How to Protect Every Dollar of Your Inherited IRA!

Video Transcript

Ray Hrdlicka – Host – Attorneys.Media

Hi, this is Ray Hrdlicka, host of Attorneys.Media – “In the News”.  And today we’re going to talk about a news article that came out that said, Hey, be careful, you might lose 25% of your inheritance on an IRA.

Now, the Fear Factor gets attention more than anything, of course, but it caught my eye, so I read about it, and now we’re talking with estate planning attorney, Andrew Dósa, in Alameda, California, and Tacoma, Washington.  He’s an expert in estate planning, so I wanted to ask him this question.  What’s about, what’s this whole thing about potentially losing 25% of your inherited IRA?

Andrew Dósa – Estate Planning Attorney – Tacoma WA and Oakland, CA

Right.  Well, thanks for asking me the question, Ray.   The new rule is this, that, well, let’s back up.  Let’s do a little bit of a broader look at IRAs.

In the past, it had been the situation that you could identify a beneficiary and they would have almost an unlimited amount of time before they would have to withdraw the funds.

So for example, if you had a 50-year-old child and you passed away, they would be able to allow that money to continue to ride tax-free in the structure of the traditional IRA or the Roth IRA.

And they would not have to withdraw until they had reached retirement age.  So that could be a 15-year period if it was 65 that they’d retire before they’d have to withdraw.  So the amount of money could continue to grow.  And again, it would grow without a tax consequence for the person withdrawing it until the withdrawal.

So the IRA rules got changed so that now an adult child has to take all the withdrawals out within 10 years.

And now the wrinkle is that once you, once you begin to take, once you have an obligation to start withdrawing the funds, you have a minimum amount that you’re required to take out.

And now the rule is this, that if you fail to take the minimum amount, there can be a penalty that is imposed against you.  And previously, the federal government had been comfortable waiving that penalty, but now there’s an indication that waiver will no longer…be permitted.

And so there is going to be some penalty that comes along.  And the maximum amount of that penalty could be 25%.  And there are all sorts of technical rules and requirements about why and how and when.  But yes, you are correct.

If you fit into the right category, which is probably not the majority of people, you could lose, you could get a 25% penalty for failure to withdraw the minimum amount required in the year when you have an obligation to do that.

Ray Hrdlicka – Host – Attorneys.Media

That’s just, that’s just thievery in my mind.  But, you know, I understand it, it’s trying to force an action and create behavior.  So let me just clarify.  So in this 10-year period, it begins upon the beginning of, begins at the inheritance state, you know, when, when someone passes away, that’s when the 10-year period begins is triggered.

So let me ask this clarifying question here.  The IRA has to be completely depleted from the date of the inheritance, is that it?

Andrew Dósa – Estate Planning Attorney – Tacoma WA and Oakland, CA

Well, the way it works is now that when someone who has an IRA passes away, the beneficiary has an obligation to withdraw the full amount in the account within 10 years.

And there are three significant exceptions.  The first one is the spouse.  That’s the good news.  I mean, the whole point of the IRA was for when someone had a spouse and they obtained an IRA, it was that they and or their spouse could gain the benefit of the tax deferred gains.

The other two exceptions are for minor children and disabled children.  So if you’re an adult child, that’s when you’re, that’s when you are among the blessed, those who have to take you within 10 years.

I will also say it doesn’t bother me too much.  If you had a parent that had given you half a million dollars in an IRA, and you were going to have to get taxed on it, seems to me you’d have way more after you got taxed than you did before you had any money.

So generally, it’s a benefit to be a designated beneficiary.  So it’s a small problem that you have to be taxed.  But remember, the full balance that is in that account has had the tax deferral for over the life of that IRA.

So remember, the IRA was established to help people create their own retirement plans to assist their own retirement plan so they’d have something.

And of course, if you did it with pre-tax or post-tax dollars, whether it was a traditional IRA or a Roth IRA, you still get benefits.  And there are ways that you can actually extend that really dramatically.

So if you have a tax consultant, that person is the one who can best give you directions.  A CPA would probably know it better than an estate planning attorney, but not always.

And certainly if you have worked with an investment advisor and they’re the one getting you involved with the IRA, they’ll be able to tell you all the nuances and the best way that you can maximize the benefits of the IRA.

Both one, you as the person who’s created it, and then you as the person designated as a beneficiary who’s receiving the full benefits of all the wisdom and smart thinking and advanced thinking by the relative that is identified…identified you as a beneficiary.

Ray Hrdlicka – Host – Attorneys.Media

Well, thank you for explaining the structure of that, because that’s important.  Nobody wants to make a mistake and lose money in a penalty, especially if that penalty is going to be enforced and not waived, as you say it had been in the past.

Andrew Dósa – Estate Planning Attorney – Tacoma WA and Oakland, CA

Right, sure.  And I’ll just say, I’m sorry, I’m cutting off, but there’s also the tax consequence from the withdrawals.  And then you add that to the penalty and it becomes really a double hit.  I mean, remember, you’re better off if you had $1,000,000 and you were in a 20% bracket, who’d want to write a $200,000 check?

On the other hand, how much time do you need to live before you would run out of $800,000?  So it’s not a bad problem to have, but why would you want to add penalties?