hopkinton-independent-logo2x
Hopkinton, MA
loader-image
Hopkinton, US
7:48 am, Thursday, November 21, 2024
temperature icon 43°F
Humidity 96 %
Wind Gust: 8 mph

SIGN UP TODAY!
BREAKING NEWS & DAILY NEWSLETTER





Professional Insights: Don’t leave your IRA to the IRS

by | Oct 28, 2023 | Business, Featured

If you’ve invested in an IRA for many decades, it may well turn into a key source of income for your retirement. Still, you might not deplete your IRA in your lifetime, especially if you also have a pension or a 401(k) and other investment income. So, if your IRA still has sizable assets after your passing, it would likely end up in your estate plan. If you leave your IRA to grown children or other family members, could they be hit with a big tax bill?

Here’s a little background: Up until the Secure Act of 2019, those who inherited traditional IRAs could extend their required withdrawals over their lifetimes, which stretched out the annual taxes due on these withdrawals. But the Secure Act changed the provisions for non-spouse beneficiaries who inherited an IRA after 2019, meaning that beneficiaries of inherited IRAs had only 10 years (beginning the year after death) to withdraw the entire balance. For some beneficiaries, this could potentially create a tax burden. (Inheritors of Roth IRAs are also required to follow the 10-year distribution rule but are not subject to income taxes on account earnings if the Roth IRA’s five-year holding period has been met).

However, not all beneficiaries were affected by the new rules. Spouses can stretch their inherited IRA distributions over their lifetimes, and exceptions exist for certain non-spouse beneficiaries. Minor children of the IRA owner (until the age of majority), chronically ill or disabled individuals, and beneficiaries who are no more than 10 years younger than the IRA owner may opt to stretch their distributions.

The new 10-year requirement applies to IRAs inherited on or after Jan. 1, 2020. But due to confusion over changes to required minimum distribution (RMD) rules for some beneficiaries of inherited IRAs, the IRS waived penalties for individuals who failed to take RMDs in 2021 and 2022 and ex- tended the RMD penalty waiver for 2023.

Although these rulings give beneficiaries — those not eligible for the exemptions listed above — more time to plan, they will eventually need to start taking RMDs, which could affect their tax situations. To help protect your heirs, consider these suggestions:

• Using permanent life insurance. A properly structured permanent life insurance policy could help you replace the assets your family might lose to the taxes resulting from an inherited IRA. You might even consider naming a charity as the beneficiary of an IRA, rather than your family members. The charity would receive the IRA proceeds tax-free, and the life insurance could then provide tax-free benefits to your heirs.

• Leaving taxable investment accounts to your heirs. Apart from your tax-deferred IRA, you may own other, fully taxable accounts containing investments such as stocks or bonds. Typically, these investments receive what’s known as a “step-up” in their cost basis once they are inherited. This means your heirs will essentially inherit all the gains your investments earned by the time of your passing — but they won’t be taxed on these gains if they sell the assets immediately. This type of sale could help offset the taxes your heirs will incur from the inherited IRA.

The tax and investment issues surrounding inherited IRAs can be complex, so consult with your tax and financial advisors before making any moves. And, as with many areas relating to inheritances, the sooner you start planning, the better.

If you would like to discuss your personal situation with a financial advisor, contact:

Mark FreemanMark Freeman
Edward Jones Financial Advisor
77 W. Main Street, Hopkinton, MA
508-293-4017
Mark.Freeman@edwardjones.com

The advertiser is solely responsible for the content of this column.

0 Comments

Related Articles

Professional Insights: How can business owners plan for an exit?

If you’re a business owner, you always have a lot to do and a lot to think about. But have you put much thought into how you’ll eventually leave it all behind? Even if you’re a few years away from that day, it’s a good idea to create an exit strategy. If you’re...

Professional Insights

Professional Insights: Heating tips to help save money

As temperatures start to drop and the vibrant foliage transforms our neighborhoods, it's the perfect time to cozy up your home for the fall season. It’s important to keep your space warm and inviting, and here are some easy heating, air conditioning and ventilation...

Professional Insights

Professional Insights: Do you need to fear retirement?

If you’re planning to retire in a few years, are you looking forward to it? Or are you somewhat apprehensive? Are you asking yourself: “What sort of retirement can I afford?” It’s a good question — because the answer can make a big difference in your ability to...

Professional Insights

Professional Insights: How should you respond to market cycles?

The movement of the financial markets can seem mysterious — and yet, if we look back over long periods, we can see definite patterns that consistently repeat themselves. As an investor, how should you respond to these market cycles? To begin with, it’s useful to...

Professional Insights
Key Storage 4.14.22