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Why You Should Never Die With Money In Your IRA

If money is transferred through
an IRA, it can put the beneficiary in a very precarious tax situation. 😦

The good news is that there are better ways to transfer money and completely avoid paying taxes in the process 😏, but first, let’s talk about the implications of transferring an IRA.

☑️ First Pitfall of an IRA Transfer (A
spouse inherits the IRA)

When a spouse inherits an IRA, they have 2 options (assuming they are not more than
10 years younger than their deceased spouse).

First, they can take the Required Minimum Distributions (RMDs) of the IRA based on either their life expectancy or the life expectancy of the deceased spouse.

Or they can take all the money out in 10 years.

Here’s where the problem arises. 😅

For oversimplification, let’s say the IRA balance requires you to take $50,000 per year out and that’s your only income source in #retirement .

As a married couple, you can take this out in the 12% tax bracket.

But, since one spouse is now deceased, the account is now going to be distributed as a single filer.

This means that
the same $50,000 will now be taxed at 22%‼️

So, the tax bill on the same money has almost doubled.

If tax rates happen to go up, which they are anticipated to, this could cause an even
greater tax bill that can eat away the proceeds of other assets (since
you have to makeup that lost income somewhere).

Not exactly an ideal #wealthtransfer

☑️ Second Pitfall of an IRA Transfer (an
adult child inherits an IRA)

An (adult) child inheriting an IRA only has 1 option… they have to completely liquidate
the IRA in 10 years.

This means that they have additional taxable income for 10 years that can easily push them into a higher tax bracket. 😢

So, let’s say you pass $500k to your 26-year-old daughter who is married with a household income of $80,000 per year.

She now must take at least $50,000/year of IRA distributions (not counting the
investment growth), which will now make her household income $130,000 per year.

This moves her and her husband from the 12% tax bracket to the 22% tax bracket‼️