Inherited IRA Distributions: Pre SECURE Act [Video]

by Financial Design Studio, Inc. / May 9, 2023

The rules around Inherited IRAs are complex. If your loved one passed away AFTER 1/1/2020 and the SECURE Act, then this video is for you! We break down the different beneficiary types, what you are required to do, and the options you have available.

Hi, I’m Michelle Smalenberger, a fee-only financial advisor at FDS. If you’re looking for videos on financial topics, you’ll want to be sure to subscribe to our channel!

Today’s topic is Inherited IRAs for a person who passed away BEFORE 1/1/2020.

The main points we will cover are

the facts you need to know
The strategy for deciding how to receive funds you’ve inherited.

What Inherited IRA Rules Apply?

But before diving in, you need to find out what Inherited IRA rules apply to you. If you inherited your IRA before 1/1/2020 then you’ll want to keep reading this information. If you inherited your IRA after 1/1/2020 then you’ll want to watch our video we put together explaining Inherited IRA Distributions after 1/1/2020.

Today, we are talking about Inherited IRAs that you received from someone who died before 1/1/2020. This means that someone owned an IRA, they passed away, and said they want you to have these funds when they are no longer living. It’s important to understand that you have to do something with these funds and there are some deadlines you have to follow. Missing a deadline could mean up to a 50% penalty on the funds you should have withdrawn.

But that’s why you’re watching this video…to save you from making any mistakes and avoiding any costs unnecessarily. If you step back and think about this for a second, you are inheriting money from someone who wants you to have it! So let’s be sure to do it right. We have noticed that many new clients coming to us have financial professionals that can’t tell them the rules they need to follow. And I am the first to say that this topic can be really confusing. That’s why we are here to bring clarity to what you need to do so you can confidently act on that.

IRA Distribution Options

Once you’ve inherited your IRA and you know it was before 1/1/2020 you can decide what to do. You have a few options:

Move the funds to your own account: This option is ONLY for a spouse! The benefit to you with this choice is that you can take the required minimum distributions out over your lifetime. If you’re younger than your spouse who passed away you could stretch the required distributions out over a longer period, potentially lowering the taxes you’ll pay by doing so.

Move the funds to an inherited account: When you move funds to an inherited IRA you do need to start taking required minimum distributions (RMD). This means you have to take a small portion from your IRA each year and pay taxes on the amount. You DO NOT have to spend this money! We have another video that talks about what you can do with the money you take as an RMD.

Take a full distribution for the total amount of the IRA: Now this option could make a very large impact on your taxes and overall financial situation so you need to be very careful and be sure to receive guidance from a financial advisor if you choose to do this. You need to confirm that you’re aware of the taxes you’ll owe if you do this.

Disclaim the account: If you disclaim this account that means you are not going to take the money. You’re letting it pass on to the other beneficiaries. You don’t get to decide who that is going to be. But if you have all the financial assets you need then this could prove to be an important consideration as part of your financial plan.

What if There are Multiple Listed Beneficiaries?

Some people ask “What if there are multiple beneficiaries on an IRA?” If you’re one of a few beneficiaries it can get complicated. But it also can be simple if it’s handled right. If you are one of a few beneficiaries then you need to consider the facts and strategies for what to do with your portion of the account. So if there are 4 equal beneficiaries you’ll receive 25% of the funds. In the easiest scenario you each receive your portion and now can decide for yourself how to act. In the most complex scenario you’re a beneficiary through a trust and other factors get considered so you may be told how much you receive each year with no say over the timing, amount, or taxes withheld.

Considerations for the strategy that might make sense for you:

Know what your financial situation looks like. Do you know if you’re on track or have the assets you’ll need to reach your goals? It’s hard to make this decision without being aware of this first.
Do you need this money? If you have a plan for yourself then this will help to answer this question.
When do you need funds from this account? If you’re young and don’t need funds from this account for a long time then it’s important to plan how you’ll let this account grow and manage the RMDs you have to distribution each year.
When can and should you pay the tax on any distribution? Tax Planning becomes really important if you need this money to last for your lifetime and that will be for many years to come.