A Great Option for Inherited IRAs
James A Saling CIMA, CPWA, SPFA, AIF
Often when someone's Parent or family member, or even a friend, plans well for their own retirement, you find, indeed, they did not run out of money before they died. Certainly not a problem for them. However, the family member, who is not a spouse, may have a problem when they inherit the remainder of the IRA, especially in their highest earning years.
The IRS has recently issued guidance on proposed regulation around beneficiary IRAs. Proposed regulation does not have to go through congress. It is issued by the agency itself. Therefore we expect this to be in force this year. It says that, already, the ability for inheritors to stretch the IRA distributions over your lifetime has disappeared. Everything must now be removed from the beneficiary IRA within 10 years (as taxable distributions). Further guidance confirms that there will ALSO be a required minimum distribution (RMD) every year until full distribution. That means the entire IRA will be made taxable over that 10 years at your highest ordinary tax rate.
This opens a window for a great idea for people who inherit beneficiary IRAs but do not need the money currently for income. Since the IRS guidance says that you MUST take distributions for RMDs now AND must have it all out within 10 years, use that. Take the money out and spend it! The key to this strategy is, don't increase your budget in the process. Make additional DEDUCTIBLE contributions to your 401(k) and/or IRA if you can (don't forget allowable spousal contributions for non-working spouses) to the maximum allowable amount. If you are making Roth 401(k) contributions you may wish to switch those to deductible contributions for the distribution year to get more deductible wiggle room then move them back to Roth contributions in later years. Remember you have 10 years to complete this strategy so maximize as much as you can as early as you can.
This will "wash" the taxable distributions with the tax deductible contributions in essence making it as if you did not have to take the RMD at all! When you retire and ultimately take retirement distributions, if you have done proper planning, you may be in a lower tax bracket AND have benefitted with higher deferred savings having effectively moved the IRA into your 401(k).
If you would like to explore this or other strategies for your retirement planning, savings or distributions call our office at 614-841-1881 or e-mail me at James.Saling@SalingSimms.com