If you have received an inherited IRA or think you will in the future you won’t want to miss this episode. In the retirement headlines segment, we’ll take a look at the proposed changes in regulations regarding inherited RMDs based on the Secure Act of 2020.
In the listener questions segment, we’ll hear from Jim who has a question about rebalancing retirement income buckets. Make sure to stick around until the end so that you understand the best way to manage your buckets in retirement.If you have received an inherited IRA or think you will in the future you won’t want to miss this episode. Click To Tweet
Outline of This Episode
- [1:32] The IRS interpretation isn’t what we thought it would be
- [7:36] An example to illustrate an inheritance scenario
- [10:45] What can we learn from this new rule?
- [14:25] Should you have 5 years of income or 25% of your portfolio value in bucket #1?
- [17:18] Should you rebalance when stocks and bonds are down?
- [18:56] Do Vanguard total bond funds qualify for bucket #1 or #2?
- [22:03] Should you maintain a small list of funds in a portfolio?
The Secure Act of 2020 will change the way RMDs get distributed
The Secure Act of 2020 changed the way that inherited RMDs could be distributed, but the regulations surrounding the rules hadn’t been clarified until now. Normally, I don’t like speculating on what the final rules and regulations will look like, but when Ed Slott from InvestmentNews.com has something to say on a tax matter I pay attention. Ed Slott is one of the top go-to tax experts for financial advisors, so when he publishes an article I take note.
The biggest surprise from the proposed regulations for required minimum distributions was the IRS’ interpretation of how the 10-year rule applies to certain IRA beneficiaries. It is important to note that even though they are still being proposed when they finally do get passed they will be retroactive.When Ed Slott from InvestmentNews.com has something to say on a tax matter I pay attention. Click To Tweet
The 10-year rule replaced the stretch IRA
The new 10-year rule is a replacement for past stretch IRA for the majority of non-spouse designated beneficiaries. Under the 10-year rule, all inherited funds must be withdrawn within 10 years after the death of the IRA owner. The exceptions for eligible designated beneficiaries are surviving spouses, minor children, disabled and chronically ill beneficiaries, and beneficiaries who are not more than 10 years younger than the deceased IRA owner.
The IRS says that RMDs would be required for years one through nine and in year 10 the entire remaining balance in the inherited IRA would have to be withdrawn by the beneficiary. This means that some beneficiaries who inherited in 2020 may have already missed an RMD that no one realized had to be taken.Unfortunately, the new regulations look like they will be less flexible than we originally thought they would be. Click To Tweet
What can we learn from this new rule?
Unfortunately, the new regulations look like they will be less flexible than we originally thought they would be. However, the RMDs for inherited IRAs will look a lot like what we are used to. So, one way to take these RMDs is to take the total value and divide it equally by 10 and take out this amount each year for 9 years. Then in the tenth year, you’ll be left to withdraw the remaining value.
Another important takeaway from the new regulation is that you should always name your beneficiaries. You may want to intentionally leave a percentage to your spouse and the rest to the kids.
Listen in to hear the details of how the new regulations could affect your inherited IRA or your own IRA when you leave it to your heirs.
Resources & People Mentioned
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