whose decedent died prior to the RBD date is, you get to choose which one of those methods you wanna do tremendous advantage.

However, if you answered, yes, listen closely. Now, if you answered yes, that you are an eligible designated beneficiary.

But no to the second question, meaning that the decedent did die on or after the RBD date, then ready, you only have one choice mandatory. You have to stretch the distributions over the longer of the beneficiary's life or the decedent's life. If the decedent had already started taking RMDs after the RBD date and leaves the IRA to somebody who's younger than the decedent, then that beneficiary has to stretch the distributions over their life because it's longer.

However, let's say the decedent was 35 years of age or 80 years of age or whatever and left it to somebody who's 90 years of age, then that beneficiary would have to stretch it over the decedent's life span. So again, if you are an eligible designated beneficiary and the decedent died on or after the required beginning date, then the beneficiary has to stretch it over the longer whichever is longer of the beneficiary's life or the decedent's life.

So next, if you answer no to both questions, one and two, you're a non eligible designated beneficiary where the decedent died prior to the RBD, the required beginning date, then yours is actually pretty simple. You have one choice and one choice only to take the money out of the inherited IRA. And that is you are subjected to the 10 year rule only. That's it.

Your choice. You can let it sit there for 10 years. But by the 10th year after death, you have to wipe it clean. You can take money out every single year. If you want, you can do anything with it within those 10 years. But by the 10th year, you need to wipe it clean.

Just some advice to you. I would not let it sit there for 10 years. Remember, these are pre taxed accounts I'm talking about. I would not let it just sit there for 10 years. And then all of a sudden you have to take it out in one lump sum unless it was a very small, small inherited ira that won't affect your tax bracket. So depending on the amount of money that is in the IRA, when you inherit it, make an intelligent decision that if it's a lot of money take it out every year. So by the 10th year it's gone, if it's not going to affect your tax bracket or it's a small amount of money, if you want to, you can leave it in there all 10 years to grow, tax deferred.

Next. If you answered no to question one and if you answered no to question two as well, then you are a non eligible designated beneficiary where the decedent died on or after the required beginning date. If that is you, then you have to do two things. You first have to stretch the distributions over the longer of the beneficiary's life or the decedent's life, whichever one is longer chances are, that's gonna be your life plus the account has to be wiped clean in 10 years. You have to do both. Again, you can take out more during those years. You can do it any way you want, but you have to take out at least the amount of money according to your life expectancy over your life or the decedent's life.

There is a third category as well and that is called a non designated beneficiary.

Remember a designated beneficiary is when somebody actually names a person who's going to inherit this retirement account. A non designated beneficiary is if the owner of the retirement account named a charity named their estate named a non see through trust. So they didn't designate an individual, they designated a charity, their state or a non see through trust.

So that's known as a non designated beneficiary. And recently a woman just wrote me and believe it or not, I think it was her grandfather, right, designated the, his estate to be the beneficiary of his retirement account.

Because if it's a non designated beneficiary, believe it or not, the rules are different and you may find yourself in a situation where somebody didn't put down a beneficiary or they just said because they couldn't decide my estate. So here's what applies to you. If it is a non designated beneficiary retirement account.

If the decedent died prior to their RBDs their required beginning date, then you have got to withdraw that money over five years. So a five year rule only applies to you. The woman who wrote in said, I'm so confused. Why would there be a difference when I'm the beneficiary of the estate? Because they didn't name you directly. So you have five years from the date of death to wipe that account clean, period. Obviously, you could do it before them. But by the fifth year after death, they die in 2024 in 2029 that account has to be wiped clean.

However, if the decedent now listen to me closely here because this is actually an advantage if the decedent died on or after their required beginning date because again, if they had, then she would not have to take it out over the five years. She would be allowed to stretch it over the decedents, life expectancy. That is how she would have to take it out.

All right, this is what you need to know. This is a master class on pre-tax inherited Ira S and other retirement accounts. But chances are they're going to all be an Ira. So now that, you know, all of this, I need you to write in your questions about any Ira that maybe you've inherited or that you don't understand in regards to this topic, right?

In your question, you only have till Wednesday of this coming week to do so. If KT chooses it, we'll answer it on the air. However, you have got to include, are you a non eligible, designated beneficiary? Are you an eligible, designated beneficiary? Did the decedent die on or after the required beginning date? You have to tell me those things for me to be able to answer your questions directly. You just can't say I just inherited an IRA. I don't know what to do with it in today's world.

Now, you have to know your situation and this master class today, I hope has defined it very clear for you. All right.

Until Thursday, there's only one thing that I hope you remember when it comes to money and it is this people first, then money, then things and if you stay safe, you stay knowledgeable, you take the time to understand everything you need to know about your money. You take the time to understand everything you need to know about money that you are going to inherit. Then guess what? You will be unstoppable.