Podcast Episode - One Mistake You Can’t Afford To Make With an Inherited IRA

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On today’s episode, Suze gives a brief overview of what happened in the economy this past week.

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Podcast Transcript:

00:00:34

Suze: July 31st, 2022. And yes, KT and I are back from the fishing trip. And Thursday, on Ask KT and Suze Anything. We will tell you all about it. But I did it. I fished. It was the best thing I ever did, and I'm just so, so happy I went for it.

00:01:03

Suze: So that's your update for right now.

00:01:06

Suze: But a lot happened in the week that we were gone.

00:01:10

Suze: The Fed's raised interest rates again. So what does that mean to all of you? Well, it means a few things. While you can expect higher interest rates on your credit cards, on loans, not necessarily by the way, higher interest rates on home mortgages.

00:01:28

Suze: Because really, the interest rate on home mortgages are directly affected by what the 10-year Treasury note is doing. So we actually saw a little bit of a decline in mortgage interest rates, but you know what else you can expect everybody? You can expect higher interest rates on what?

00:01:49

Suze: On your savings accounts. Whether they are at banks or credit unions. Now, obviously, you know, that this podcast, the Women & Money podcast, is sponsored by the Alliant Credit Union. You also know that you can open up the Ultimate Opportunity Savings Account at Alliant by simply going to my Alliant.com.

00:02:19

Suze: And if you just deposit $100 at least and then you put in $100 every month thereafter, at the end of 12 months they will give you $100. The way it works, really, you can listen to the end of this podcast and you will hear all about it. However, so many of you, in fact over $400 million credit union since we started this.

00:02:49

Suze: But the good news is, I'm gonna let a little secret out. I hope they don't get mad at me is tomorrow August 1st. They are raising the interest rate again to 1.4%. Fabulous. Right. You know when we first started this, it was at .60%. And during the time we started it, it was one of the highest interest rates that you could find anywhere.

00:03:16

Suze: And as the Feds continue to raise interest rates, Alliant Credit Union has stuck right by all of you, and has gone up as well. So just saying, you might want to check it out. Alright. Obviously, even though the Fed's raised interest rates, the market went up fabulously last week and actually it's been going up for a while now.

00:03:42

Suze: But I don't want all of you to think this is it, it's going straight up from here like it did in March of 2020. I don't think so. I think you're going to see it go up, I think you're going to see it continue to go down, back up again. But it's not all bad news right now when it comes to the market. The real thing, and I've told you this before, you all have to watch, which will really dictate what happens to this market,

00:04:12

Suze: will be inflation.

00:04:16

Suze: And while inflation seems like in certain areas it's coming down, it's really not coming down fast enough in energy, as well as food. So we just have to be careful here still, but you'll continue to dollar cost average, and everything over the long run will be fine in terms of Series I Bonds, my absolutely favorite,

00:04:40

Suze: favorite topic of all time for this year. It is not impossible that come November, you could see a 10, 11 or 12% renewal rate come November 1st. So let's just watch what's happening there, and if you haven't taken advantage yet of Series I Bonds, I'm like really alright, I just have to divert here for a second.

00:05:06

Suze: So we're at this lodge in British Columbia,

00:05:10

Suze: And it's fabulous. I mean it took us forever to get there. Like 13 hours. But you land on this little pod in the middle of nowhere, your helicopter lands there because it's the only way to get there is on a little helicopter, and there's about 20 people in your lodge that all eat together,

00:05:32

Suze: and are together. Our party was myself, KT, KT's sister, her husband, our two nieces and nephews, so there were six of us and four of our friends Scott and Katie Mitic and their two kids, Dylan and Tyler and so there were 10 of us and all of us go way back and love each other and there are 10 other people besides us.

00:06:01

Suze: Now. Those 10 people, many of them were actually financial advisors from a very major financial firm. And I knew who they were,

00:06:14

Suze: and they obviously knew who I was. But we really didn't talk at all until the last day.

00:06:22

Suze: And I'm sitting there the last day, and we're waiting because we can't get off the island, because the fog now has come in, and the helicopter can't land. So for three or four hours, all of us just sat around in a room talking. And little by little, one by one, they would come up to me and they would go Suze we love you. We didn't want to bother you. We just want you to know that we follow you and so on and so forth. And I said to them,

00:06:51

Suze: yes but are you all investing and telling your clients to invest in Series I bonds? And you know what every single one of them, I'm not just talking about one or two, every single one of them that I talked to said to me, what are they? How do they work?

00:07:12

Suze: Not one of them knew about Series I Bonds. Like are you kidding me? Are you just absolute kidding me? But the reason that I tell you this story is that so many times financial advisors that you go to really only concentrate on stocks and ETFs and mutual funds, and ways to get your money to grow. Well I personally don't know a better way at this point in time with

00:07:40

Suze: inflation being so high, to get your money to grow other than Series I Bonds. So get with the plan everybody. Series I Bonds. Treasurydirect.gov. Listen to the April 17th podcast, the May 12th update on it. And again, I think it was last Thursday's quizzie, actually it was July 21st. I should know because that was KT's birthday quizzie on gifting I bonds. Are you kidding me? Okay.

00:08:08

Suze: That's what I want to say. I just want to say one other thing which is, I'm not loving XLE . I know I've told all of you in the past. and when it was a whole lot cheaper if you want to just buy an ETF that takes advantage of energy and oil do, XLE. I'm not loving it as much. I still like Devon the individual stock DVN, that pays a fabulous dividend.

00:08:37

Suze: All right, that's all I have to say about that.

00:08:41

Suze: I want to talk however, today’s Suze School, I wanted to be on inherited

00:08:49

Suze: traditional IRAs or 401ks. And the reason that I want to do that is just the other day,

00:08:57

Suze: I was looking through my emails to prepare for Thursday's Ask KT and Suze Anything, and a woman wrote in and said Suze

00:09:07

Suze: I inherited an IRA from my father, I think she said in the year 2013, and now I'm afraid because I hear the laws have changed for inherited IRAs. Am I okay or am I not? Now she was fine. She didn't have to worry. But that made me realize, oh my God, there are many of you

00:09:33

Suze: out there that really don't understand how the laws have changed since the end of 2019 on inherited IRAs or 401k S. Now I'm talking about traditional IRAs or 401ks, or 403Bs or TSPs. Traditional meaning, they had never paid taxes on that money

00:10:02

Suze: versus Roth retirement accounts where that is after tax money.

00:10:08

Suze: They work very very different on this topic than traditional inherited retirement accounts.

00:10:18

Suze: So I realized that it is probable that not only do you not know what recently has been happening, but I would bet my bottom dollar

00:10:28

Suze: that your advisors don't know either. Because I was then going through the Internet and looking at certain financial firms websites, and they have not updated the confusion about inherited retirement accounts from 2020 till today.

00:10:52

Suze: And the reason that it's so confusing, is that because the IRS itself keeps changing the interpretation of the Secure Act that was passed at the end of 2019.

00:11:11

Suze: Now there are approximately, I think 275 pages of this act.

00:11:19

Suze: and they don't have a clue how to interpret what this act actually meant and means today. So stick with me here for a little bit so I can give you a history

00:11:35

Suze: of what the confusion happens to be.

00:11:40

Suze: When the act was first passed,

00:11:44

Suze: essentially it said, or it was interpreted to say,

00:11:49

Suze: that anybody who died from 2020 on,

00:11:55

Suze: okay, that when anybody other than a spouse inherited that IRA, they could no longer do a stretch distribution over the beneficiary's lifetime.

00:12:14

Suze: Example.

00:12:17

Suze: Prior to 2020, your father died. Let's just say he died in 2017.

00:12:26

Suze: And he left within a retirement account,

00:12:31

Suze: that he hadn't started to take distributions from yet, he left you $500,000 in that traditional retirement account. And you are relatively young.

00:12:45

Suze: You were 30 years of age. And now you inherited that. Again. We're not talking about spouses, we're talking about anybody other than a spouse. So you inherited that, you were able to stretch the distributions from that inherited IRA over your entire lifespan if you wanted to.

00:13:12

Suze: And the reason that you would have wanted to, is because you then would not have to pay a lot of taxes, because the distributions would be little every single year for the next maybe 50 years. So your tax bite on that would be relatively small.

00:13:33

Suze: And many people chose to do that.

00:13:38

Suze: However, starting with anybody who died in 2020 or after,

00:13:46

Suze: and they left their traditional retirement account to a beneficiary other than a spouse,

00:13:54

Suze: the Secure Act stated you could no longer stretch it over your lifespan. You had to withdraw it in 10 years. That was the longest period of time that you could leave the money in there.

00:14:13

Suze: Now when it was first interpreted, it was interpreted of, okay, I just inherited this traditional retirement account.

00:14:24

Suze: And I don't have to touch it for 10 years, but in the 10th year I have to withdraw it all and wipe it clean.

00:14:34

Suze: Now maybe you would choose to do that, because just maybe you were, let's say, 60 years of age when you inherited this retirement account.

00:14:45

Suze: And you knew that you were going to be retired at the age of 70, and your tax bracket wasn't going to be that large anymore, and maybe you didn't inherit that large of an amount of money, and you thought you were gonna wait for 10 years, and in the 10th year, wipe it clean and pay taxes at that time.

00:15:06

Suze: And many people thought that. Obviously, you could always take out as much as you want prior to that, you could take it out in any way that you wanted. but the rule was that within 10 years, it had to be wiped clean, and you had the option of waiting to take anything out till the 10th year.

00:15:29

Suze: So that's how it was originally interpreted.

00:15:34

Suze: Then in March, approximately March of 2021,

00:15:39

Suze: they changed that.

00:15:42

Suze: They absolutely changed that interpretation.

00:16:00

Suze: And what they then said was, that no, you cannot wait till the 10th year to withdraw it all, you have to start making annual distributions, listen closely to me now everybody. Annual distributions, starting in the year after the person died that you inherited the IRA account from.

Suze: So if they died, let’s just say in the year just let's say 2020, in 2021 you would have had to start withdrawing contributions.

00:16:50

Suze: In 2021, 2022, to 2023, all the way up to the year 2031,

00:16:59

Suze: were in the 10th year, whatever was left that you hadn't distributed to yourself, would have had to be wiped clean so that the account would be totally empty.

00:17:12

Suze: Now I know this may sound complicated, but you have got to understand what I'm saying here. And the reason that you've got to understand, is because any amount that you need to take out of a retirement account and you don't, there is a 50% penalty tax on that. That's 5-0% penalty tax.

00:17:41

Suze: So we have to be clear on what the law is, and how does it affect you.

00:17:48

Suze: Now...

00:17:50

Suze: In I think it was May of 2021. They revised it again. And they said no, no, we're interpreting it that you don't have to do that. And then they redid it again and said, no you have to do it that way. So currently, as I'm speaking to you,

00:18:13

Suze: which is July 31, 2022, the current interpretation of this law is, you have to start taking distributions out the year after the person died whose IRA you inherited.

00:18:32

Suze: If and only if that person started taking their RMDs by April 1st after the year they turned 72.

00:18:45

Suze: So if the interpretation stands, and they will not know until the end of this year,

00:18:53

Suze: but if it stands,

00:18:55

Suze: if you had somebody that died in 2020,

00:19:01

Suze: and they were taking RMDs at the time of death, and they did not withdraw their RMD for 2020.

00:19:10

Suze: And you did not take out that RMD in 2021.

00:19:16

Suze: You could very possibly owe a 50% penalty on the amount of money that you should have taken out in 2021. Please know that spouses, this includes you. But it usually only applies for your deceased spouse's year of death, but for everybody else, here is what I want you to do.

00:19:42

Suze: I want you to wait until the end of this year to see what the final interpretation is going to be of the Secure Act.

00:19:53

Suze: If it comes out that you needed to take out money in 2021 and you did not,

00:20:02

Suze: you are to go to your tax person,

00:20:05

Suze: and you are to file form 53-29,

00:20:10

Suze: and you are to take out two withdrawals. One for 2021, as well as one for 2022. And hopefully that will help you avoid

00:20:24

Suze: the 50% penalty on what you should have taken out in 2021. Now I am hoping that the IRS is smart enough to realize that there is more confusion on this matter than ever before, and so they'll put in a safeguard for you and not penalize you.

00:20:45

Suze: Now maybe you want to just wait and see what the final interpretation is at the end of this year. Hopefully I can let you know, because maybe you don't want to take money out right now.

00:20:58

Suze: Now, I get that this is confusing. So I just want to be perfectly clear, and make sure you understand the difference between those that are inheriting a traditional retirement account, that has not had RMD started, and those that have. So let's just be clear. For those of you who inherited

00:21:24

Suze: a traditional retirement account in 2020 or later, where the owner of the account who did not need to take RMDs, you have 10 years till you have to wipe the account clean. You can take it any way you want. A little here, a little there, or you can wait for 10 years.

00:21:46

Suze: But for those of you who inherited a traditional retirement account in 2020 or later, from someone who had started taking RMDs for they had reached the age of 72, and they started taking those RMDs by April 1st after they turned 72, if the current interpretation of the Secure Act holds,

00:22:13

Suze: you have to continue taking RMDs starting the year after the owner died for 10 years. According to your life expectancy. And then in the 10th year, December 31st of the 10th year, you have to take out whatever money is left in that account.

00:22:38

Suze: So let's just see what actually happens, and how they're going to interpret it. You know this originally started with what was called the IRS publication 590-13. For those of you who want to just research things on your own. But it's really horrible. It's just horrible

00:23:02

Suze: that they can't decide, what does the law that they created actually mean.

00:23:10

Suze: So that's what you need to know about inherited traditional retirement accounts. For those of you who are smart enough,

00:23:21

Suze: not only to listen to the Women & Money podcast, but to also only have done Roth 401ks, Roth IRAs, whatever it may be. When you die, or if you have inherited

00:23:38

Suze: after the year 2020, if you have inherited a retirement account that is a Roth, you do not have to worry about this because Roth IRAs don't have required minimum distributions. So this is not your problem.

00:24:01

Suze: Just remember, with an inherited Roth, you can leave your money in there for 10 years, and not have to worry about RMDs.

00:24:13

Suze: But in 10 years after the death of the owner, and again this is for everybody other than a spouse, you have to withdraw all of it, but that's okay for whatever you withdraw is tax free. So who cares?

00:24:30

Suze: Just remember everybody, that the five year rule still applies, even to inherited Roths. So educate yourself on how that five year rule works, by listening to the February 6th podcast of 2022.

00:24:50

Suze: So that's why I'm also bonkers, not just on Series I bonds, but that's why I am bonkers on Roth retirement accounts. Because I have said to you over and over again. As the government gets into trouble, and they are in financial trouble, they are having to save this, and save that, and fund a war, and they're in deficits and they're doing all of these things,

00:25:17

Suze: and they owe so much money, where do they get that money to pay back what they owe? Well they know how much money you have in retirement accounts. They change things like, the inherited rules where they got rid of the stretch accounts so they could get money faster.

00:25:37

Suze: Then they said that you could wait 10 years but now they're saying probably not on inherited IRAs with the RMDs  that had already started, so that they can get money faster. But when you are in a roth retirement account, and they can't do anything that affects what's in your account, because what you see is what you get. So can all of you again

00:26:02

Suze: just think twice about why you would not be doing a Roth IRA, a Roth 401k or 403B, A Roth TSP. Are you kidding me everybody? So

00:26:17

Suze: that is the Suze School for today. Now you may need to listen to this over and over again. Fine. I think I was pretty clear on it.

00:26:28

Suze: But you have to understand this because a lot of us are getting older,  a lot of us may inherit now from our parents that are definitely older.

00:26:41

Suze: And you just want to know whenever you inherit a traditional retirement account you know what the rules are so that you don't fall into a penalty situation. Alright everybody, so until Thursday when Miss. Travis is going to join us, she is going to tell you everything about things that happened on this trip. I'm going to let her do that.

 00:27:08

Suze: But until then, there's really only one thing that I want for all of you. And that is for all of you to stay safe, strong, smart and secure. I want all four of those things for you. So until then, take care. Bye bye.

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