Brett Johnson [00:00:01]:
We are looking forward our way. Hi. This is Brett. In the mid 19 seventies, the federal government created a new retirement savings vehicle called individual retirement accounts or IRAs. 50 years later, many are experiencing financial and tax consequences from the distribution of their IRAs and in particular inherited non spousal accounts. Today, we're going to explore this fiscal dilemma, review guidelines, and understand the consequences if we ignore the rules. Welcome our guest, Larae Schroeder from Schroeder Law. Larae, thanks again for joining us on the podcast.
Larae Schraeder [00:00:35]:
Hello, Brett and Carol. Thank you for having me. I'm glad to be back.
Brett Johnson [00:00:38]:
Glad to have
Carol Ventresca [00:00:39]:
you for sure. We are so excited. This is a topic that Brett and I have constantly discussed in in our the years we've worked together, because we've both been in the situation.
Brett Johnson [00:00:51]:
Because because now I'm a grown
Larae Schraeder [00:00:52]:
up. Congratulations.
Brett Johnson [00:00:54]:
Yeah. Exactly.
Carol Ventresca [00:00:55]:
As soon as you get an inheritance, that that's it.
Brett Johnson [00:00:58]:
You're a grown up now. There you go. Yeah.
Carol Ventresca [00:01:00]:
Well, I'll tell you one thing. Getting an inheritance and all of the paperwork that goes with it, especially if you're the executor, is huge. I mean, these are huge questions. And as I said, I I've really been wrestling with it and have talked to Larae a couple of times and said, can we do this? And so thank you so much for, digging in there with us and getting doing all your research and coming back to see us today. So, Beth, before we all talk about IRAs, we wanna talk about you and your path to Schrader Law.
Larae Schraeder [00:01:32]:
I had a nontraditional path. After 20 years in financial services, I decided law school was the right path for me. And now as an estate planner, probate attorney, and elder law attorney, I find that what I learned about those financial products is a theme. Those are the same IRAs, 401 k's, bank account CDs. Those are the life insurance policies. Those are the same things people have when they want to leave them to the next generation and they're planning. Those are the same financial assets that they die owning that occasionally need to go through probate, and those are the same assets sometimes they have when they're looking at long term care and potentially running out of care and needing Medicaid. And so that's the theme, right, throughout, my practice and has allowed me to build on my past experience, and prior career before becoming an attorney.
Carol Ventresca [00:02:24]:
Wonderful. Thank again, thank you. I I think the reason that I particularly, and I think Brett too, really wanted to talk about this is there are so many details, as you just said, that people don't recognize to be aware of. You may or may not be able to do anything about it, but at least to be aware of. So, thank you again.
Brett Johnson [00:02:46]:
Yeah. The, if I read recently the creator of the of the concept of the IRA recently passed away. And he mentioned in an interview before he did that the an unforeseen result was the elimination of pension programs in private industry. That was not what he had in mind. So, those who took tax advantage of IRA IRA programs in our twenties thirties now have come of age, so distributions and tax payments are required. Let's set the stage by first detailing what IRAs are, why distribution and taxes are required at a given age, and then those consequences of not full following those rules.
Larae Schraeder [00:03:25]:
1st, let me just say an IRA is an individual retirement account, and we're using that term in a very general sense today in a much broader way than it is actually intended. So an individual retirement account is just that. It is tied to an individual's Social Security number, and it is eligible for some special tax treatment when you deposit money into this special kind of account and it grows, until you, can begin taking distributions. But for purposes of our conversation, many of the details and nuances also apply to other kinds of retirement accounts, whether they're a 401 k, a 403b, a 457. There are other forms of compensation that you don't receive now, but that are waiting on the shelf for you when you retire.
Carol Ventresca [00:04:09]:
And
Larae Schraeder [00:04:09]:
so I just wanted to start by clarifying for purposes of our conversation that IRAs generically, for the most part, applying to any of those types of, of accounts that you may have because, the point is you save while you're younger and then just take distributions when you're older. So an individual retirement account was intended to supplement, a pension, which is, as you mentioned, disappearing, and it is a a common form of holding wealth. 41,000,000,000,000 in retirement accounts at the end of 2021 according to some congressional research. And the retirement accounts are really there for providing a source of income. And different parts of the United States, I find, are more land rich and cash poor. But I would say here in Central Ohio, especially, we find people that is where they hold the majority of their wealth after their primary residence. And in many cases, more than their primary residence, that's where their nest egg is. And it is, again, intended to be their income.
Larae Schraeder [00:05:10]:
And in many cases, it is an increasing percentage of the income that they will rely on because Social Security is not always going to fill that gap or, the state pensions that that other people have that aren't part of the Social Security plan. So I refer to retirement accounts generically as anything that's qualified for special tax treatment. So some people generically lump these kinds of accounts into qualified and nonqualified or qual and non qual as some of the industry lingo. But we're basically saying because it's tied to your Social Security number there and it is for you as an individual, you are deferring the tax on the earnings as you go. You don't pay tax each year on the dividends or interest that are accumulating on money that you have deposited. And there are, for that reason, you're qualified for true treatment. Same with Roth. It's qualified in additional ways because you're not taxed on the way out either.
Larae Schraeder [00:06:06]:
And so, again, it's a special sort of, an account. And it's really, again, qualified for special tax treatment. I think that's the best way of thinking
Carol Ventresca [00:06:16]:
about that term. Right. And and one of the other terms that we don't use often because it's really only for state employees is deferred comp. Yes. Same kind of thing, but I there are issues about deferred comp that I didn't realize until I started talking to my financial planner about RMDs with deferred comp.
Larae Schraeder [00:06:35]:
Yes.
Carol Ventresca [00:06:36]:
And so it that's huge.
Larae Schraeder [00:06:37]:
And RMDs is something we're gonna need to define for our listeners. Right. Right. So a RMD is called it stands for required minimum distribution. And what happens is when you become a certain age, which is your required beginning date, When you are required to begin, you're required to take out a certain amount, and that is the required minimum distribution, also known as the RMD. And, so that is what
Carol Ventresca [00:07:09]:
a
Larae Schraeder [00:07:09]:
lot of people face first. That's their first exposure to the IRA if they're not just in savings mode. But I know today we also wanna spend some time talking about what happens when you inherit an IRA where you weren't the participant, you weren't the saver, and you are so also not the one receiving the standard distributions that come out because of age. You may be receiving a different kind of distribution. And I think that's what the 2 of you have also experienced firsthand. Exactly.
Brett Johnson [00:07:32]:
Right.
Carol Ventresca [00:07:32]:
Exactly.
Brett Johnson [00:07:33]:
Yeah.
Carol Ventresca [00:07:34]:
So, Larae, in the past, we've discussed the need to prepare well when you're talking about your estate and, how it's going to be distributed and how you want your final wishes met. Do we wanna ensure, if we want to ensure, that our heirs can bypass probate court, what do you suggest we do when we are creating our retirement accounts?
Larae Schraeder [00:08:01]:
The general rule of thumb is to have a beneficiary designated. It's really a contract. It's between you and the account custodian, right, who's holding those funds, whether it's Fidelity or Schwab or John Hancock. You were saying, I will deposit my money here, you in the special retirement account that's qualified for special tax treatment, and you promise that if there's money in this account when I die to pay the people I have listed on this form. And so that's the basic way of thinking of a beneficiary designation. And it is that agreement between you as the individual participant and that company holding your funds that's contractually binding. And this is the misnomer. It has nothing to do with what your will says or if you even have a will.
Larae Schraeder [00:08:49]:
It's going to trump any other form of estate planning that you have if you have listed a specific person on that form, whether you like them or not. Now I will say there's always an exception to the rule because this is law. And as you, you know, noticed noticed, it's detailed. It is true in Ohio that if you were divorced, that's ex spouse's name, if it still appears on the document, you it wouldn't necessarily be the recipient. But for the most part, you can just count on the fact that if you die and someone's name was on that form, they're gonna get it.
Carol Ventresca [00:09:21]:
So, again, it's really, really important to not only know the details, know the contracts that you're signing, but review them once in a while. Yes. See what it is that you've got.
Larae Schraeder [00:09:31]:
It is true, that there are a lot of surprises. In some instances, people think that having a beneficiary named the estate of Larae Schroeder is going to get to someone in particular or someone that, you know, I've named in my will, but it's not. That's just an invitation for the court, to have to work with that, executor of your estate to go to that financial services company to have the funds released. It doesn't go direct to dial to the beneficiary in the way that you may have intended. And people sometimes have no beneficiary at all or a beneficiary that they don't understand or interpret, which is occasionally the estate of. And there can be significant tax differences between whether you have named your spouse, as an example, or whether you have just left it to a to a person that may be a child or a grandchild or a friend, or your partner, if you're unmarried, versus leaving it, to to your estate. And so I think to understand who is on that form and make sure that that's really what you intend.
Brett Johnson [00:10:33]:
So let's pretend I'm in my thirties looking to increase retirement savings, and let's say that my spouse wants to be a snowbird every winter. Upon my death, my spouse inherits the retirement savings account. This should be an easy process when with no court action. However, some issues could occur such as whether beneficiary information is not clear like we kinda mentioned.
Carol Ventresca [00:10:56]:
Mhmm.
Brett Johnson [00:10:57]:
When we commit to an IRA program, what are the most important items to complete?
Larae Schraeder [00:11:02]:
So when you commit to contributing, I think the important thing is that you're choosing the right custodian and you're investing the funds in the way that you intend. Gotcha. Right? You can go to a bank. You can go to other financial services institutions, and and you have many choices. So understanding if there's going to be an annual fee assessed for you to have that account, and then making sure that the options for you to invest, are they all aggressive? Are they all, stocks? Are they, all mutual funds? Are they what kind of investment options do you have available to you is important. And then also, how easy, does the provider make it for you to change those elections? Right? As and what guidance might you want to get, and can other people access that information easily to help you manage your funds? Because in some cases, if you have an employer provided, financial oversight person helping you, right, they may not be able to see something that you set up at a stand alone bank. And the other thing to keep in mind was the beneficiary designations, making sure you can see it, making sure you can change it easily, that you know where it is. And the other thing I would say is making sure that there's a trail so that other people know that you have that IRA because so many things happen online these days.
Larae Schraeder [00:12:10]:
In the past, if someone passed away, we would simply wait for their mail to show up. And in this case, if you were working to set up a program, you would just wanna make sure that other people know know it's out there.
Brett Johnson [00:12:21]:
Okay.
Carol Ventresca [00:12:22]:
You know, one of the interesting things I just read today online that there are 1,000,000 of dollars worth of IRAs that have are literally sitting there. Nobody's paying attention to them. So for instance, a young person may have started with a company. They created a 401 k program for them. This individual left, went to another company, forgot all about it, and 20 years later, they're sitting there going, whatever happened to that? Maybe the original company closed down. There's actually a process now that the government has set up that you can track those old four zero one k's IRA account.
Larae Schraeder [00:13:02]:
One other, issue I've seen even with a family member, 2 providers of IRAs merged, and all of the funds were simply liquidated and held in cash. And fee, the annual maintenance fee for the IRA continued to come out. So after 4 years, this relative has fewer dollars, and these have been years of investment. And and if it would have been invested in almost anything, right, except held in cash. But it makes sense because of the merger. And you think, okay. Fine. I have a new account number.
Larae Schraeder [00:13:32]:
I know who to call if I have a question. But you don't realize, right, that the underlying investments, you know, had to be liquidated. Because as I mentioned, what is available to you to invest with 1 provider may not be the same options available for the second. And they didn't, you know, obviously map you to a a new one, and you needed to pick. And if you missed the mail, if you missed the memo, then then, yeah, you
Brett Johnson [00:13:53]:
Because they can choose whether it's aggressive or conservative or yeah.
Carol Ventresca [00:13:58]:
Or or a a standard savings account at a half a percent interest Right. As opposed to the market, which has been at 8%. Right.
Larae Schraeder [00:14:06]:
Which is why they took the conservative approach and said, like, here it is. It's on the shelf waiting, and now you need to invest it as you choose. And and if you don't pay attention, then that would be something where, you know, they don't have a duty to reach out to you once a year to say They're getting their fee. That's right. That's right.
Brett Johnson [00:14:20]:
Well, so that that's a good red flag warning whenever you see any financial institution being purchased or emerging Mhmm. Kinda follow making sure you're getting information and and see what's going on.
Larae Schraeder [00:14:31]:
It's also the most common time when beneficiary designations are dropped.
Brett Johnson [00:14:38]:
By the financial institution?
Larae Schraeder [00:14:40]:
Yes. Oh, really? So if you have a new account held by a new provider, you should also pay attention to any communications about that because it's a new account.
Carol Ventresca [00:14:47]:
Oh, wow.
Larae Schraeder [00:14:48]:
Yes. They're porting over your money, and you don't have to take a check and deposit it into the new institution. But I do see that. And and it's true too for 401 k providers. Occasionally, we know of employers when they are choosing a new third party administrator, to work with and to be, their provider that that you have to go in and re out redesignate your beneficiaries. And so we have had that situation with with our probate cases.
Carol Ventresca [00:15:13]:
And you wanted I was gonna say, you wanna do it while you're still living and making that choice as opposed to Absolutely. It just appearing
Brett Johnson [00:15:20]:
The court's making the choice, basically. Right. Or the financial institution.
Carol Ventresca [00:15:23]:
Right. To go back to that your comment about fees, but we have to be careful about fees. There are a lot of different types of fees. So there is a there could be an annual maintenance fee, and then there are also fees for the company that's holding the money as well as if you have a an individual financial planner. So you really kinda need to know, you know, am I how much am I losing to fees?
Larae Schraeder [00:15:47]:
It's the cost of doing business.
Carol Ventresca [00:15:48]:
It is the cost of doing business, and I I've always said I'll pay the fee if it's a reasonable fee as opposed to me trying to figure out where to put the money. So, you know, it's much easier to trust my financial planner who I dearly love.
Brett Johnson [00:16:02]:
Well, and it's so much easier to miss that because, I I I don't know if anybody that's sending me paper anymore. So you have to go online to see this stuff.
Carol Ventresca [00:16:12]:
Paper? Paper?
Brett Johnson [00:16:13]:
Do you because I know another I forget who it was sent something in the mail. I think it was nationwide, sending something is like, hey, as of this date, we're going paperless.
Carol Ventresca [00:16:23]:
Mhmm.
Brett Johnson [00:16:23]:
And you can opt out of that, but I'd have to probably a fee to it more likely, which again, if you want the paper, that's cool. But my point being, it's a lot easier to miss it if you don't have the paper coming to you on a monthly basis.
Carol Ventresca [00:16:35]:
Right. And that's why
Brett Johnson [00:16:36]:
going on.
Carol Ventresca [00:16:36]:
That's why I keep getting the paper for Yeah. And and, unfortunately, it's all or none. You know, I I the what I want are the monthly reports. Mhmm. I and luckily, they don't send me too much other stuff, but I can't get rid of the other stuff and not get rid of the monthly report. So I get all the paper.
Brett Johnson [00:16:53]:
Yeah.
Larae Schraeder [00:16:54]:
Occasionally, the monthly statements will just say beneficiary on file. So I would also encourage people to make sure they really know what's on file. And it's not a bad thing to print out and throw in your drawer even if you don't have paper statements coming otherwise or even if you do. Yeah.
Brett Johnson [00:17:07]:
So that's
Larae Schraeder [00:17:07]:
what I would encourage.
Carol Ventresca [00:17:08]:
Wow. Right. Right.
Larae Schraeder [00:17:09]:
I will also say working with a professional, is one common way for people to have someone else looking out for their beneficiary designations. I think, by and large, those who are paying a professional through one form or another for advice, they often are more proactive in monitoring the beneficiary designations.
Carol Ventresca [00:17:28]:
Well and and with the beneficiaries, young folks who don't have kids yet don't think about have they when they have to go back in and rethink those beneficiaries after having children. And those of us on the other end of the beneficiary is the correct language, that what it states in the beneficiary is the correct language for that trust. Right. So I
Larae Schraeder [00:17:58]:
will say that marriage changes. I I touched on this earlier in the form of divorce. If you've named a spouse that's no longer your spouse, there could be a difference in whether that institution will pay the name on the form or someone else. But the difference is also true if you were to marry for the first time. If you filled out that beneficiary designation form when you're single, if you are now married, there are some spousal rights, depending on the way the accounts have been, created or the plans. And so I would encourage people to think about whether they have changed their marital status either way. And spouses really have rights unless they've waived them. So if your spouse didn't sign off on the fact you wanna leave it to a child from your first relationship, that may create an outcome other than what you expected.
Larae Schraeder [00:18:42]:
Right. And it may also be to your disadvantage from a tax standpoint, because the spouse may have some advantages about, how they can take the distributions from that IRA that might not be available, right, to your child or other other, beneficiary that you have in mind.
Carol Ventresca [00:18:59]:
Right. And really, any life transition, life event, you you you need to rethink all of those bits and pieces.
Larae Schraeder [00:19:07]:
Right. And someone that can help you look across the different pots of money that you may have may help you see, you know, what it may make more sense for you to leave this for the spouse. And instead, let's name this for that child, especially when there's been a blended family. So even if it's the same amount on the surface, people don't always realize that, all accounts aren't created equal.
Carol Ventresca [00:19:27]:
Right. Right. It's so now we're in a situation in which an individual is deceased and they leave behind debt. And we've had long conversations with you about this before. But how does that debt affect their estate for the spouse or other heirs? And would a IRA actually be used to pay that debt before it's dispersed to the individuals? It is possible.
Larae Schraeder [00:19:53]:
And so the attorney answer, it depends, is true in this situation as well.
Brett Johnson [00:19:58]:
Is that when you guys go to school in law
Larae Schraeder [00:20:01]:
We practice. Course.
Brett Johnson [00:20:02]:
Is that the, you know, the l one first class always answer, it depends.
Larae Schraeder [00:20:09]:
Yes. We practice it in unison together. Yes. Absolutely.
Brett Johnson [00:20:12]:
Stand up and say together, it depends.
Larae Schraeder [00:20:18]:
The general rule is no debts are not assumed by your heirs. And if you had funds in an IRA and you named a beneficiary who is alive and well and able to collect, from that institution, then any debt that you have on paying your final cell phone or Discover bill or something like that would not be, covered by the IRA that your spouse or child just inherited. It is possible, though, if you don't have a a valid living beneficiary, and it is paid to your estate, that it would become available to your creditors. So that's the probate process, right, of adding up the assets stuck in someone's name and adding up the debts that are valid and recognized and working through that process. And beneficiaries are lower in the pecking order than, you know, a debt that someone incurred. Right? Honestly.
Carol Ventresca [00:21:11]:
Such such as a mortgage on a house. Definitely. Because the house is on
Larae Schraeder [00:21:15]:
the line for a mortgage. Right. But even general unsecured debt, like the credit card debt, like the final, like I said, cell phone bill, what you promised to pay AAA or something, right, for a subscription, right, service. Things are like that would be, you know, still owed.
Brett Johnson [00:21:30]:
Okay. So that's what you sign off on on that whole long list of, okay, I agree. It's those agreement terms stating they they go up first in line. Interesting.
Carol Ventresca [00:21:40]:
So they're
Brett Johnson [00:21:40]:
gonna somebody reads, of course. You know?
Larae Schraeder [00:21:41]:
They're gonna pay a beneficiary, like, last if if it gets stuck going through the probate process. So that's where, you know, paying for someone's funeral comes first. Paying for court costs and attorney fees, of course, is higher. Paying for, expenses relating to someone's last illness and then finally, unsecured debt. And then the beneficiaries would get what's left over. To contrast that, if they're named as a beneficiary directly on that IRA form that we talked about, that contract, then they're going to get it direct, and there's no debt. Like, no one's going to say, hey, Fidelity. Mom had a Discover card with a $500 balance.
Larae Schraeder [00:22:17]:
Right? Can you deduct that before you pay, right, the children? No. That doesn't happen. And so that's why I'm saying the general rule is that children would inherit an IRA without any strings attached. Right? Clean and clear.
Carol Ventresca [00:22:29]:
Which is really good testament to spending a little bit of money making sure you have all of those legal documents on the right path to make sure then later on, your family isn't paying much higher costs, whether it's legal fees, probate fees, or loss of of, assets. And sometimes paying debts is a
Larae Schraeder [00:22:52]:
good thing and a necessary thing. So if you have nothing but an IRA left. Right? Imagine. No checking account. No anything. Where you just have an IRA, and it has your children's names on it. Two names, 5050. Who's gonna pay your funeral bill? You're going to have those children walk away with a check from the IRA holder as soon as, you know, they've shown up with your death certificate.
Larae Schraeder [00:23:14]:
But then they need to work together to pass the hat. And so the question is, are they going to do so? Right? Are you going to have the bills paid that you need to have paid Right. For someone to get the dumpster to clean out your house or to to do those things? And so I find on occasion, there are situations where family members that have 100% of their assets settled with beneficiaries, they don't actually have a a pot of money ready and available because it is like speed dial. Right? When there's a beneficiary designated on an IRA, they show up with a death certificate. The payout is usually very instant, and there's no taking into account, well, is there a balance owed to the funeral home? Do we owe anything for the for the court, process to get, you know, the house out of mom's name, even if there was a beneficiary on the house? Right? So those those are the things where people don't always think about it, and you can kind of sub optimize it by having a beneficiary on everything, again, depending on the rest of your circumstances.
Brett Johnson [00:24:09]:
Okay. Yeah. Okay. Well, the dollars used for our IRAs were pretax funds as that's the beauty of it. Income that was not included in calculating the income tax paid that year. So, individuals who began contributing to IRA's in the seventies eighties have now reached the mandatory age for required minimum distributions or RMDs. This sudden increase in income and taxes may possibly increase the cost of Medicare too. So, we'll see significant issues when we complete our annual 10.40.
Brett Johnson [00:24:41]:
Can we avoid the major tax burden such as utilizing qualified charitable distributions or, you know, just how do we massage this to a certain degree?
Larae Schraeder [00:24:51]:
Certainly. A qualified charitable distribution is one option to lower your taxable income in that year. And what that means is rather than taking a taxable distribution out of your IRA, you you fill out the paperwork so that that distribution is sent directly to an institution that is eligible for special tax treatment. They're a nonprofit, and they're designated appropriately by the IRS for that. And that makes them eligible to receive the funds directly from the IRA without you having that amount added to your taxable income for the year. It's a win for you. It's a win for the institution. And I will also say about the Medicare.
Larae Schraeder [00:25:32]:
If you have changes in your income, like the loss of a part time job or your spouse stops working, because you've already retired and it's time for them to join you too, you can also, work with Social Security to have them revise that income adjustment that you may find, because of the extra income triggering additional Medicare tech Medicare, premium costs.
Carol Ventresca [00:25:55]:
Mhmm.
Larae Schraeder [00:25:56]:
So those are one other way to lower that taxable income for the year that's legitimate.
Brett Johnson [00:25:59]:
Yeah. Once you get to that age, it gets a little it can be complicated because you have all these income sources, plus you wanna be respectful of the social security may and maybe you defer social security for a minute. I mean, there there's so many little chess pieces to play with that. It's good because you're not stuck in one lane that you have to do this, but lots of options can make it somewhat complicated to to to in in increasing anxiety going which way is the right way
Carol Ventresca [00:26:26]:
Mhmm.
Brett Johnson [00:26:27]:
That that benefits everyone around.
Larae Schraeder [00:26:29]:
So many levers and you need to know the right adjustment for all of them because you're absolutely right to change to start to adjust your income. There are are many places you can go.
Carol Ventresca [00:26:38]:
You know, one of the things I found out when I started looking at the qualified charitable distributions, I'm and I'm so glad I'm doing this years in advance from when I actually have to deal with RMDs. Not every, company that you that holds your IRAs can do qualified charitable distributions or there could be a limit. So Ohio Deferred Comp, I called and talked to them, they don't do qualified charitable distributions at all. So whatever I'm going to be required to take out of that account is going to be income and taxable. The other companies that I'm working with, I can well, the the, they call it a BDA account, but the IRA from my parents cannot be used for charitable qualified charitable distributions. And my other accounts can be, but there's a limit to how many charities they'll send checks to. So then you're like, okay. Do I send it all to 1, or do I figure out which 5 or 10 I wanna do? You know? So there are all those kinds of questions.
Carol Ventresca [00:27:51]:
And again, it's like, you don't think about those questions when you're creating these IRAs 40 years ago. That's right. And you also don't think about the impact to charity when you die if that charity gets a $200,000 request from your estate because of
Larae Schraeder [00:28:07]:
the probate process or if that charity gets a $200,000 request from your IRA. So one thing to consider is if you are potentially making a charitable bequest, the IRA beneficiary could be the charity directly.
Carol Ventresca [00:28:22]:
Mhmm.
Larae Schraeder [00:28:22]:
In that instance, you have never paid tax on that money. And an example that Brett gave, right, we had a reduction of our income in the year the contribution was made to the IRA. It grew tax deferred. Never paid tax on it. During my lifetime, I never took it out. It wasn't a distribution. And it's going directly to the charity, so the charity doesn't pay tax on that distribution. And so that is one tax advantaged way to get the most bang for your buck.
Larae Schraeder [00:28:48]:
Right. So not only the charitable qualified charitable distributions, but then also considering charities, again, based on where you're structuring and what you're leaving, that may be an asset to consider.
Brett Johnson [00:28:58]:
Mhmm.
Carol Ventresca [00:28:59]:
An individual, not a spouse, and we're gonna define spouse, inherits funds from an IRA, and they're required to receive distributions and dissolve that IRA in 10 years with distributions required every year. Some of that has been more recent legislative changes. There is an added burden because in 2025, unless congress acts, the lower tax brackets that we have had for the past few years are going to go back to the original. It's going it's going to increase. So not only are we required to take money out, we're required to do it in a limited amount of time, and now we're going to have a higher tax percentage taken out. I guess in some ways we have to realize these things change every year. Yes. Congress changes every year.
Carol Ventresca [00:29:56]:
Know the rules.
Larae Schraeder [00:29:57]:
Right. I think that's the advice. Yeah. Know the rules on what you can put in because not every year, but often that changes. Know the rules on what you need to take out, what you may take out. Sometimes the the distributions are permissive. And as you mentioned, sometimes they're required.
Carol Ventresca [00:30:12]:
Mhmm.
Larae Schraeder [00:30:12]:
And so sometimes you can back end a little more of it. You don't always have to take out 1 tenth. There are some fact patterns where you can take out something each year, but it's not always, an equal tenth. So I think the important thing is to know the rules and to know that they change, so continue to know the rules.
Carol Ventresca [00:30:29]:
And and when you're saying know the rules, that's not easy. I mean, you have to have somebody who can not only know them but explain them to you because it's tough.
Larae Schraeder [00:30:37]:
Yes. And I will say it's really hard to wait till December to begin thinking about that required minimum distribution. You don't have time to get the tax advice that you would maybe benefit from. You don't have time to get, you know, if your check gets lost in the mail, there's not always a lot of time to recover from some of the processing errors that could happen along the way. And so, yeah, getting advice, getting it early, and kind of working a plan, I think, is the is the best thing that you can do, especially as a non spouse. Because after the SECURE Act was passed, and then the secured 2.0, right, has been passed, you're right, Carol. Someone cannot, stretch that inherited IRA across their lifetime, and that had historically been the case. Their life expectancy was what drove the amount that was forced out of there.
Larae Schraeder [00:31:23]:
The government's like, we've waited long enough on the taxes. Right? We we've let you or your parents, I should say, defer this, and we're we're ready to have a little bit of it. We need you to take some of it and consider it income and pay tax on it, please. And so that's what's happened. And now it's a 10 year, window that people have to stretch that out rather than their lifetime. Now that being said, a spouse still has the opportunity to do something throughout their lifetime. The other thing available to a spouse is for them to just reclassify those funds as if they were their own. Only a spouse can begin treating that deceased spouse's funds as if it were her own.
Larae Schraeder [00:32:02]:
And so that it's going to follow the same RMD rules. It's going to say follow all of the same distribution rules if that is if that election is made. So they can choose one of 2 things. Right? They can take an inherited IRA and stretch it throughout their lifetime, or they can just fold it into their account under their Social Security number and have all
Carol Ventresca [00:32:19]:
the pros and cons of doing that?
Larae Schraeder [00:32:22]:
Depending on the age difference, depending on the account difference, you you might find that it would be easier to defer the income longer. Because if my husband is older than I am, you know, we're 9 years apart. Right? If he were to pass away and leave funds to me, I could stretch it out throughout my lifetime. Or for simplicity, I could also just dump it into my account. And if I didn't need to live on those funds because maybe I decided to start my Social Security or something like that, I then could defer the distributions. So I'm not beginning now and stretching it throughout my lifetime. I'm waiting until I need to take a distribution, which for me right now is currently 73. Right.
Larae Schraeder [00:32:59]:
So the ability to leave it longer in a tax deferred way would be one advantage. Again, depending on your situation, depending on your income, depending on your other assets.
Carol Ventresca [00:33:07]:
Yeah. Well and going back to the non spousal IRA inheritance, when my parents passed away, I wasn't even 50. So here in the back of my mind, I'm thinking, oh, I don't have to take this money till I'm 70, and oops. Yeah. By the by the way You too. You have to take it. Now luckily, though, it's been so long ago, I have over my lifetime as opposed to 10 years, which makes a huge difference difference in allowing that fund to accumulate more dollars. So, you know, sitting in the market over the past 10 years, it's making money where if I had been required to take it out right away, I, you know, I would have lost quite a bit.
Brett Johnson [00:33:51]:
Right. And that RMD for Roth IRA is a little bit different. Correct?
Larae Schraeder [00:33:55]:
Yes. Again, different rules.
Brett Johnson [00:33:56]:
Yeah.
Larae Schraeder [00:33:57]:
But it needs to come out.
Brett Johnson [00:33:58]:
Yeah. Over over a a But
Carol Ventresca [00:34:00]:
you're not paying taxes on it. Correct. That's the big thing.
Brett Johnson [00:34:02]:
Yeah. Exactly. Yeah.
Carol Ventresca [00:34:03]:
That's why I
Brett Johnson [00:34:03]:
thought that because there's a there is a differentiation point to it. So yeah. So, although we hope our will and estate documents clearly communicate our final wishes, there is no guarantee that our heirs will be in harmony once that's all settled. Though again, a lot of people say, I don't care. I'm gone already. But let's just say you care. So there could be dispute on how assets are treated how they're distributed how the estate is managed or whether documentation is up to date you know that lost will suddenly appearing in those mystery movies How can the executor control those situations? And if they can't, does the court step in? And and, you know, and I think that's a valid question because I'm sure many of our listeners are executors, and they may walk into this situation. You know, they they raise their hand saying, yeah, I'll be an executor.
Brett Johnson [00:34:55]:
Kinda not knowing what they walked into potentially. They think it's gonna be clean. So what can an executor do?
Larae Schraeder [00:35:03]:
So there may not be harmony. But, again, if there isn't from an IRA or retirement account standpoint, if there isn't a beneficiary, it would land in the jurisdiction of the executor and the court. As soon as I finish this podcast recording, I'm going to help sign the paperwork for someone wrapping up a probate estate. And she was surprised at the tax return that shows there was a $641, distribution, right, to and it's taxable because no beneficiary was on her brother's IRA. And now the estate is paying the tax on that and had to recognize it as income because he didn't recognize his income during his lifetime. So it's just and it's such a small amount of money. There's been so much overhead related to handling this one little tiny pot because it was from a former employer and then, you know, maybe had some of it had come out. I I don't know.
Larae Schraeder [00:35:52]:
But it it's it's taxed, you know, at a in in such a way that you're doing an extra return because it wasn't his personal income. It didn't show up on his own 10.40. It's on the estate's 1041, right, which is where the estate is paying income tax. So, like, it just compounded the paperwork in so many ways, to have to to deal with that, extra complexity. But, yes, we hope that our will would direct where our funds would go if we didn't already have them earmarked. I'd say it's like a little gift tag, right, when you put a beneficiary on something. Everyone knows that's where it's supposed to go, and it's earmarked and crystal clear. And in the case of a lost will, you know, you are subject to what the government defaults, you know, say should happen to your things.
Larae Schraeder [00:36:34]:
So hopefully, everyone gets along, but sometimes they don't. And our, our legal process, right, is designed to understand that there are opposing parties when trying to resolve that. And sometimes there's great communication and sometimes there's not.
Carol Ventresca [00:36:48]:
I'm I'm hoping that all of our IRA questions have been answered today, Brett. Thank you, Larae. This has been wonderful. As I said, this has been a topic that he and I have had just these little side conversations on for years and wanted to really sit down and and talk it through. So thank you for your time and your expertise. Thank you. As always, we ask our guests, do you have any, last words of wisdom for the audience?
Larae Schraeder [00:37:13]:
I think especially when a spouse loses someone with an IRA that they are ready to inherit, I would just say it it's really important to get professional advice at that point, as to whether to treat that IRA as their own or as an inherited IRA. I think that is, a really strategic time, right, for a decision and to not just default into it. And the other thing for people to know is there are deadlines. So we've talked about some of the choices and some of the rules, but some things have to be determined by the September following someone's passing. Some things related to inherited IRAs have to be determined by the December following a person's death in that year. So I just think to be aware of the fact that you can't just crawl under a rock when you're mourning, even if that's what your instinct is to do, because it it can have consequences that last for many years. Thank you.
Brett Johnson [00:38:00]:
And sadly, you're not gonna get anything in the mail going, oh, by the way, you've gotta make a decision on this other than maybe some from your financial institution or maybe the investment firm or possibly. But, yeah, you're right. You're kind of like swimming in deep water. Oh, my gosh. Yeah.
Carol Ventresca [00:38:15]:
And you have to really read all that mail, all the details.
Brett Johnson [00:38:18]:
You should. Yeah. Exactly. Yeah. It really takes time. Yeah. Exactly. Well, many thanks to our expert guest, Larae Schroeder from Schroeder Law, for joining us today.
Brett Johnson [00:38:25]:
Listeners, thank you for joining us. You're gonna find the contact information and resources we discussed in the podcast show notes and on our website at looking forward our way.com. And we are looking forward to hearing your feedback on this or any of our other podcast episodes.