Navigating Inherited IRAs | Ziad Hijazi
Gerber Kawasaki Wealth & Investment Management
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Navigating Inherited IRAs?
By: Ziad Hijazi
Inheritances can be hard to manage. Not only can it be difficult to process on the emotional side, but it also can be tough to properly move the assets and manage the proceeds after you’ve received them. When navigating retirement accounts, tax laws can make things complicated very quickly. As a part of the SECURE Act in 2020, there were many changes made to inherited retirement accounts, specifically when beneficiaries are required to distribute funds. These recent changes have led to a lot of confusion, which is why the IRS recently gave out final guidelines on what is required from beneficiaries. With these new guidelines providing the added clarity that many have been waiting for, I want to break down some of the important considerations and conditions to keep in mind when managing distributions from your inherited IRA.?
Inheriting an IRA BEFORE 2020?
If the original owner of the IRA passed away before 2020, then you are required to take distributions every year based on life-expectancy tables posted by the IRS. Many people take advantage of this, by “stretching” their inherited IRAs, only taking the required minimum distribution (RMD) and then investing and growing the rest throughout their lives.?
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Inheriting an IRA AFTER 2020?
Because so many people were “stretching” their inherited IRAs, the government wasn’t collecting as much taxes from inherited retirement accounts as expected. So, per the changes from the SECURE Act in 2020, if you are inheriting a retirement account from somebody who passed away after 2020 you are now required to take out the entirety of the account within 10 years after the death of the original owner. In short, the recent changes clarified whether you are still required to take distributions each year, or if you can wait and take the entirety of the funds by the 10th year.??
If the original owner of the retirement account was already taking RMDs, then the beneficiary is required to take distributions each year, as per the life-expectancy tables posted by the IRS. If the original owner of the retirement account was NOT taking RMDs or if the retirement account was funded by Roth dollars, then the beneficiary can wait if they would like. They only are required to distribute the entire account by the 10-year mark.?
If you missed taking distributions, the amount you missed will be taxed at a 25% tax rate. However, since the updated guidance for the SECURE Act was just announced, any accounts inherited after 2020 will have penalties waived from 2020 through 2024. Starting 2025, it’s important to make sure you are reviewing and distributing from your inherited IRA accordingly to avoid those penalties.?
Inheriting a Spouse’s IRA?
If you are a spouse inheriting a retirement account, you have a unique opportunity to merge the retirement assets in your own IRA. The funds must move from like-to-like accounts, so Pre-Tax funds must move to a Pre-Tax IRA, and Roth funds must move to a Roth IRA. However, once the accounts are merged, you simply treat the funds as you would your own IRA. There is no 10-year distribution period and you are not required to take RMDs unless you reach age 73 and older.?
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There are also a few other exceptions to keep in mind when inheriting retirement assets. If a beneficiary is minor, disabled/chronically ill, or an entity (instead of a person) there are separate conditions that apply to their case.?
With all this being said, IRA rules can still be extremely complex. What are you required to take out? What makes the most sense for your situation? How should you be investing your IRA? What are the tax implications of your distribution? What should you do with the funds once they are distributed? These are all tough questions to answer, and you shouldn’t have to do it alone. As advisors, we are here to help you with this and so much more. Planning around inheritances, especially from retirement accounts, can get complicated and you don’t want to make any mistakes. If you or someone you know is working through an inheritance, reach out to us! We’re happy to walk through your situation and needs and come up with the best recommendation possible for your situation.?
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Gerber Kawasaki Wealth & Investment Management is an investment advisor located in California. Gerber Kawasaki Wealth & Investment Management is registered with the Securities and Exchange Commission (SEC). Registration of an investment advisor does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Gerber Kawasaki only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Gerber Kawasaki Wealth & Investment Management 's current written disclosure brochure filed with the SEC which discusses, among other things, Gerber Kawasaki Wealth & Investment Management's business practices, services and fees, is available through the SEC's website at: https://www.adviserinfo.sec.gov .?
Ziad Hijazi is a Financial Advisor of Santa Monica, California-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately ~$2.6B billion in assets under management as of 12/31/23. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss. Readers shouldn't buy any investment without doing their research to determine if the investments are suitable for their situation. “All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results."?