An Option for Inherited IRAs
Insights from OSAP Member Jim Saling, CIMA®, CPWA®, CPFA®, AIF®
Often, when someone's parent or family member, or even a friend, plans well for their own retirement, they find that they, indeed, had 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 Internal Revenue Service (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 and therefor is expected to be in force this year. It says that, already, the stretch IRA has disappeared.
Everything must now be removed (taxable distributions) from the beneficiary IRA within 10 years. Further guidance confirms that there will also still be a required minimum distribution (RMD) every year. That means that the IRA will be made fully taxable over that 10-year period and at your highest ordinary tax rate.
This opens the window for a great idea for people who inherit beneficiary IRAs that do not need the income currently. Since IRS guidance says you must take distributions for RMDs now AND must have it all out in 10 years, use that. Take the money out and spend it! But don’t increase your budget. Make additional contributions to your 401(k) in the same amount as a deductible contribution up to the maximum contribution for your 401(k). That will wash the taxable income with the tax deduction essentially deferring the money from the Beneficiary IRA as though you never had to take the distribution in the first place. If you bump up against that maximum because the beneficiary IRA is larger, you can spread this strategy over as much as 10 years.
Also, if you are making contributions to your 401(k) as a Roth contribution, you may want to change that to a deductible contribution to give you some extra room. When you retire and ultimately take the distributions from the 401(k), if you have been strategic in your retirement planning, you may be in a much lower tax bracket and will have benefitted from the tax deferred growth as well. This can save thousands in the right planning situations.
If you would like to explore this or other strategies for your retirement planning, saving or distributions call our office at 614-841-1881 or email me at James.firstname.lastname@example.org. To learn more about Saling Simms Associates, OSAP's titanium partner, please select this link.