A Twist on IRA Tax Planning
Tuesday, August 6th, 2024 | Uncategorized | Comments Off on A Twist on IRA Tax Planning
By Yvonne Marsh, CFP®, CPA
Back in 2019, the SECURE Act created a new twist in tax-planning when it took away the ability of most adult children to stretch out their taxable IRA inheritance over their lifetime. Instead, they now have to take the entire account as taxable income within 10 years, losing more of their inherited dollars to income tax.
Here’s an example: a married couple, each with their own $1 million IRA, has named their spouse as primary beneficiary and their kids as back-up beneficiaries. Under the old rules, it was a no-brainer for the surviving spouse to inherit all of the IRA money, keep withdrawing their Required Distribution and then, at the end of their days, pass the IRA to the kids. They’d, in turn, stretch the taxable inheritance out over their lifetimes and everyone was happy.
But under the SECURE Act, this strategy doesn’t always work so well. In the same scenario, if the surviving spouse takes ownership creating a $2 million IRA and then ultimately passes it to the kids, the kids have 10 years in which to withdraw the $2 million and pay tax on ALL of it. Not such a great tax answer – they’re layering that taxable withdrawal on top of all of their regular wage income and easily pushing themselves into the 32% – 37% tax brackets. There goes over a third of your hard-earned money to Uncle Sam.
Here’s potentially a better answer: it’s called a disclaimer. What happens in this scenario is that the surviving spouse “disclaims” or formally refuses some or all of the deceased spouse’s IRA and lets it immediately pass to the kids as contingent beneficiaries. So now they have 10 years to stretch out one parent’s IRA, and then when the second parent passes, they’ll have another 10-year period to stretch out the second parent’s IRA. A much better tax answer.
Planning has to be done ahead of time:
1. Spouses have to be named primary beneficiaries, and kids have to be named as contingent beneficiaries on the IRA beneficiary form. Your will is irrelevant – it has to be the IRA form.
2. Touch nothing after death! In order to execute a disclaimer, the beneficiaries cannot have “accepted” the property by taking distributions or transferring the account.
3. The disclaimer is a legal document that is executed by a qualified estate planning attorney. It is not a simple form from the IRA custodian.
4. The deadline for delivering the disclaimer to the custodian is 9 months from the date of death.
So, what’s your tax strategy? Letting the government have more than their fair share because you haven’t gotten around to tax planning yet? It’s time! Hop on my Calendly calendar to schedule a complimentary 30-minute phone call so we can talk about my all-time favorite topic: tax planning! Pick a time at https://calendly.com/yvonnemarsh/connect. Or contact me via email at ymarsh@marshwealth.com.
Marsh Wealth Management, LLC
Fiduciary Registered Investment Advisor
504 Ebenezer Road
Knoxville, TN 37923
865.622.2162
www.marshwealth.com
Investment Advisory Services offered by Yvonne Marsh, as an investment adviser representative of Marsh Wealth Management, LLC (“MWM”), a registered investment advisor. Tax services are offered by Marsh Professional Group, LLC, a TN registered public accounting firm and a separate legal entity from MWM. For a detailed discussion of MWM and their investment advisory fees, see the firm’s Form ADV on file with the SEC at www.adviserinfo.sec.gov
