With the passing of Memorial Day, we’re now entering one of the most glorious times of the year: summer.
School’s out, Redding pools are open, backyard barbecues commence, and wedding season is about to go full tilt (something to get tax-minded about).
It seems strange that a holiday meant to remember those who have given their lives in service to our nation is the day that heralds fun times… then again, maybe it’s the perfect way to commemorate them.
However you spent the day, it seems appropriate more than ever that we remember what heroism really looks like.
Also, a quick reminder for you if you’ve been living overseas… June 17 is your deadline for getting taxes filed. Yes, you’ve still got a few weeks to wrap things up and submit your forms, but as I say often to my Redding clients during the regular tax season… better done sooner than last minute. If you need help finalizing things, you know where to find me:
While you’re thinking about summer fun, I’m thinking about how to save you money on taxes. That seems especially useful when a lot of life changes are happening.
One particular life change you don’t always expect is someone passing away. And when you become the inheritor of their assets, there are some things taxwise that you’ll need to consider and plan for. For today, let’s talk about that specifically in relation to becoming an IRA beneficiary…
Dennis Fritz’s Tax Saving Strategies for an IRA Beneficiary
“The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.” – Jean-Baptiste Colbert
Inherited IRAs are on the rise. This is largely due to the Baby Boomer generation starting to reach their later life stages and passing on their stored wealth. Now, it used to be the case that you could withdraw the required minimum distributions (RMDs) for this account over the course of your own life expectancy.
But thanks to the SECURE Act, the time period for RMDs has boiled down to a much shorter period. Now, you typically have to withdraw the entire IRA balance within 10 years of the original receipt of the inheritance. However, just recently, the IRS and Treasury decided to give one more year of time to make that withdrawal (how generous).
Now, despite that extra time, the obvious problem here is that faster withdrawals can translate to higher tax bills, especially if the IRA you inherit holds a significant sum.
And, whether your IRA beneficiary status comes because of loss, disability, or a change in family circumstances, if you’re an IRA beneficiary, you’ll need to make sure you understand the tax considerations that come along with receiving that kind of windfall.
Due to a recent IRS ruling, beneficiaries generally won’t face penalties for missing RMDs in 2024, provided the original IRA owner died in 2023 and was already subject to them. This is a temporary relief measure, and the 10-year rule for withdrawing the entire IRA balance will still apply, with standard enforcement resuming in 2025.
Unfortunately, a significant portion (around 70 percent of non-spouse beneficiaries) are still unaware of RMD rules in general. Missing deadlines after the extension period ends can still result in a hefty 50 percent penalty on the undistributed amount – a major tax headache!
If you don’t want to get stuck with a larger tax bill when you’re not expecting it, then you’ll need to be intentional about making it work on your behalf instead of the IRS’s. Now, I will outline a few strategies here, but if you want to talk about things more in-depth, you can always schedule a time with me here:
So, if you’re one of my Shasta County clients who recently became an IRA beneficiary, here are some strategies to consider for managing your inheritance tax efficiently:
Leveraging trust strategies: Trust strategies can be a great tool for an IRA beneficiary. For instance, a conduit trust can inherit the IRA and distribute funds over a longer time frame based on the trust’s age, potentially reducing your tax burden. Trusts can also be useful for spreading out distributions to multiple beneficiaries or protecting assets from creditors. However, trusts can be complex, so consulting with an estate planning attorney is crucial to determine if one is right for your situation.
Qualified Charitable Distribution: Inherited IRAs offer unique tax advantages for charitable giving. While you can’t deduct the donation itself, a Qualified Charitable Distribution (QCD) allows you to transfer up to $100,000 directly to charity each year, reducing your taxable income. This maximizes your charitable impact and minimizes your tax burden. Consult a tax advisor to see if a QCD strategy is right for you.
Maximizing tax-free gifts: The IRS lets you give away 18K per person each year without any gift tax hassle. This can be a great strategy if you inherit a big IRA and are worried about estate taxes. Let’s say you inherit 200K and are in a high tax bracket. By strategically gifting some of it to loved ones over a few years, you can lower your overall tax burden.
Retirement savings contributions: Inheriting an IRA can be an opportunity to jumpstart or accelerate your own retirement savings. Consider contributing a portion of the inherited funds to your own IRA or employer-sponsored retirement plan (like a 401(k) if your employer allows rollovers from inherited IRAs). This offers a double benefit: you’ll reduce your current taxable income by contributing to a tax-advantaged account, and simultaneously grow your retirement savings for the future.
And if you’re over 50, you’re eligible for higher “catch-up” contributions to your retirement accounts. This allows you to contribute an additional tax-deductible amount on top of the standard yearly limit.
Some factors to consider when making decisions…
- Age: Younger beneficiaries may benefit from stretching out RMDs over a longer period, while older beneficiaries may need to withdraw funds more quickly.
- Tax Bracket: Understanding your current and future tax bracket will help determine the tax implications of different withdrawal strategies.
- Financial Goals: Consider how the inherited IRA fits into your long-term financial plans, such as retirement savings or future inheritance goals.
We understand that each IRA beneficiary situation is unique and requires some thoughtful consideration to being well-positioned for tax filing. But we can help you create a plan and manage your inheritance in the most tax-efficient manner.
And if you know this could be a possibility in the near future, we can still sit down and discuss what to potentially do if you find yourself an IRA beneficiary.
In your corner,
Dennis Fritz
