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How your spouse handles an inherited IRA can shorten—or extend—your children’s tax-deferred growth.
I read, but did not comprehend the article (link below) which I received from Morningstar this morning, but think it may be of value to others.
Bottom line for me is I will inform my wife this morning that after my death she should not do anything with my traditional IRA until she discusses this issue with our estate attorney.
PS Does anyone else despise the term Kids as my wife and I do? Our progeny are children, not the byproduct of goats.
https://www.morningstar.com/personal-finance/ira-decision-that-affects-your-kids?utm_source=eloqua&utm_medium=email&utm_campaign=MorningDigest&utm_content=None_73639&utm_id=38375
I had thought when the kid inherit an ira they can take distributions over 10yrs
we are both taking rmds now. age 76,75
am I wrong
I don’t think so.
I am more than a little surprised by how many believe punting this to an estate attorney will provide your heirs with the advice they need to make the best financial decisions with inherited IRAs? Unfortunately, I have now gone through this scenario from several very unimaginable angles and I can tell you that I have yet to talk to an estate attorney (of which I have talked to four) who can provide any form of good IRA advice. That is not what they do! They provide a legal structure and the hopefully the enforcement of that structure for your assets. Not tax and or investment advice. Frankly, they could care less about the assets, except that they can get paid. CPA’s have more experience but here again I have experienced a very wide range of knowledge and received some very poor advice more than once. Fortunately, I did not accept their answers and kept asking questions, doing more research, and found a very good CPA, eventually. Talk to your CPAs now and run through scenarios that pertain to you and determine if they can respond? Hopefully, you have a partner who WILL NOT accept the easy answer – especially if they are on the young side (< 67) or on the old side (>80) with heirs that may be involved in some of the decisions and who will eventually inherit the IRA. Can your CPA answer: What is a BDA IRA? What is a good example of when a spouse should do a BDA IRA? When might it be an advantage for heirs? If they don’t know what a BDA IRA is or can’t answer quickly the advantages of a BDA IRA, run! If they immediately say, “You should never do that, your partner should roll it into their IRA,” without at least preferencing your and your partner’s ages and/or asking you more questions about your partner’s tax rate after your death and your heirs potential needs, Run! Please consider thinking of this seriously before your death so that your partner and heirs aren’t at the mercy of attorneys and CPAs who do not have sufficient IRA tax and financial planning experience.
Children yes
It looks like, since children over age 18 are not an “eligible designated beneficiary,” the distribution is 10 years until 12-31 of the 10th year after death. BUT the difference is if a person has not started RMDs, the 10 years has no minimum, but if RMDs have started, the beneficiary must use the single life expectancy table (for themself), until the last year when the account must be emptied.
This is for when the surviving spouse rolls the other spouse’s traditional IRA into their own.
Just make sure you’ve named beneficiaries and that they are the ones you want named.
I have tried to understand the IRS explanation of how inherited IRAs must be distributed. My take on the rules suggests that the yearly required minimum distribution for young beneficiaries is based on the age of the beneficiary, not the IRA owner who died.
Note that if the IRA owner had not taken their RMD for the year, the beneficiary will have to take the amount the IRA owner would have for the year in which the IRA owner died. In subsequent years I understood the beneficiary’s RMD would be calculated using the beneficiary’s age with the requirement that the account be emptied by December 31st of the 10th year after the IRA owner’s death.
Distribution rules are more generous if the beneficiary is close in age to the IRA owner who died. Different provisions apply when the IRA beneficiary is under 18 years of age, and there some complicated rules that pertain to IRA beneficiaries who are not actual people. There are also some trusts that are fashioned in a way to take advantage of favorable IRA distribution schemes.
As I am not an accountant, lawyer, or IRS enrolled agent, I could be mistaken. I heartily agree with the advice to contact an expert when setting up your estate plan and when inheriting an IRA.
I have one further gripe about the Morningstar article. The article assumes that the spousal IRA beneficiary is female. I am quite sure a male who inherits an IRA from his spouse has the same decisions to make.
Wow, great example that the U.S. tax code is exhausting!
Mind twister. The most important thing about all this, is be sure to put your spouse as the beneficiary, and whoever dies first, again be sure to have the beneficiaries you desire. As both my wife and I are already taking RMD’s the money that makes it to the children, will have 10 years to disperse. My take, that is a good thing to have.
Seems like one of the main points was that if the IRA is rolled into the surviving spouse’s (vs. keeping as beneficiary IRA), then when the kids inherit it, they may have longer before they’re required to take distributions.
Yes – But if your partner is under the RMD age and at a lower tax rate following your death, they can take distributions at any age without penalty and may want to consider getting some of the money out of the IRA before they have to take big fat RMDs and get thrown into a higher tax bracket. Why pay the IRS money they could use sooner or save for heirs in a less onerous tax structure than a traditional IRA! They can always roll the BDA IRA into their own IRA down the road.
So then the BDA is only useful if you’re under 59.5?
I looked up the article, and wow, that’s complicated. We have an estate attorney, a trust (that then flows into our daughter’s trust once we’re both gone), and a local fiduciary as the successor trustee, so she’ll have all the advice she needs.
If I’m understanding it correctly, a key variable that’s hard to predict is whether you/your spouse dies before RMDs are required. Once that happens, it seems like most decisions are already made. I guess if the surviving spouse disclaims the inherited IRA, that changes the time line a bit. But I wonder how many people are really in a position to do that. Makes my head hurt.
https://www.morningstar.com/personal-finance/ira-decision-that-affects-your-kids
Dana,
You and others may find a 2025 post by Dr. Jim Dahle, founder of the White Coat Investor, titled Disclaiming an Inheritance: How, When, and Why an interesting read on the many reasons why disclaimers are filed and also why they are so rare.
Best, Bill
Bill, thanks for the link. That was an interesting article. It also reminds me that I need to do something about our timeshares in our estate plan. I had it on my to-do list but then this home purchase/moving stuff got in the way.
(I may write an article about this once it’s done, but right now I’m leaning towards walking away from one of them and putting the other into our trust. Stay tuned…)
I’ve listened to the White Coat Investor podcast, specifically to listen to an episode with a doctor who’d written a book about “loving” your timeshare. I got and read the book and it was quite good.
Can an heir disclaim part of an account?
My understanding is yes if the state specific rules are followed and the disclaimer is filed timely. Dr. Dahle’s post in the above linked post lists six key general aspects for a disclaimer to be valid.
I think the need to file a disclaimer could often be eliminated with appropriate planning and action during life.
DrLefty
I have been reading financial information for decades and consider myself pretty capable of breaking down fairly complex information. However It would probably take me at least half a day to sit and untangle this web, but I have no interest. This is why I wrote about my wife contacting our estate attorney. This is a case where the attorney earns every penny of their high fees.
I remember many years ago buying and reading Estate Planning for Dummies. I could have saved my money because it pretty much boiled down to one sentence, repeated often: You need an estate law attorney because this is all too complicated for “regular” people to handle on their own.
My husband is an attorney, and we still paid an expert to do this for us. She’s also a CPA and really knows her stuf
No, estate attorneys are the worst! Especially, with IRAs and how they will apply to the unique financial situations that your heirs’ inherit when you pass. Even finding a CPA with on point knowledge is very difficult. Do not leave this to a novice spouse and whoever drafted your estate docs. Please!!!!!
Thank you for this post. Yes, the first sentence in my instructions to my family is to do nothing until they consult with a CPA.
How I wish Congress simplifies all these retirement vehicles into one: health, retirement, and education with an upfront tax exemption for contributions and everything else is tax free. Wrap it up with a catch-all estate tax.
David, I had the same thought as you while reading the article this morning, that Chrissy should get advice before making any changes.
I preferred to call the kids, ankle-biters, but I now realize the term puts them on the same level as Sophie the Wonder Cat😸