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Inheriting from a loved one

Inheriting from a loved one

May 30, 2023

Did you inherit money from a loved one as a result of COVID or other recent death? 

If the money you inherited was an IRA, 401k or other retirement-type account from a non-spouse (mother, father, aunt or uncle, grandparent, etc,) you may want to be aware of some special rules that affect you. We can help you sort out the tax and penalties that may be involved with your inheritance.

Legislation passed after the outset of COVID-19 changed how required minimum distributions (RMDs) were done on inherited accounts.  Prior to 2020, if you inherited retirement-type monies, you had to take out RMDs but the amount withdrawn was based on your life expectancy and could be drawn out for many years.  That made it fairly easy to control the tax burden of those inherited accounts.

When the Secure Act was passed, the rule was changed so that all of the inherited retirement money needed to be withdrawn within 10 years. Yikes - that could cause some serious tax implications! Some people interpreted this to mean that you could wait until the 9th year and 364th day if you wanted - and others thought it was 1/10 of the money every year.  There was quite a bit of confusion.

Secure Act 2.0 was recently passed to clear up the confusion and here's how it affects you:

  • if you inherit retirement money (IRA, 401k, 403b, etc.) that has already been having RMDs taken out by the decedent, you will need to take RMDs out for the next 10 years and then completely liquidate the account by end of year 10.  
  • if you inherit retirement money (IRA, 401k, 403b, etc.) that has NOT had RMDs started - the owner was not yet RMD age - you are not required to take RMDs and can time your withdrawals when you want as long as the account is empty by the end of year 10. 
  • if you miss an RMD or don't withdraw as much as you should, you are subject to the tax due AND a 20% penalty. If you can correct it within 2 years, your penalty can be reduced to 10%.

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When money is held in a traditional retirement account, the individual has been allowed to put the money in "pre-tax" - meaning that no tax has ever been paid. 

Required Minimum Distributions (RMDs) are the government's way of saying "it is time to pay some tax."  The owner needed to withdraw some money and pay tax if they were over a certain age and you, as heir, do as well - at some point over the 10 year period.  

You don't have to be afraid of this. It can actually be quite painless IF you know the right strategies and timing to use. We help people with this all the time and would be happy to help you as well.  

Please accept our sympathy as you have lost someone dear to you...and please accept our help to preserve as much of their hard-earned money as possible. We can help!