On September 16, 2021, Sand Hill CIO Brenda Vingiello, CFA joined the CNBC Halftime Report panel once again and discussed what positive catalysts investors canread more
What Happens After Inheriting an IRA or Roth IRA?
The Individual Retirement Account (IRA) first came into existence over four decades ago, followed in 1997 by its lesser known sibling, the Roth IRA. Fast forward to present day, as the original owners of these accounts continue to age and eventually pass away, these valuable retirement planning vehicles are steadily transitioning into Inherited IRA and Inherited Roth IRAs. For the millions of people named as beneficiaries of these accounts, there is often confusion about what happens after they inherit the retirement assets. Presented below is a breakdown of important current rules for Inherited IRAs/Roth IRAs.
Let’s first address Traditional (or “Regular”) IRA assets. If the beneficiary is the decedent’s spouse, then the surviving spouse can take full ownership of the IRA assets as if they were his or her own and then treat it that way going forward. For any other person or entity named as beneficiary, the IRA assets must be distributed into a newly created Inherited IRA.
The next step is to determine if the original IRA owner was over the age of 72 at the time of death. If yes, then a current year Required Minimum Distribution (RMD) must be satisfied prior to transferring the assets into either the spouse’s IRA or an Inherited IRA. The distribution amount of this final RMD is based on the life expectancy of the original account owner.
For Inherited IRAs, the new owner will be required to completely draw down the balance of the account by December 31 of the 10th anniversary of the original owner’s death. This a significant change from prior law, which allowed distributions to be made over the lifetime of the Inherited IRA account owner. The SECURE Act of 2019 instituted this new 10-year rule, and it also pushed back the Required Minimum Distribution age for Traditional IRAs from 70 ½ to 72. Importantly, whereas previously RMDs were required annually from an Inherited IRA account, the new 10-year rule means the Inherited IRA account owner can draw down the account at any point in those 10 years, and even defer any distributions until the 10th year, as long as the account is fully distributed by the end of that 10th year.
For Inherited Roth IRAs, mandatory distributions are also required and the same 10-year rule applies. All distributions from an Inherited Roth IRA are income tax free to the account owner and assets that remain inside the Inherited Roth IRA continue to grow tax free during those 10 years. Note, traditional Roth IRAs are not subject to Required Minimum Distributions, but Inherited Roth IRAs are.
With the aggregate value of retirement assets in the U.S. continuing to increase, and with the Baby Boomer generation continuing to age, it is no surprise that Inherited IRAs and Inherited Roth IRAs are becoming more prevalent. In particular, for those many non-spouses named as beneficiaries, it is important to understand the impact that this can have. Your Sand Hill Wealth Manager is ready to work proactively with you and your tax professional to plan for your unique personal circumstances.
Source: Internal Revenue Service
Articles and Commentary
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All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.