Mark is a CERTIFIED FINANCIAL PLANNER™ professional and his main responsibilities include managing and monitoring client portfolios, researching and monitoring our mutual fund investments, financial planning and reviewing portfolios with clients. Prior to joining our team, Mark was involved in portfolio and wealth management at Charles Schwab & Co. and Clarity Financial, LLC.
Mark earned a bachelor’s degree in Business Management from Central College.
Outside of my professional career I am passionate about: I am passionate about living life and fully engaging in many activities; tennis, pickleball, working out, family, yard work, photography, and football.
What drew you to the wealth management industry? What drew me into wealth management was being able to work in an industry that centered on investing and having your money working for you.
What is the most rewarding part of being a BFSG Team Member? The teamwork, collaboration, and being around great people.
The one word or phrase that best describes me is: The word that best describes me would be Disciplined.
What’s the best piece of advice you have ever been given and how might this apply to your role here at BFSG? Work hard and do the right thing even when no one is watching.
As Sam enjoys their Sunday evening, Sam gets a call from their sister Maya. This is unexpected since Sam hasn’t talked to Maya in years. “Hi, Maya”, Sam answers the phone. Maya responds, “Hi, Sam. I have some news for you.” Maya proceeds to tell Sam that their Aunt Gertrude passed away and as the executor of her estate, Maya lets Sam know that they are one of the beneficiaries of Aunt Gertrude’s estate. Maya also lets Sam know that there will be a meeting with all of the beneficiaries to read out Aunt Gertrude’s Will on Saturday at Maya’s home. Sam gives their condolences to Maya and proceeds to hang up the phone. Sam is confused because Sam and Aunt Gertrude never really saw eye-to-eye. Frankly, Sam is surprised Aunt Gertrude would leave Sam any inheritance at all. Nonetheless, Sam arrives at Maya’s home. Sam then greets Maya, their cousin Cilas, and Aunt Gertrude’s best friend Dottie. Maya then begins reading out the will.
Maya: “To my best friend Dottie. I leave to you my opulent primary residence.”
Dottie: (thinking to herself) “Oh wow, thank you Gerty. I will treasure it always.”
Maya: “To my nephew Cilas. I leave to you my palatial vacation home in Spain.”
Cilas: (thinking to himself) “Aunt Gerty. Thank you for your kindness. I’m at a loss for words.”
Maya: “To my niece Maya. I leave you all my personal belongings and my taxable investment account of $5 million.”
Maya: (thinking to herself) “This is life-changing Aunt Gerty. Thank you.”
Sam: (thinking to himself) “All right! There are no other heirs besides me and the only thing that Maya hasn’t discussed yet is the Aspen mansion! I get the Aspen mansion! Hello, fresh powder! You were a crotchety old bat, but I guess you did care about me in the end, Aunt Gerty. Oh boy, I’ll need new skis. I…”
Sam’s pleasant winter daydream is suddenly interrupted by a shrill bark.
Maya: “To my beloved Pomeranian, Snowball. I leave to you the Aspen mansion. Enjoy playing in the snow with your new caretaker.”
Sam: (thinking to himself): “Gee, I wonder who that new caretaker will be.”
Maya: “Sam, you can be Snowball’s caretaker. You can also have my Traditional IRA worth $46,200 for your trouble.”
Sam: (thinking to himself): “Uhm. Well, $46,200 is better than a poke in the eye. Plus, I get the Aspen home when that cotton ball of a dog finally keels over.”
Maya: “Sam. I know Snowball won’t live forever but don’t get your hopes up. You know we never agree on anything politically and I never really liked you because of that. When Snowball passes, Maya, Cilas, and Dottie will get the Aspen home since they know how to vote correctly.”
Sam: (thinking to himself): “Fine, Gerty. You win. This still won’t make me change how I vote in November though.”
Maya: “Thank you all for coming. I will send you the appropriate paperwork tomorrow.”
You may be thinking, “Why is the IRA given to Sam in the example $46,200? That number is oddly specific.” Well, I didn’t pull that number out of a hat. $46,200 is the average inheritance that an American household inherits according to the Federal Reserve. If you are expecting a lofty inheritance, we don’t recommend counting on it to make your financial plan successful. With that being said, say that you just received an IRA for $46,200. What are the rules around your new account?
Inherited IRA Rules
The first thing that you likely need to do is get the IRA into an inherited IRA in your name. You normally aren’t able to transfer an IRA you get from an inheritance directly to an IRA you already own. The only time that it can go into an IRA you already own is if the decedent was your spouse. In that case, you would just treat the IRA as your own and the regular Traditional IRA rules apply. Otherwise, it must go into an account titled as an inherited IRA. Once that is done, several scenarios can occur. Below is a flowchart that can be referenced later throughout this section:
Since the IRA in the introduction was inherited by someone other than your spouse, you have to ask yourself if you are any of the following:
Are you disabled or chronically ill?
A child of a deceased owner that is not yet the age of majority?
A person not more than 10 years younger than the owner?
If you answered yes to any of these questions, then you can “stretch” the inherited IRA over your life expectancy. The specifics of how the RMD (required minimum distribution) is calculated can be found on the IRS website here.
If you are the beneficiary of an IRA and answered no to all of those questions above and the decedent was not the spouse, you are required to take the funds out over 10 years. Beneficiaries of IRAs for decedents who passed away before 2020 were able to stretch the RMDs over their life expectancy. There is also an RMD that you need to take each year, starting the year after the original IRA owner passes. The account must also be fully depleted by December 31st of the 10th year following the year of the original IRA owner’s death.
Please make sure to note that a Roth IRA would still follow all of the same rules illustrated above. Even though RMDs were never required during the original Roth IRA owner’s lifetime, the beneficiary would still have to take RMDs as the inherited Roth IRA account owner. You just wouldn’t owe any taxes on the distribution.
Keep in mind that missing an RMD means that a 25% excise tax is levied on whatever balance should have been taken out of the account. For example, if your RMD was $10,000 and you only took $5,000, there would be a $1,250 excise tax. In another example, if your RMD was $10,000 and you didn’t take anything, the IRS would impose a 25% penalty on $10,000, or a $2,500 excise tax. It is also possible that this can be reduced to a 10% penalty if the RMD is corrected within two years.
Tax Year 2024 IRS Ruling
If you read the previous section thinking, “Ok, that’s a bit convoluted how that works…”. Well, guess what? The IRS recently updated how inherited IRA RMDs work and how any penalties are applied for missing them. I know what you might be thinking but leave your cynicism aside. In this case, this update is more of a respite than anything else.
The IRS will not impose any penalty for missed RMDs for persons subjected to the 10-year rule from 2020, 2021, 2022, 2023, and 2024. However, this does not apply to persons who can take inherited IRA RMDs over their life expectancy. The IRS decided this because many taxpayers and financial services firms complained to the IRS about how to administer and comply with the new rules. This does not mean, for example, that someone who inherited an IRA from someone who passed in 2020 has a new 10-year window beginning in 2025. The IRS will not leverage penalties for missed RMDs from 2020-2024. However, that person would still need to deplete the inherited IRA or inherited Roth IRA by the end of 2030.
Financial Planning Applications
Numerous financial planning opportunities arise when dealing with IRAs, Roth IRAs, inherited IRAs, and inherited Roth IRAs. Here are some practical examples of applying each account type within a financial planning context.
IRA example: You have two kids who are struggling to get by and have no other beneficiaries. Your kids would need the money from the IRA they would inherit and would still be in a low tax bracket even with the additional ordinary income earned from the required minimum distributions.
Roth IRA example: You have two kids who are doing well for themselves and are even in a higher tax bracket than you are. You still want to bequeath the Roth IRA funds to them since you have no other beneficiaries. They are still obligated to make RMDs from the Roth IRA they would inherit, but it would be tax-free to them.
Inherited IRA example: You are over 70 ½ and just received an inherited IRA. You do not need the money from the RMD. You are also charitable. It may be beneficial to do a qualified charitable distribution (QCD) for the inherited IRA RMD amount. The maximum amount that can be made in a QCD as of 2024 is $105,000 per person per year adjusted for inflation.
Inherited Roth IRA example: You just received an inherited Roth IRA for $50,000 and you have $45,000 of credit card debt at an interest rate of 25%. It may be beneficial to pay off the credit card debt with the inherited Roth IRA funds now since you would not owe tax on the distribution, and you would be wiping out that $45,000 of debt at that sky-high interest rate of 25%. You take $45,000 out of the inherited Roth IRA now to pay off the credit card debt and then leave the remaining $5,000 in the inherited Roth IRA. The remaining $5,000 in the inherited Roth IRA is still subject to the RMD rules until the account is depleted in 10 years.
Conclusion
In summary, I’ve highlighted the inherited IRA rules and some practical applications for inherited IRAs and inherited Roth IRAs. While most scenarios aren’t like the one in the introduction outlined above, odds are you probably won’t receive an inheritance. According to Yahoo Finance, 70-80% of households receive no inheritance at all. This is why sitting around and waiting for an affluent older family member to pass away, hoping they leave you a big enough inheritance to pay off your mortgage is not a sound financial planning strategy. If you are amongst the lucky 20-30% that do receive an inheritance, we are happy to review your financial plan when you receive that inheritance to make sure that you are optimizing it over the rest of your lifetime. If you need to develop a financial plan to account for your new inheritance or work on an estate plan for which of your heirs will inherit what assets, please give us a call at 714-282-1566 or email us at financialplanning@bfsg.com to get the conversation started. Thank you and have a good day.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.
*Please Note: Limitations. The scope of services to be provided depends upon the terms of the engagement, and the specific requests and needs of the client. BFSG does not serve as an attorney, accountant, or insurance agent. BFSG does not prepare legal documents or tax returns, nor does it sell insurance products. Please Also Note: Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by BFSG) or any financial planning or consulting services, will be profitable, equal any historical performance level(s), or prove successful.
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