In this episode, Al Smith explores the intricacies of inherited IRAs, shedding light on the rules beneficiaries need to consider. From inherited IRAs for spouses to non-spousal beneficiaries, understand how the distribution timelines work and what strategies might benefit you and your heirs. With a touch of personal insights and professional advice, Al provides clarity on a usually complex topic.
Welcome to Retirement Unpacked with Al Smith, owner of Golden Eagle Financial. You want a retirement plan that alleviates your fears about the future so you know your money will last. As a chartered financial consultant, Al Smith will help you find a balance between the risk and reward of the market and the safety of your retirement income. And now, here’s your host, Al Smith.
SPEAKER 03 :
Welcome to another program of Retirement Unpacked. I want to thank you for tuning in. There’s other things you could be doing, but you’re listening to me and I have some good information for you this afternoon. Now, if you’re listening and you’re not driving and you have questions, I encourage you to call in because I’m going to be talking a lot about IRAs this afternoon. Now I know you all know what an IRA is, but I’m going to go deeply into some things about IRAs that you probably didn’t know. IRAs became available in 1974 with a law being passed called ERISA. ERISA stands for Employee Retirement Income Security Act. And at that time, IRAs, you could put in $1,500, and it was only for people who had no retirement plan through an employer or personally. A few years later… In 1981, another act was passed called IRTA, and that’s the Economic Recovery Tax Act. And what that did, it made IRAs eligible for everyone, even for folks who already had a retirement plan through their employer. A few years later, 1997, another act, another law was passed called the Tax Relief Act. And that was the birth of the Roth. And I don’t have the details about him, but there was a representative there. of Congress whose last name was Roth that came up with that. And we have progressed a lot since the original passing of ERISA when you could put $1,500 into your IRA. I’ll give you a breakdown. It was initially $1,500. It went to $2,000 in 1982, went to $3,000 in 2002, It went to 4,000 in 2005. It went to 5,000 in 2008, and then 5,500 in 2013, which I thought that’s kind of a wimpy increase, but they kept that for five years. And in 2019, it was bumped up to $6,000 per year that you can put into your IRA or your Roth, should you prefer that. And in 2023, it was bumped to $6,500. And since 2024, this past year, the limit is $7,000. But they also have what’s called a catch-up provision. And they have the same thing for maximum amounts people can put into 401Ks, but that’s not our topic today. But basically that means if you are over 50, instead of just being able to put in 7,000, you can put in 8,000. And 2025 has the same rule as 2024, $7,000 per year maximum, $8,000 if you are over age 50. And there are some restrictions where you can put your money in order for your IRA. One of those restrictions is you cannot do collectibles. You cannot invest in art or baseball cards or collectible coins. Those are not permitted to be IRA investments. Neither is life insurance. Now, life insurance companies are normally the companies who provide annuities. Annuities are permissible, just like bank accounts, investment accounts, mutual funds, and so things of that nature. And people sometimes ask me about security and one thing or another. Well, there is bankruptcy protection that’s been around since 2005. One million dollar maximum is protected from bankruptcy that is in an IRA. And if the IRA is a rollover, or if it’s part of an SEP IRA, which is a self-employment IRA, or a simple IRA, which are sort of different animals, but they’re both IRAs also, those are totally exempt. They don’t have that million-dollar limitation on them. So that’s something to be noted. Something else, if you inherit an IRA from a parent, a sibling, anyone, those are not protected from bankruptcy. Now, some states, they may have laws that protect an inherited IRA from bankruptcy proceedings, but they’re not protected under federal law. Federal law does protect IRA balances up to $1 million. And if they’re inherited, that’s a different animal. You would need to check what the laws are in the state where you live to determine that. And again, if you’re driving or if you’re listening somewhere, and if you have a question about IRAs, or if you’d like to schedule a time to talk to me in my office about IRAs, my number is 303. 744-1128. And I will definitely be able to carve out some time so we can talk about what your own retirement looks like, whether an IRA is part of that or not. Now, we talked about inherited IRAs as far as bankruptcy, but people often ask, well, what happens when an IRA is inherited? Well, the rules are a little bit complex. If a spouse inherits an IRA, he or she has quite a few different choices. First of all, it could be treated exactly as his or her own IRA and subject to those same rules, the rules of not being able to take money out before age 59 1⁄2 and the rules of required minimum distributions at certain ages, which we’ll talk about when we talk about RMDs. Now, also, an inherited IRA, which is similar but treated a bit differently, that could be established for a spouse. And a spouse could also completely disclaim the proceeds and that way the spouse would avoid the tax and then that inherited IRA would pass on to children. Now this is an option for a spouse and if a spouse were left financially in a very strong circumstance, that’s not a bad idea because that way the tax on those proceeds of the deceased spouse’s IRA, the taxes can be avoided, the money can continue and ultimately benefit children. The last option for a spouse is lump sum. Now, that’s not advised unless the balance is quite small because a lump sum distribution of an IRA is taxable all of it in that year that you take the distribution. Now, if it’s a $5,000 or $10,000 IRA and someone doesn’t have a lot of income, necessarily a big problem. Now, what about if a non-spouse inherits an IRA? Could be a son or a daughter or a sibling or something like that. Well, one of the main rules is the distribution has to be complete out of the IRA within 10 years. All of it has to be out in 10 years. Now, the jury is out on if it has to be taken out uniformly or if you can wait nine years and take it all out at once, which I wouldn’t recommend that, especially if the IRA had a large balance, it would be wiser to take more uniform amounts out each year. But these are some of the things I talk to my clients about because I have a lot of clients who own inherited IRAs from a parent or something like that. And even though they are not older, they are drawing required minimum distributions because those are the rules. so to speak. Now, if a beneficiary is older than the deceased IRA owner, that person who inherits it, he can take distributions based on the owner’s age, which is a bit different. And in the research that I did, in addition to some of the numbers and things that I’ve been talking to you about, they had some interesting information about the savings habits and how many people have IRAs and things of that nature. And in the most recent statistics that they had available, which are from 2011, 43 million people had IRAs at that point. And the balance on all of those was 5.2 million. Now, since that’s 14 years ago, I don’t think they have a number right now, but I would think it very well may likely be nearly double that amount, depending on where those IRAs were invested. Now, any of you who have had statistics, you know the difference between a mean, which is an average, and a median. If you had 100 items and you wanted to take the average value of those items, the mean would be you would add them all together and then divide by 100 and that would be the mean or the average. On the other hand, the median is if you had 100 people and each one of them had an IRA, the one that ranks in the middle 50th, that would be the one to find the median balance of IRAs. And what they determined is that the average IRA balance is $70,000. But the median is only $20,000. And I think the reason for that, there are a lot of people who have IRAs, but there are also a lot of them who have small balances because they may have not contributed a lot or they may be And so the median, that one right in the middle, is substantially smaller. 6.3% of people in the United States have IRAs whose balance is $250,000 or greater, which is good to know because a lot of the financial gurus say, end up talking about the amount that you need in savings in order to have a comfortable retirement. And they’re not talking about $250,000. They’re talking about numbers substantially higher than that. And the last big statistic before we go to break is that 45% of Americans have no retirement assets, no savings or retirement that is linked. No IRA, no 401k, no 403b, no 457, no pension or para. So that’s a large chunk of the population in the United States. And we’ll talk about some more options you may not have heard about for IRA investing after the break.
SPEAKER 01 :
This is your time to shine, to enjoy the rewards for the hard work and sacrifices you’ve made. Al Smith of Golden Eagle Financial knows that a fulfilling retirement is less about your money and more about your time. The better you plan for your retirement, the more time you’ll have to enjoy it. You can enjoy it any way you like. Whether it’s traveling, volunteering, or exploring hobbies, spend it your way. Al and Golden Eagle see time as a measurement of your wealth. But it’s difficult to strategize that for yourself. You need Al’s years of experience to help you evaluate it clearly and to convert that nest egg to a healthy income that lasts. Al thinks outside the spreadsheet, taking into consideration who you are and what drives you, what brings you joy. You’ve worked hard your whole life to enjoy your final years, and Al Smith can make sure you maximize your time in retirement, which is the true measure of wealth. Find out more about Golden Eagle Financial on the klzradio.com advertisers page. Investment advisory services offered through Brookstone Capital Management LLC, a registered investment advisor. BCM and Golden Eagle Financial Limited are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents.
SPEAKER 03 :
Welcome to the second half of Retirement Unpacked. I have good information for you, the second half. Also, we’re talking about IRAs. If you’re listening and you have questions about your own IRAs or a spouse IRA or anything like that, then give my office a call. We can talk about it on the phone or you can come in for a free consultation. My number is 303-744-1128. If you’re driving, contact KLZ when you get an opportunity to use the phone, and they will put you in contact with me. They’re very good about that. Now, the one thing we didn’t talk about, and I don’t have the precise date that it became available, But you can establish an IRA for a non-working spouse. That can be a traditional IRA or it can be a Roth. And the spouse doesn’t need to be working. It can be a stay-at-home spouse to take care of the kids and that sort of thing. But that is one of the options. I don’t have written down the actual date that became available. Excuse me. But that is one of the developments of IRAs over time. Now, when IRAs were established, in addition to the amount you can put in, they established some rules about taking distributions from your IRAs. For many, many years, the age at which people were required to begin taking money out of their IRAs was 70 and a half. And also, there was an unfortunate rule that has since been changed that people couldn’t contribute to an IRA after age 70. And that has changed. So people, as long as they’re working, you could be 90 years old and still contributing to your IRA provided that you have earned income. Well, the RMDs, the original, that stands for Required Minimum Distribution, those used to be required at age 70 1⁄2. And after a number of years, they changed that. They made it more modest. And now… If you were born between 1951 and 1959, you have to begin taking your RMDs at age 73. They got rid of the half, which I think makes sense. If you were born in 1960 or later, you don’t have to start taking your required minimum distributions. until you are 75. And this is helping people to accumulate a larger nest egg. Now one of the things I like to talk to people about is as people move into that phase of their life where they have required minimum distributions, some people, because of inheritances or maybe they’ve invested in real estate, they may not need the money from their required minimum distribution. There’s something called a QCD, which is a Qualified Charitable Distribution. And if you are of the age where you’re required to take a required minimum distribution, you can send all of that or part of it to a charitable institution, a 501c. That can be the church where you attend regularly. It can be some other entity that helps disasters. It could be Samaritan’s Purse, any number of different organizations that is a nonprofit. Now, you can’t take money out of your IRA and put it in your checking account and then write a check. It has to be on a special form, and it has to come directly from your IRA to that charitable entity. And if this is something you’d like to explore further, again, give my office a call. Also, there are some options for early distributions because we know that you can’t take money out of your IRA until you’re 59 1⁄2, but there are exceptions to that. I won’t go through every exception because there’s about 15 of them, but some of them include medical expenses that exceed 7 1⁄2% of adjusted gross income. the purchase of a first home. You will pay tax, but you will not pay that 10% penalty. Disability, you can draw money from your IRA and avoid the penalty. Educational expenses, now these have certain limitations on them, but these are some ways you can get money from your IRA before age 59 1⁄2 without penalty. There is another way just to take distributions without having to pay a penalty. And the tax code on this one is called 72T. And essentially, let’s say if someone is 55 years old and they want to begin drawing money from their IRA because they’re retired. Well, as long as they take distributions uniformly equal amounts each year, they can establish a mechanism where they can draw money from their IRA and pay only regular income tax, not the penalty. And once that person reaches age 59 and a half, then he or she can take larger amounts. He’s not subject to that rule of taking uniform amounts out each year. Now, there is a big topic that I’m going to squeeze into the last part of the program, and that is self-directed IRAs. They are a different animal. They are IRAs that require a custodian or an administrator. And that custodian or administrator will let people know what kind of investment you can have in your IRA. And that custodian or administrator will charge a fee. Now, they’re not an advisor. They will not tell you this is a good investment or that’s a good investment. That is up to you, but there’s an enormous selection of investments in self-directed IRAs, but there are also some pitfalls. For example, you can invest in private equity, crypto, precious metals, trading accounts in foreign currencies, real estate, or even promissory notes. You can even invest in horses. Now, you can’t just go make that investment. You have to first select a custodian or an administrator and establish that. And there will be fees to establish it initially and fees each year. Now, some of the risks of having this type of an IRA, a self-directed IRA, included is the administrator and their fees, and they have to do due diligence and so forth. Some of these investments that I spoke about are not liquid, so some of them, if there’s some kind of an emergency, those funds may not be readily available. Also, because we’re not talking about investments that everybody has heard of, Fidelity, Charles Schwab, places like that that everyone knows, You don’t need to necessarily check their validity and so forth. But some of the custodians and administrators are from companies from whom you haven’t heard anything about yet. So there is a potential for fraud with respect to self-directed IRAs. Also, with real estate, there are a lot of rules involved. that are closely associated with self-directed IRAs. You can’t live in that real estate yourself. You can’t have family members live in that real estate. And I did have a client who had real estate that he was using. I believe it was a condominium in Summit County. And he was pretty happy with his appreciation and so forth. But one of the obvious downsides is if you have a self-directed IRA and it’s invested in something that’s not very liquid, that presents problems once you reach the age of require minimum distributions. If you have real estate, how do you take $4,000 or $5,000 out of your real estate to satisfy those required minimum distributions? So along with those advantages, there are some downside and some risks. And so I don’t strongly recommend self-directed IRAs because along with that opportunity for higher returns, there comes along with it higher fees, less transparency, and a greater amount of things that we need to keep track of. I want to thank everyone for listening, and I want to do two things. I want to not only pray for those folks who have lost family in Texas, especially children, young counselors, and so forth. We want to pray for comfort for those families, but we also want to praise. I believe there was a Coast Guard worker and some sheriffs who were down there In the very early morning of the 4th of July, getting people out of their campsites, their campers and their homes. So there were hundreds of people who were saved. So this tragedy could have been far worse if it weren’t for the efforts of some, you know, first responders and some really tremendous people involved. in the state of Texas. So let’s keep them in our prayers. God bless you. Thank you for listening. And hopefully you’ll be here next week.
SPEAKER 02 :
But are offered and sold through individually licensed and appointed agents.
