Parents and grandparents use 529 education savings plans to help with the cost of college expenses. However, they are also a good tool for estate planning, according to a recent article, “Reap The Recently-Created Planning Advantages Of 529 Plans” from Forbes.

There’s no federal income tax deduction for contributions to a 529 account. However, 35 states provide a state income tax benefit—a credit or deduction—for contributions, as long as the account is in the state’s plan. Six of those 35 states provide income tax benefits for contributions to any 529 plan, regardless of the state it’s based in.

Contributions also receive federal estate and gift tax benefits. A contribution qualifies for the annual gift tax exclusion, which is $17,000 per beneficiary for gifts made in 2023. Making a contribution up to this amount avoids gift taxes and, even better, doesn’t reduce your lifetime estate and gift tax exemption amount.

Benefits don’t stop there. If it works with the rest of your estate and tax planning, in one year, you can use up to five years’ worth of annual gift tax exclusions with 529 contributions. You may contribute up to $85,000 per beneficiary without triggering gift taxes or reducing your lifetime exemption.

You can, of course, make smaller amounts without incurring gift taxes. However, if this size gift works with your estate plan, you can choose to use the annual exclusion for a grandchild for the next five years. Making this move can remove a significant amount from your estate for federal estate tax purposes.

While the money is out of your estate, you still maintain some control over it. You choose among the investment options offered by the 529 plan. You also have the ability to change the beneficiary of the account to another family member or even to yourself, if it will be used for qualified educational purposes.

The money can be withdrawn from a 529 account if it is needed or if it becomes clear the beneficiary won’t use it for educational purposes. The accumulated income and gains will be taxed and subject to a 10% penalty but the original contribution is not taxed or penalized. It may be better to change the beneficiary if another family member is more likely to need it.

As long as they remain in the account, investment income and gains earned compound tax free. Distributions are also tax free, as long as they are used to pay for qualified education expenses.

In recent years, the definition of qualified educational expenses has changed. When these accounts were first created, many did not permit money to be spent on computers and internet fees. Today, they can be used for computers, room, and board, required books and supplies, tuition and most fees.

The most recent expansion is that 529 accounts can be used to pay for a certain amount of student debt. However, if it is used to pay interest on a loan, the interest is not tax deductible.

Finally, a 2021 law made it possible for a grandparent to set up a 529 account for a grandchild and distributions from the 529 account are not counted as income to the grandchild. This is important when students are applying for financial aid; before this law changed, the funds in the 529 accounts would reduce the student’s likelihood of getting financial aid.

Two factors to consider: which state’s 529 is most advantageous to you and how it can be used as part of your estate plan.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Can a 529 Plan Help with Estate Planning?” read also these additional articles: Can You Prevent Family Fights over Inheritance? and Top Five Estate Planning Mistakes and What Do You Need to Do When a Spouse Dies? and What If Estate Is Beneficiary of an IRA?

Reference: Forbes (Oct. 27, 2022) “Reap The Recently-Created Planning Advantages Of 529 Plans”

Family finances can be a big issue in any circumstances. It’s even more significant with blended families, where two sets of often well-established financial histories and philosophies try to merge into one.

Kiplinger’s recent article entitled “Yours, Mine and Ours: A Checklist for Blended Family Finances” says that a blended family is one where people have remarried, either after a divorce or the death of a spouse. Sometimes it’s older couples already in retirement. In other cases, it’s a younger couple still trying to raise children.

However, regardless of the specifics of any individual situation, when families blend, so do their finances. That is when things can get problematic, if careful planning and communication don’t occur.

Here are a few things to consider:

Money habits. People are raised with different ideas about money. They’re influenced by their parents or by the circumstances of their formative years. Some people are exceptionally frugal and save every penny and seldom, if ever, splurge on something just for fun. Others spend with reckless abandon, unconcerned about the unexpected expenses that life can throw at them at any moment.

Many people are somewhere in between these extremes. If you are entering a serious relationship, you should speak to your new partner about how each of you approaches spending money.

Financial accounts and bills. Once you learn each other’s financial philosophy, you will have decisions to make. These include whether to blend your financial accounts or keep them separate. If the two of you are closely aligned with your finances and how you approach spending, you may want to simply combine everything. If you’re older, have adult children from prior relationships and are more financially established, you may decide to keep things separate.

For many, a hybrid approach may be best — keep some things separate, but have common savings, investments and household accounts to reach your blended goals.

Family. When there are children from a prior marriage — especially young children — additional financial situations will need to be addressed. Issues of child support and how it fits into the overall budget is one concern, as is the status of college funding for the children.

Talk to an experienced estate planning attorney to make sure you have the plans for your blended family set up the way you wish.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “What Does a Blended Family Need to Know about Finances?” read also these additional articles: Shocking! 8 Things That Can Spark a Will Contest and SCOTUS Rules States Can Recoup a Larger Share of Injury Settlements and Three Estate Planning Options for Your Art Collection and What Common Mistakes are Made with Living Trusts?

Reference: Kiplinger (June 27, 2022) “Yours, Mine and Ours: A Checklist for Blended Family Finances”

IRAs are valuable tools for retirement savings because they offer tax benefits in exchange for putting aside money for your golden years. Money Talks News’ recent article entitled “8 Ways to Maximize Your Traditional or Roth IRA” explains that contributions to IRAs are capped at $6,000 per year for most people, and that can make it difficult to amass the $1 million some people suggest is needed for retirement. Nonetheless, you can maximize your IRA contributions – both this year and over time – by using these ideas.

1. Know your IRA options. See if you’re eligible to open a specialized IRA with a higher contribution limit. Self-employed people can also contribute to a SEP IRA. These Simplified Employee Pension plans let workers save 25% of their compensation.
2. Don’t forget about the catch-up contributions. When you reach 50, you’re eligible to make catch-up contributions to traditional and Roth IRAs. It’s another $1,000 a year. Therefore, everyone age 50+ can contribute a total of $7,000 to their IRA for 2022.
3. Take advantage of a spousal IRA. You typically need to earn taxable income to contribute to an IRA. However, there’s an exception for spouses. A non-working spouse can set up and contribute to an IRA, as long as their spouse has taxable income. However, if you file your taxes separately, you’ll miss out on this opportunity. Your total IRA contributions also can’t exceed the taxable income reported on your joint return.
4. Make regular contributions throughout the year. If you wait for a year-end bonus to make your annual IRA contribution, you might be shortchanging yourself. Try to make small monthly contributions. Known as dollar-cost averaging, this makes saving money a habit and can result in more efficient investments. It may help your IRA grow more quickly.
5. Start contributing as early as possible. It’s never too early to begin saving for retirement, so open an IRA as soon as you’re able and start your deposits as early in the year as possible.
6. Look into a Roth conversion. Both traditional and Roth IRAs offer tax advantages. However, they differ. A traditional account offers an immediate tax deduction on contributions and then taxes withdrawals in retirement as regular income. With a Roth, there’s no tax deduction for contributions. However, the money is tax-free in retirement. If you have a traditional IRA, you can convert it to a Roth account.
7. Invest for the long term. As far as your money in your IRA, “set it and forget it.” Moving it around frequently could incur fees and selling off investments during a down market simply means you’ll be locking in losses. Determine the appropriate investment strategy for your goals and risk tolerance and then stay with it. And remember that you may have to ride out some short-term bumps in the market to maximize your long-term gains.
8. Talk to an expert. For savvy investors and those with the time and inclination to research investment choices, managing an IRA can be a viable option. For others, using a professional can save time and may result in better returns.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “How Do I Maximize My IRA?” read also these additional articles: Can My Pet Help Me in Old Age? and Can New Program Help Dementia Patients? and RMD Formula Changes for First Time in 20 Years and Dynasty Trusts: A Tax-Efficient Way o Pass Wealth Down Through the Generations

Reference: Money Talks News (Dec. 20, 2021) “8 Ways to Maximize Your Traditional or Roth IRA”

For the first time in two decades, the IRS has updated actuarial tables used to determine Required Minimum Distributions, the amount taxpayers are required from their retirement accounts starting at age 72, reports Yahoo! Money in the article “Good News for Retirees: RMD Formula Changes for First Time in Decades.”

The new tables rely on longer lifespans to calculate RMDs from tax deferred accounts, including traditional IRAs, 401(k)s and other similar retirement accounts every year.

One of the key benefits of retirement accounts are the tax advantages they offer. Traditional IRAs and 401(k)s allow savers to defer taxes until funds are withdrawn, letting their investments grow over an extended period of time. However, as with all good things, there are limits. To encourage people to take funds from the accounts (which generate tax revenues), the IRS requires a certain amount of money be taken out after a certain age.

The age requirements have changed over the years. Before the SECURE Act of 2019, withdrawals were required starting at age 70.5. After the SECURE Act, if you reached age 70.5 in 2019, the prior rules applied, and you had to take the first RMD by April 1, 2020. However, if you reached 70.5 in 2020 or later, the first RMD needs to be taken by April 1 in the year after you reach age 72.

Here are the accounts subject to RMDs:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k), retirement plan from private sector employers
• 403(b), retirement plan for public employees and nonprofits
• 457(b), retirement plan for some state and local government employees

Profit sharing plans and other defined contribution plans are also included in this category. Roth IRAs are not subject to RMDs.

With the IRS raising the average life expectancy from 82.4 to 84.6, retirees will also need to make their retirement savings account last longer. Therefore, the RMDs starting in 2022 will be less than those from the prior calculation, which has been the same since 2002. Smaller RMDs will also lower tax liabilities and might even put some people into a lower tax bracket.

You can still withdraw as much as you like from an IRA or the accounts listed above. However, be mindful of the resulting tax bill.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “RMD Formula Changes for First Time in 20 Years” read also these additional articles: Dynasty Trusts: A Tax-Efficient Way to Pass Wealth Down Through the Generations and What Does An Executor Do? and How to Deal with an Estranged Child in Your Estate Plan and Should a Reverse Mortgage Be Used for Long-Term Care?

Reference: Yahoo! Money (June 15, 2022) “Good News for Retirees: RMD Formula Changes for First Time in Decades”

Someone turning 65 has nearly a 7-in-10 chance of needing long-term care in the future, according to the Department of Health and Human Services. However, many people don’t have the savings to manage the cost of assisted living. What they do have is a mortgage-free home — and the equity in it, giving them the potential option of a reverse mortgage to help cover care costs.

MSN’s recent article entitled “A reverse mortgage could be one way to pay for long-term care, but should you do it?” looks at how to evaluate whether a reverse mortgage might be a smart option.

A reverse mortgage is a loan or line of credit on the assessed value of your home. Most reverse mortgages are federally backed Home Equity Conversion Mortgages, or HECMs, which are loans up to a federal limit of $970,800. Homeowners must be 62 years old to apply.

I find that when it comes to long-term care, reverse mortgages are generally NOT a good idea, especially if your goals are to finance long-term care.  If you obtain a reverse mortgage in exchange for cash (the equity in your home), the resulting cash is a “non-exempt asset” that must be used for your care, whereas the home itself is generally an exempt asset (at least on the “front end” when attemting to qualify for Medicaid long-term care).  However, even if the home is exempt on the “front end” it may not be exempt on the “back end” when you pass away due to Medicaid Estate Recovery.  This allows Medicaid to recover what they paid on your behalf for your long-term care up to the value of your home.  Of course, the best option is to protect the home entirely and qualify for Medicaid long-term care, which can be done through advanced planning with an irrevocable trust.  

With that said, if financing long-term care is not your goal, a reverse mortage can be a viable option for achieving other goals (although I discourage my clients from them).  If you have at least 50% to 55% equity in your home, you have a good chance of qualifying for a loan or line of credit for a portion of that equity. The amount depends on your age and the home’s appraised value. Note that you must keep paying taxes and insurance on the home. The loan is repaid when the borrower dies or moves out. If there are two borrowers, the line of credit remains until the second borrower dies or moves out.

If you’re the sole borrower of a reverse mortgage, and you move to a care facility for a year or longer, you’ll be in violation of the loan requirements. Therefore, you’ll have to repay the loan.

Because of the costs, reverse mortgages are also best suited for a circumstance where you plan to stay in your home long-term. They don’t make sense if your home isn’t right for aging in place or if you plan to move in the next three to five years. However, for home health care or paying for a second borrower who’s in a nursing home, this loan can help bridge the gap.

The income is also tax-free, and it doesn’t affect your Social Security or Medicare benefits.

Reverse mortgages are expensive. The costs are equal to those of a traditional mortgage, 3% to 5% of the home’s appraised value. Interest accrues on any portion you’ve used, so eventually you will owe more than you’ve borrowed. Finally, you’ll leave less to your heirs.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.

If you liked this article, “Should a Reverse Mortgage Be Used for Long-Term Care?” read also these additional articles: Did Actor Ray Liotta Have an Estate Plan? and What Is Congress Doing to Guarantee a COLA Increase for Vets? and How Do I Store Estate Planning Documents? and Are Vitamin D and Dementia Connected?

Reference: MSN (June 13, 2022) “A reverse mortgage could be one way to pay for long-term care, but should you do it?”

Losing a beloved spouse is one of the most stressful events in life, so it’s one we tend not to talk about. However, planning for life after the passing of a spouse needs to be done, as it is an eventuality. According to a recent article from AARP Magazine, “The Financial Penalty of Losing Your Spouse,” the best time to plan for this is before your spouse dies.

You’ll have the most options while your spouse is still living. Estate plans, wills, trusts, and beneficiary designations can still be updated, as long as your spouse has legal capacity. You can make sure you’ll still have access to savings, retirement, and investment accounts. Create a list of assets, including information needed to access digital accounts.

Make sure that your credit cards will be available. Many surviving spouses only learn after a death whether credit cards are in the spouse’s name or their own name.

Get help from professionals. Review your new status with your estate planning attorney, CPA and financial advisor. This includes which accounts need to be moved and which need to be renamed. Can you afford to maintain your home? An experienced professional who works regularly with widows or widowers can provide help, if you are open to asking.

A warning note: Be careful about new “friends.” Widows are key targets of scammers, and thieves are very good at scamming vulnerable people.

Be strategic about Social Security. If both partners were drawing benefits, the surviving spouse may elect the higher benefit going forward. If you haven’t claimed yet, you have options. You can take either a survivor’s benefit based on your spouse’s work history, or the retirement benefit based on your own work history. You will be able to switch to the higher benefit, if it ends up being higher, later on.

Be careful about your spouse’s 401(k) and IRA. If you’re in your 50s, you are allowed to roll your spouse’s 401(k) or IRA into your own account. However, don’t rush to move the 401(k). You can make a withdrawal from a late spouse’s 401(k) without penalty. However, it will be taxable as ordinary income. If you move the 401(k) to a rollover IRA, you’ll have to pay taxes plus a 10% penalty on any withdrawals taken from the IRA before you reach 59 ½. Your estate planning attorney can help with these accounts.

Use any advantages available to you. The IRS will still let you file jointly in the year of your spouse’s death. Tax rates are better for married filers than for singles. Any taxable withdrawals you’ll need to take from 401(k)s or IRAs may be taxed at a lower rate during this year. You may decide to use the money to create a rollover Roth IRA or to put some funds into a non-tax deferred account.

Don’t rush to do anything you don’t have to do. Selling your home, writing large checks to children, or moving are all things you should not do right now. Decisions made in the fog of grief are often regretted later on. Take your time to mourn, adjust to your admittedly unwanted new life and give yourself time for this major adjustment.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.

If you liked this article, “What Happens Financially when a Spouse Dies?” read also these additional articles: What the Latest Dementia Study Says about Links with Certain Medicines and What Fruit Is Best for My Heart? and How to Get Into a Nursing Home as a Medicaid Recipient and What are the Most Important Estate Planning Documents for Seniors?

Reference: AARP Magazine (May 13, 2022) “The Financial Penalty of Losing Your Spouse”

If you are very close to the person who has passed away, you’ll likely have a lot to do immediately after their death.

Katie Couric Media’s recent article entitled “What to Do Immediately After the Death of a Loved One” says that it’s normal to feel like your brain short circuits each time you try to make a decision and you find it hard to concentrate. Making it through the days after a loss will be painful. However, here are some things to do immediately and shortly after someone dies to make the process of grief a bit easier.

Plan ahead. This can make a big difference. It will let you have the time and space to grieve after death. This involves both talking about priorities and, ideally, talking to an elder law or estate planning attorney.

Call 911 if they’re at home. To get a death certificate, first, you have to get an official declaration of death. If your loved one died at home without a medical professional present, a medical professional must declare them dead. Call 911 soon after they died and have them transported to a hospital, where they can be declared dead and moved to a funeral home.

Get organized. Make a list of the things people are doing for you and your family, and keep a folder to keep all the documents you’ll be given.

Get the death certificate — and make copies. Without a declaration of death, you can’t get a death certificate. You also won’t be able to handle the deceased’s legal affairs. Obtain a dozen copies of the death certificate from the funeral home because you’ll need these copies for things, such as insurance claims and closing accounts.

Read everything carefully. In your grief, haste and anxiety, it is easy to overlook things. Therefore, when it comes to things like the death certificate — which the funeral home staff often prepares based on the information you provide — the exact spelling of names matters. Draft the obituary and send it to a family member or close friend to review before submitting it to the funeral home.

Think through, or put off, financial decisions. Wait on making financial decisions. In times of distress, especially grief, your judgment may be a bit clouded. So, unless a big purchase is absolutely necessary for the funeral or the burial, wait on other financial decisions.

Take a video of the home. It’s important to document what assets are in the home, such as any valuables, both of financial and sentimental value. A good way to do this is to record a video of the house. Record each room, and every detail. Be sure to open up cabinets and drawers. If there is ever an issue as to the person’s assets later, or even the insurance company, you have your video.

Overcoming sadness accompanied by grief is a terrific feat. Use these tips to help you.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.

If you liked this article, “What Do I Need to Do Right after Spouse Dies?” read also these additional articles: Can a Family Limited Liability Company Reduce Estate Taxes? and Should I have a Pour-Over Will? and How Do I Find a Great Elder Law Attorney? and What Is Cause of Death in Half of Seniors?

Reference: Katie Couric Media (April 28, 2022) “What to Do Immediately After the Death of a Loved One”

The loss of a spouse is an extremely stressful event. It comes with many emotions that can be overwhelming for the bereaved.

Hopefully, life insurance is one thing that was put in place to allow those remaining to process their loss without fretting over their finances, says Kiplinger’s recent article entitled “What Is the Best Way for a Widow to Use Life Insurance Proceeds?”

Life insurance death benefits can be paid within 30 days after you submit a claim. To do this, you need a certified death certificate, which in Louisiana is generally issued in a couple of weeks by the funeral home. You should also order plenty of copies (about 15) for closing accounts.

The best use of the money is different for each widow or widower and their unique situation.

Funeral Costs. Use life insurance money to cover these costs to decrease your financial strain.

Ongoing Expenses. When your spouse dies, living expenses do not stop. Your income is frequently reduced. In fact, after the death of a spouse, household income generally declines by about 40% due to changes in Social Security benefits, spouse’s retirement income and earnings. The death benefit from a life insurance policy can help provide the funds you need to help cover your mortgage, car payment, utilities, food, clothing and health care premiums.

Debts. You are generally not personally responsible for paying off the debts of your deceased spouse, provided they are in the deceased spouse’s name alone. However, debts entered into during the marriage are regarded as “community obligations” or “community debts”.  When an estate does not have enough funds to pay all the debts, any gifts that were supposed to be paid out to beneficiaries will most likely be reduced. Note that you may be responsible for certain types of debt, such as community debts or debt that is jointly owned or a loan that you have co-signed. Talk to an experienced elder law attorney to understand Louisiana’s laws so that you know where you stand concerning all debts.

Create an Emergency Fund. Life insurance can help build a liquid emergency fund, which should cover three to six months of expenses.

Supplement Your Retirement. When a woman loses her spouse, she becomes much more vulnerable to poverty. To retire, a person typically needs 80% of their preretirement income to live comfortably.

Education. If you are a young widow, the life insurance proceeds can be used to pay for going back to school to augment your earning abilities. These funds could also cover the cost of college for your children. However, you should only save for college educational costs after your retirement savings are secure.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.

If you liked this article, “How Do I Use Deceased Spouse’s Life Insurance?” read also these additional articles: Is there a Connection between Vitamin Deficiency and Dementia? and What Does ‘Community Property’ Mean? and Can My Ex Get Some of My Estate?  and Will Eating More Fish Help Me Stay Healthy?

Reference: Kiplinger (Dec. 17, 2021) “What Is the Best Way for a Widow to Use Life Insurance Proceeds?”

When you retire, you’ll have some major expenses. Money Talks News’ recent article entitled “11 Huge Retirement Costs That Are Often Overlooked” details some retirement costs that people often forget to figure into their financial calculations.

1. Health insurance. With Medicare in retirement, you should know that there can be recurring costs like premiums and deductibles which tend to rise each year. Some seniors have the option to buy a supplemental Medicare health insurance plan, also known as a Medigap policy, to cover some out-of-pocket costs. However, a Medigap policy is still an expense in itself.
2. Long-term care. This is an expense that Medicare generally doesn’t cover. Unless you bought a long-term care insurance policy, you might have to cover the cost of long-term care yourself, if you need it.
3. Home renovations. About 82% of seniors would stay in their current home for the rest of their lives if they could, according to a 2021 survey by American Advisors Group. Known as “aging in place,” this has costs. It could include doorways that may need to be widened for wheelchair passage, a bedroom added to the main floor or a bathroom renovated to accommodate the limited mobility that often comes with advanced age.
4. Federal income taxes. If your income decreases when you retire, your taxes likely also will drop. However, that doesn’t mean your federal income tax bill will fall to $0. This because even Social Security retirement benefits are taxable in certain situations.
5. State income taxes. Like federal income taxes, state income taxes don’t necessarily stop when you retire. Some states tax Social Security benefits, and many states tax certain other types of retirement income to some level.
6. Transportation. If you drive an older model vehicle, or you’re still making payments on your car, owning a car can become an expensive investment for a retiree. You could possibly sell one car if you have two. Even if the car is paid off, you’ll save on insurance and other ongoing costs. You could also start using public transportation, if it’s available.
7. Travel. Having the free time to travel is a fantastic retirement perk. However, that travel can come at a cost, even with the senior discounts.
8. Needy adult children. Some adult children return home to live. However, your children might ask you to co-sign loans and then bail on the payments, leaving you with the bill. They may also need your money to pay their rent, student loans, phone bills or other expenses.
9. Entertainment. Musicals, plays and other live performances are not inexpensive. American households led by someone age 65 or older spent an average of $302 on entertainment-related fees and admissions in 2020.
10. Inflation. You must plan for what the next 10, 20 or 30 years will bring.
11. A long life. People are living much longer than in the past. This compounds all your expenses.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.

If you liked this article, “What are the Biggest Retirement Costs Often Overlooked?” read also these additional articles: Is Estate Planning Affected by Property in Two States? and What are the Current Gift Tax Limits? and No Will? What Happens Now Can Be a Horror Show and What Does Study Say About Dementia and Mortality?

Reference: Money Talks News (Dec. 14, 2021) “11 Huge Retirement Costs That Are Often Overlooked”

If you’ve inherited an IRA, you won’t have to pay a penalty on early withdrawals if you take money out before age 59½. However, you may have to make those withdrawals earlier than you’d wanted. Doing so may trigger additional income taxes, and even push you into a higher tax bracket. The IRA has always been a complicated retirement account. While changes from the SECURE Act have simplified some things, it’s made others more stringent.

A recent article titled “How Do I Avoid Paying Taxes on an Inherited IRA?” from Aol.com explains how the traditional IRA allows tax-deductible contributions to be made to the account during your working life. If the IRA includes investments, they grow tax—free. Taxes aren’t due on contributions or earnings, until you make withdrawals during retirement.

A Roth IRA is different. You fund the Roth IRA with after-tax dollars, earnings grow tax free and there are no taxes on withdrawals.

With a traditional inherited IRA, distributions are taxable at the beneficiary’s ordinary income tax rate. If the withdrawals are large, the taxes will be large also—and could push you into a higher income tax bracket.

If your spouse passes and you inherit the IRA, you may take ownership of it. It is treated as if it were your own. Howwever, if you inherited a traditional IRA from a parent, you have just ten years to empty the entire account and taxes must be paid on withdrawals.

There are exceptions. If the beneficiary is disabled, chronically ill or a minor child, or ten years younger than the original owner, you may treat the IRA as if it is your own and wait to take Required Minimum Distributions (RMDs) at age 72.

Inheriting a Roth IRA is different. Funds are generally considered tax free, as long as they are considered “qualified distributions.” This means they have been in the account for at least five years, including the time the original owner was alive. If they don’t meet these requirements, withdrawals are taxed as ordinary income. Your estate planning attorney will know whether the Roth IRA meets these requirements.

If at all possible, always avoid immediately taking a single lump sum from an IRA. Wait until the RMDs are required. If you inherited an IRA from a non-spouse, use the ten years to stretch out the distributions.

If you need to empty the account in ten years, you don’t have to withdraw equal amounts. If your income varies, take a larger withdrawal when your income is lower and take a bigger withdrawal when your income is higher. This can result in a lower overall tax liability.

If you’ve inherited a Roth IRA and funds were deposited less than five years ago, wait to take those funds out for at least five years. When the five years have elapsed, withdrawals will be treated as tax-free distributions.

One of the best ways for heirs to avoid paying taxes on an IRA is for the original owner, while still living, to convert the traditional IRA to a Roth IRA, paying taxes on contributions and earnings. This reduces the taxes paid if the owner is in a lower tax bracket than beneficiaries, and lets the beneficiaries withdraw funds as they want with no income tax burden.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.

If you liked this article, “Do You Have to Pay Taxes on Inherited IRAs?” read these additional articles: Must I Sell Parent’s Home if They Move to a Nursing Facility? and When Can Estate Assets Be Distributed? and What’s the Limit for Earning with Social Security? and Is a Bypass Trust Necessary?

Reference: Aol.com (Feb. 25, 2022) “How Do I Avoid Paying Taxes on an Inherited IRA?”