The Importance of Professional Guidance in Inherited IRAs

“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.”

The Origins and Purpose of IRAs

IRAs were designed to supplement disappearing pension programs and provide a significant source of income for retirees. According to Larae Schraeder from Schraeder Law, these accounts were intended to grow tax-deferred until the holder reached a certain age, at which point distributions—and consequently, taxes—would be required. With roughly $41 trillion in retirement accounts as of 2021, these funds represent a crucial part of many people’s financial planning, especially in areas like Central Ohio.

What is an IRA: A Broader Perspective

An IRA is tied to an individual’s Social Security number and benefits from special tax treatment. This also includes similar retirement accounts like 401(k)s, 403(b)s, and 457 plans. These function similarly in terms of tax deferment and eventual distribution. The idea is to save during your younger years and withdraw the money as income after retirement.

Navigating Beneficiary Designations

One of the most straightforward yet crucial steps when managing an IRA is designating a beneficiary. This ensures that the remaining funds go directly to the intended person or entity upon the account holder’s death. Schraeder emphasizes the contractual nature of beneficiary designations, noting that they supersede wills and other estate plans. Regularly reviewing and updating these designations is vital. Especially after significant life events such as marriage, divorce, or the birth of a child.

The Role of Required Minimum Distributions (RMDs)

Once an individual reaches a certain age, currently set at 73, they must start taking Required Minimum Distributions (RMDs) from their IRAs. These withdrawals are calculated based on life expectancy and account balance. This serves as a mechanism for the government to finally tax those deferred earnings.

Complications with Inherited IRAs

Inherited IRAs, especially those inherited by non-spouses, come with their own set of tax rules and distribution requirements. Schraeder explains that recent legislative changes now require these inherited accounts to be emptied within 10 years. That is a significant tightening from previous rules that allowed stretching distributions over the beneficiary’s lifetime.

Strategies for Reducing Tax Burden

Given that the funds in an IRA are pre-tax, distributions in retirement can significantly impact your tax bracket. Schraeder suggests utilizing Qualified Charitable Distributions (QCDs) as one method to manage this. By directing IRA distributions to a qualified charity, you can reduce your taxable income while supporting a cause you care about. However, not all accounts and providers offer this option, so it’s crucial to verify.

The Interplay Between IRAs and Debt

An often-overlooked aspect of estate planning involves the treatment of debt upon death. Schraeder points out that IRAs with designated beneficiaries usually bypass the estate and, consequently, any creditors. However, if no beneficiary is designated, the funds become part of the estate and can be used to settle debts before any remaining funds are distributed to heirs.

The Importance of Professional Guidance with Inherited IRAs

Whether it’s an attorney, financial planner, or accountant, having expert guidance can make navigating the complex rules around IRAs and inheritance much easier. Professional advisors can help you optimize your beneficiary designations, manage RMDs, and make tax-efficient decisions.

Deadlines and Legal Considerations

Schraeder stresses the importance of being mindful of deadlines related to inherited IRAs and other estate matters. Decisions made following a loved one’s death often have to be executed within specific timeframes, failure to adhere to these could result in unfavorable financial consequences.

IRAs offer a valuable way to save for retirement. But they come with intricate rules and regulations that can impact your financial well-being and that of your heirs. Review your accounts, understand the importance of beneficiary designations, and seek professional advice. This will ensure that your retirement savings are optimized to benefit you and your loved ones.

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Recorded in Studio C at 511 Studios. A production of Circle 270 Media® Podcast Consultants.

Copyright 2025 Carol Ventresca and Brett Johnson

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The views and opinions expressed by the experts interviewed on this podcast are their own and do not necessarily reflect the views of the podcast hosts or any affiliated organizations. The information provided in these interviews is for general informational purposes only and should not be considered as professional advice. Listeners are encouraged to consult with qualified professionals for specific advice or information related to their individual circumstances. The podcast host and producers do not endorse or guarantee the accuracy, completeness, or reliability of any information provided by the experts interviewed. Reader and listener discretion is advised.