Podcast Episode - Suze School: What You Can and Can’t Do With Inherited IRAs

For this Suze School, we get a detailed lesson about the new rules from the IRS. Specifically, what you now are allowed to do when you inherit money in an IRA.  We’ll learn about how the new regulations determine when you have to start withdrawing money.  Plus, Suze shares how she was inspired by Celine Dion’s performance at the opening ceremony for the 2024 Olympic Games in Paris.

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Podcast Transcript:

Suze: July 28th 2024. Welcome everybody to the Women and Money podcast as well as everybody smart enough to listen.

Well, how was your week last week? Were you watching the markets? Were you watching your technology stocks? Were you watching them go down, down, down, down and then kind of up? But the market's down big and then all of a sudden Friday ends up big.

So we all got used to, in my opinion, to stocks, especially the technology stocks just going up and up and up and we were so afraid of missing out, right? So afraid. And you just wanted to jump in with everything you had because you wanted to be part of that. But as soon as they start to go down big time, now you get afraid and now you don't do anything. That is why dollar cost averaging is absolutely so essential. I firmly believe from the bottom of my heart that the key to a successful investor is, they invest via dollar cost averaging.

That doesn't mean that you only buy when a stock is going down. But it means that if you have a specific sum of money that you don't put it all in at once, you put a little bit in. If the stock continues to go up, maybe you put a little more in and a little more, but you leave enough out so that it would last you at least a year for investments. So if you had $12,000 to invest, maybe you would put $1,000 in one month, maybe the next month another $1,000, then another $1,000. But you wouldn't have to do it always on the same day.

Or you have that money there and when things happen, like it happened a few days ago, that's when you go in and you buy, that's when you really love dollar cost averaging because it could bring the cost of what you have purchased down so that there's more of a chance of you making money in the future.

But now most of you were writing me saying, I need to sell, I want to sell, I can't take this anymore. Listen, if you can't take it and you're losing sleep at night over it, maybe you shouldn't be in it at all. Or maybe you should have faith in the investments that you do have so that you just don't even watch them. Maybe you've invested all the money that you possibly can into these investments. You don't have any more money to dollar cost average into it. Then what do you do? Then you just sit tight, just sit tight because good stocks will come back. Might not come back for a year or so. But you just stick with it unless something has happened to make you think, that isn't a good stock anymore, that I just want to get out, whatever it is, but you just stick with it.

It was also in my opinion, a good lesson on why you can't put 100% of your money into technology stocks. You should be in defensive stocks, in some pharmaceuticals. If you look at the seven ETFs that I mentioned in January and you looked at how they performed last week, they actually went up from 8% a month ago to finishing almost 13% up since January. That's a great return.

But they were real estate, they were communications, they were everything. Now, if you go to the Women and Money app, you will see the ETFs that I recommended back then. Now I may change some of those. So those were the ones back then. But I want you to take note of the diversification and if you're in them, I want you to stay in them until I tell you not to. But do you see what I'm saying?

We were not all in tech. In fact, I think only one ETF was about tech. The rest were all over the place and yet we still made money. And I can tell you for those people who invested in those seven ETFs, they weren't losing sleep over it. They felt secure.

So please don't be one of these investors that I call an all-or-nothing investor. They put all their money into individual technology stocks and they brag about how much money they are making and on and on. They have no other investments. That's it. And then all of a sudden last week happens. Now, I'm not worried about it, but you know, it is possible that last week can happen again and it can last a long time. So it could take a long time for these stocks to recover. Then what are you doing in the meantime?

So that's why you have to be invested, not necessarily diversified all across the board, but you have to be somewhat in different areas of the market that are also favorable besides just technology.

All right, before I go on to Suze School, I just have to say, did you see Friday night? The ending of the Olympics. Now, it ended with Celine Dion singing a song by Edith Piaf. That was not an easy song to sing and I'm sure there wasn't a dry eye anywhere in that stadium or at home for those people who know what Celine has been through.

I suggest, because I'm sure you all saw it, I suggest you all watch—I think it's on Amazon—*I Am Celine Dion*. You should watch that because you should see. And this just came out about a month ago, this documentary, you should see what she has been through over the past few years.

She had this dream that she would perform again, even though she really couldn't. Singing, she could barely talk at times. She would go into these, um, convulsions or whatever it was that made her body absolutely rigid. And it was just horrible to see really because you felt for her. And to see her, in a really relatively short period of time, do something that I'm sure nobody thought—especially if you saw that documentary—that nobody thought she would ever be able to do again.

But you admired her because she would work out every day and she would try singing and she would just try and try and the great Celine couldn't do it, couldn't do it. Well, I got news for you. She sure did it this last Friday night for the whole world to see.

I can't even imagine what that felt like for her. I can't imagine. But it also makes me think—here's a woman who had a dream and she wasn't going to stop until that dream became a reality. And it didn't matter if it didn't become a reality, at least she was trying.

And I started to think how many of us have a dream, or how many of us just kind of want to do something that's maybe a little difficult, and maybe we try it once or we try it twice and then we just give up. We do not stick with it until that dream becomes a reality.

And then I started to think—what if we did stick with it and our dreams did become reality? And they didn't have to be big dreams. They could be little dreams. Maybe for some of you, it's a dream of, I have an eight-month emergency fund. Maybe that's your dream. Or I'm totally out of credit card debt. Maybe that's your dream. Or I wanna invest and I wanna understand how to do it and I wanna learn about this—and that's your dream. Or whatever your dream may be.

I want to buy a home—whatever it is. What are you doing to really make that dream a reality? Because all I know is I have never been so inspired as I was watching Celine Dion sing on Friday night. Oh my God. So I just wanted you all to think about that in your own life because truthfully, oh, I'm thinking about it in my own.

You know, I still think sometimes I even give up way too soon of trying something. No, it hurts. No, I cough. I this and that. I'm not gonna give up again. Are you ready to go to Suze School?

Ok. This is a little bit of a technical one, but one that you really, really need to understand.

On July 18th, the IRS—believe it or not, only took them four years—anyway, the IRS finally answered the question regarding distributions that happened to affect the beneficiaries of anyone who inherited an IRA from someone who died in 2020 or later.

So if somebody dies—now this affects you—but if somebody died 2020 or later and left you a retirement account, you inherited it, there has been total confusion over the rules and regulations on some parts of it. So again, this confusion has been going on for four years now. And finally, we have an answer from the IRS.

So first of all, make sure you get out your little Suze notebooks because you're gonna start to need them.

All right, let's just go back in time a little bit so that you can understand the confusion that has been caused when a law changes. Before 2020, if somebody died and you were a beneficiary—let's say you weren't the spouse—but you were a beneficiary of their retirement account, one of the ways that you were able to choose to withdraw the money from the retirement account was something called the life expectancy method or what was known as a stretch IRA.

And the reason that most people other than a spouse chose to withdraw money under the stretch IRA methods is that most people years ago didn't have their money in Roth IRAs, which could be withdrawn in most cases tax-free. Most people were inheriting—and still inheriting to this day, because you're not listening to me—they were inheriting traditional IRAs or retirement accounts where the distributions are taxable as ordinary income.

So before 2020, to lessen the tax burden rather than taking out large sums of money over a short period of time, if they were able to stretch the withdrawal over their life expectancy, that would help them with the tax burden tremendously. It was a great advantage to people other than a spouse.

Now, you hear me say "other than a spouse" and the reason is when a spouse, even today, inherits an IRA—a retirement account from her deceased spouse—she can roll it over and take it on as her own. She can do all these things with it. That was true before 2020 and it's still true to this day.

So I just want you, however, to make sure that you understand the terminology that you are about to hear me say, so you understand how these new rules apply to you. You're going to hear me say quite a few times terms like "non-EDB beneficiaries," which stands for non-eligible designated beneficiaries. So you're going to hear me say that, and I just want you to know what I'm talking about and how probably the majority of you out there are non-EDBs.

So these are like specific terms that are used to describe different types of beneficiaries that I'm about to tell you for an IRA. And if you can understand these terms, then you'll know which one applies to you when you inherit an IRA. So, are you ready?

Suze School... Anyway, a beneficiary is simply a person or an entity such as a trust or charity that is designated to receive the assets in an IRA after the owner's death. Write that down.

An eligible designated beneficiary or an EDB—again, eligible designated beneficiary or an EDB—is a specific type of beneficiary who could take advantage of more favorable distribution rules when it comes to inherited IRAs, just that simple.

Now, who is an EDB? An eligible designated beneficiary or an EDB can be:

• a spouse of the original account owner,
• a beneficiary who is disabled or chronically ill,
• a beneficiary who is not more than 10 years younger than the original account owner,
• and also minor children until they reach the age of majority or up to the age of 26 if they're still in school.

Now once again, a spouse who is an eligible designated beneficiary—they have the most benefits of anyone out there, as I told you just a few seconds ago.

But besides a spouse, if you are an eligible designated beneficiary, then the main benefit to you is that you can still do things such as a stretch IRA, which could help you tremendously on your taxes. So if you meet any of those things that I just said, when you inherit an IRA, you still get to do a stretch IRA. And if you're the spouse, you can do a whole lot of other things as well.

All right. Non-eligible designated beneficiaries—or a non-EDB, it's just easier to say that—which most of you probably are on some level, is a beneficiary who does not meet the criteria to be an eligible designated beneficiary or an EDB. Got that?

You're just somebody who is not a spouse, you're not critically ill, you're not those things—you're a daughter, you're maybe a sister, who knows, right? But that's a non-eligible designated beneficiary.

Listen to me closely now. For non-EDBs, the SECURE Act that came into effect 2020—the SECURE Act requires the entire account balance of an inherited IRA to be withdrawn within 10 years of the original account owner's death.

So simply what they're saying to you is: they have gotten rid of the stretch IRAs. That's simply what it says. Ok?

You also just should know that a designated beneficiary is just simply a beneficiary who specifically is named on the IRA beneficiary designation form. And this can include both EDBs and non-EDBs. Because being a designated beneficiary means nothing. What means something is if you're a non-eligible designated beneficiary or an eligible designated beneficiary—that makes all the difference in the world.

All right. Have you had enough already? Maybe so. But now that you have that, let's fast forward to December 2019 when the SECURE Act was passed. That put an end to the stretch provision for most non-spouse beneficiaries or non-EDBs. Ok?

The new regulations stated that for non-eligible designated beneficiaries who inherited an IRA from someone who died 2020 or later, they had a maximum of 10 years to wipe the inherited retirement account clean—even if the retirement account was a Roth IRA.

Now, I just want to say something here. That's not that difficult to understand. But you need to know that if you have 10 years to wipe a traditional inherited IRA clean, you would not want to wait till the 10th year. Because even though you got deferral on that money, the growth of that for those 10 years—if you have to draw out a large lump sum in the 10th year—you're gonna be hit by big time taxes. So you would want to take it out year after year after year just to make sense.

Unless you're smart and you've been listening to me and your family has been listening to me—and if you inherited a Roth IRA—then if you didn't need the money, you would just let it sit there until the 10th year, let it grow tax-free, and in the 10th year, you could take it all out tax-free. Just something for you to think about.

The confusion came when you inherited an IRA and the owner of the IRA died at or after the RMD date was to begin. What is the RMD date? Required minimum distributions. And required minimum distributions are required to start where you take out money from your IRA April 1st after the year that you currently turn 73, or starting in a few years, 75. A few years ago, it was 72.

So the question that was confusing everybody—and the IRS could not give them an answer—is starting in 2020, did the beneficiary need to continue to take the RMDs or did they have 10 years from the date they inherited the account to withdraw all the money in there?

So you had people who inherited an IRA from somebody who should have been taking required minimum distributions, and the question was: did the beneficiary need to continue to take those required minimum distributions, or could they have 10 years from the date they inherited to simply wipe the account clean?

Well, for all these years, the IRS has not been able to answer that question. So nobody knew what to do. Because nobody knew what to do, those people were allowed—who didn't have an answer to that question—they were allowed not to take RMDs out of an account that the IRS may rule they needed to take them out.

Well, guess what? The IRS ruled that you have to start taking RMDs out. It is final now. And you have to start taking RMDs out by 2025—it's when you have to start taking out RMDs on that inherited IRA.

So there were people that weren't taking those RMDs out for a matter of, let's say, three years. But the IRS said, don't worry, because the IRS has stated that there will be no penalty and no requirement to make up those missed distributions.

So we all got a break there if we should have been taking them out and we didn't. However, here's what you need to know. Let's say you inherited an IRA in 2021 that fell under the requirements that you had to take out the RMDs. But you didn't. Remember—even though you're not going to be penalized for it and you have to start doing it starting 2025—you only have till 2031 to wipe that account clean.

So you might actually be in this situation where you want to take out more than the RMD requirement so that you're not hit with a large tax bill in another six years. I hope that was clear to all of you.

You might want to listen to this podcast over and over again just so you can be clear. But we now have the true regulations of what you can and cannot do with inherited IRAs for any owner of that IRA who died in 2020 or later.