Inherited beneficiary traditional IRAs… What they used to be and what they are now

Five Things You Should Know

1. Equity Markets – fell this week with U.S. stocks (S&P 500) down -2.16% and international stocks (EAFE) down -2.61%  
2. Fixed Income Markets – moved lower this week with investment-grade bonds (AGG) falling -1.78% and high yield bonds (JNK) down -1.11%
3. A House Divided – It has now been almost three weeks since Kevin McCarthy was ousted as Speaker of the House and Congress has yet to agree on a replacement. Rep. Jim Jordan was officially dropped as a nominee today following 3 failed attempts, with the expectation that House Republicans will meet on Monday to discuss candidates and attempt another vote on Tuesday. While no clear favorites currently exist, Congress will be motivated to move past gridlock amidst ongoing global conflict and a November funding deadline. 
4. U.S. Imposes Further Restrictions on China – The U.S. has moved to tighten sweeping measures aimed at restricting China’s access to advanced chipmaking gear and semiconductors and thus hampering the global power’s ability to keep pace with cutting-edge technologies and innovation. Amongst other changes, the measures include a requirement that overseas manufacturers working with Chinese chip design firms to gain a U.S. license in order to fulfill orders from those companies.
5. Key Insight – [VIDEO & ARTICLE] This week Dave and Jon take a look at tax law updates and how they impact your beneficiary IRAs.

INSIGHTS FOR INVESTORS

Inherited beneficiary IRAs are typically an emotional topic. Generally, they represent diligent savings from a loved one who has passed away, and you have now inherited an IRA or 401k from them since you were named the beneficiary on the account. This could be a parent, sibling, spouse, or someone else very special in your life. Pre-SECURE Act, which was passed in December 2019 and for decedents who passed away on or before 12/31/2019, this was an easy decision; generally, the beneficiary was: 1) a designated beneficiary who used the “stretch rule,” or 2) you were a non-designated beneficiary, such as a charity or estate, which was under (and still under) the 5-year rule. Overall, the rule under the pre-SECURE Act was straightforward (see Exhibit 1 below):

Source Kitces 8/9/2023

The enactment of “SECURE ACT 1.0” added a new layer. Now, there is a determination of 1) an “eligible designated beneficiary,” which is generally a spouse, a minor, or other known exceptions that are less common, or 2) a “non-eligible designated beneficiary,” which is mostly everyone else (see Exhibit 2).

Source Kitces 8/9/2023

If you are an eligible designated beneficiary, they have their own rules and would recommend consulting your CPA and your financial advisor over this determination, and the rule in SECURE ACT 1.0 remains in place.

However, for everyone else who is a non-eligible designated beneficiary, “the powers that be” said they wanted all traditional and Roth beneficiary IRAs liquidated ten years from the decedent’s passing (so typically 11 tax years). For Roth IRAs, there are no tax implications, and the beneficiary gets 11 years of additional tax-free growth before moving out to a taxable account. For Traditional IRAs, this has created real tax consequences and made it harder to know when the beneficiary should take the distributions from the beneficiary IRA from a tax perspective. Facts and circumstances are different for each, but generally, a plan was decided on how to liquidate the account. At that time, the Government said they wanted the funds out in 10 years but was unclear on “how” they wanted them disbursed.

Enter near the “SECURE Act 2.0” enactment in December 2022… The IRS began publicly discussing the “required minimum distributions” or “RMDs” on these traditional Bene IRAs accounts and why they didn’t see the expected increase in tax revenue. They soon realized the original law did not conclude that accounts of decedents taking RMDs (or ones now eligible if they were still alive) should still be taking RMDs through the 10-year rule above.

In late 2022 and 2023, the IRS provided notice of the “new guidelines” on non-eligible designated beneficiaries. “Good news” is the IRS waived the RMD penalty for FY 2021 and 2022 in October of 2022, given the subjectivity of the law. “Bad news” though the IRS has not concluded on the RMD penalty in the future, they did all additional decision-making for a “non-eligible designated beneficiary,” we need to consider the “required beginning date” or “RBD.” Essentially, this is the date the decedent was or should have started their RMDs (see Exhibit 3):

Source Kitces 8/9/2023

Though the IRS hasn’t provided how long they will provide relief from the RMD penalty (2023 is waived), we encourage you to take out at least the calculated RMD based on the RBD each year to smooth out the tax consequences. However, consult your CPA and your financial advisor to determine what is best for your situation.

To wrap it up, an emotional situation that used to be straightforward is now much more complex and requires planning on what to do with the funds of an inherited IRA. Please see us and see how we can help your situation.

-Jon Heideman, CPA/PFS CFP® and the Ten Capital Team

Data, Just the Data

U.S. Jobless Claims – fell by 13,000 from the prior week to 198,000 on the week ending October 14^th. This was the lowest since January of 2023 and fell well below market estimates of 212,000.

U.S. Housing Starts – rose by 7% MoM to a seasonally adjusted annualized rate of 1.36 million in September of 2023. This rebounded from the upwardly revised, three-year low of 1.27 million from the previous month. Estimates of a sharper 1.38 million starts.

U.S. Industrial Production – in the United States increased 0.1% YoY in September of 2023, following a 0.1% rise in August. Mining surged 3.4%, utilities rose 2%, and manufacturing fell 0.8%.

UK Producer Price Change – decreased 0.1% YoY in September 2023, easing from a 0.5% drop in August and aligning closely with market estimates of a 0.2% decline.

Eurozone Inflation Rate – was confirmed at 4.3% YoY in September 2023, down from August’s 5.2%. This is the lowest reading since October of 2021.