Understanding and successfully following the inherited IRA rules can be a bit confusing, but it doesn’t take away from the fact that it’s vitally important to get it right. As there is a 50% penalty of the amount you should have distributed if you don't take the proper RMD's (Required Minimum Distributions).
Never forget: The IRS wants its money and the IRS gets paid when you distribute money from an IRA account.
As a result of the SECURE Act that was passed in late 2019, there are now essentially two sets of rules (and some additional sub rules) for inherited IRAs.
How do you determine which set of rules to follow depends on two things:
If the original IRA account holder passed away in 2020 or later
If the IRA owner died in 2020 or later, we first must determine whether the beneficiary is an “eligible beneficiary” or not.
Eligible beneficiaries include:
If the beneficiary is an “eligible beneficiary,” then the more favorable “old” rules apply – go to the section that begins with “Eligible beneficiaries and deaths that took place in 2019 or earlier” below. If the beneficiary isn’t considered an eligible beneficiary, then the “New” Inherited IRA Rule applies – see below.
The “New” Inherited IRA Rule
If the beneficiary is not an “eligible beneficiary” from above, the new rule applies. What’s the new rule say?
It says that the account must be completely distributed within 10 years of the original owner’s death.
The distributions do not, however, require that they be taken evenly over those 10 years. For example, if you wanted, you could take no distributions for the first 9 years, then distribute everything in year 10. However, the account must be fully distributed by 12/31 of the 10th anniversary year of the original owner’s death.
Eligible beneficiaries and deaths that took place in 2019 or earlier
The “old rules” discussed in the remainder of this article apply in situations in which either:
Under the “old rules,” there are still actually two sets of rules: one set of rules that applies if the deceased owner was your spouse, and another set for any other designated beneficiary.
With this, the rules are different depending on the relationship to the original account holder:
1. Inherited IRA: Spouse Beneficiary
As a spouse beneficiary, you have two primary options:
Note: There is no deadline on a spousal rollover. Should you want to, you can own the account as a spousal beneficiary for several years, then elect to do a spousal rollover.
If you do a spousal rollover, from that point forward it’s just a normal IRA (i.e., it’s just like any other IRA that was yours to begin with), so all the normal IRA rules apply, whether Roth or traditional.
If you continue to own the account as a spousal beneficiary, the rules will be similar to normal IRA rules, but with a few important exceptions.
No 10% Penalty
First, you can take distributions from the account without being subject to the 10% penalty, regardless of your age. So if you expect to need the money prior to age 59.5, this is a good reason not to go the spousal rollover route — at least not yet. (As mentioned above, there’s no deadline on a spousal rollover.)
Withdrawals from Inherited Roth IRA
Second, if the inherited account was a Roth IRA, any withdrawals of earnings taken prior to the point at which the original owner would have satisfied the '5-year rule' will be subject to income tax (though not the 10% penalty).
Spouse Beneficiary RMDs
Third, you’ll have to start taking required minimum distributions (RMDs) in the year in which the deceased account owner would have been required to take them. (If the original owner — your spouse — was required to take an RMD in the year in which he/she died, but he/she had not yet taken it, you’re required to take it for him/her, calculated in the same way it would be if he/she were still alive.)
Your RMD from the account will be calculated each year based on your own remaining life expectancy from the 'Single Life' table in IRS Publication 590-B.
2. Inherited IRA: Non-Spouse Beneficiary
When you inherit an IRA as a non-spouse beneficiary, the account works much like a typical IRA, with three important exceptions.
No 10% Penalty
Distributions from the account are not subject to the 10% penalty, regardless of your age. (This is the same as for a spouse beneficiary.)
Withdrawals from Inherited Roth IRA
If the inherited account was a Roth IRA, any withdrawals of earnings taken prior to the point at which the original owner would have satisfied the 5-year rule will be subject to income tax, though not the 10% penalty. (This is also the same as for a spouse beneficiary.)
Non-Spouse Beneficiary RMDs
Each year, beginning in the year after the death of the account owner, you’ll have to take a required minimum distribution from the account. (If the account owner was required to take an RMD in the year of his death but he had not yet taken one, you’ll be required to take his RMD for him, calculated in the same way it would be if he were still alive.)
The rules for calculating your RMD are similar (but not quite identical) to the rules for a spousal beneficiary. Again, your first RMD from the account will be calculated based on your own remaining life expectancy. However, in following years, instead of looking up your remaining life expectancy again (as a spousal beneficiary would), you simply subtract 1 year from whatever your life expectancy was last year.**
For example, imagine that your father passed away in 2018 at age 65, leaving you his entire IRA. For 2018 (the year of death), you have no RMD. On your birthday in 2019, you turn 30 years old. According to the Single Life table, your remaining life expectancy at age 30 is 53.3 years. As a result, your RMD for 2019 would have been equal to the account balance as of 12/31/2018, divided by 53.3.
For 2020, if it weren’t for the CARES Act eliminating RMDs for 2020, your RMD would have been equal to the account balance at the end of 2019, divided by 52.3. (But because of the CARES Act, the RMD for 2020 would be zero.) In 2021, the RMD will be the 12/31/2020 balance, divided by 51.3.
Important exception: if you want, you can elect to distribute the account over 5 years rather than over your remaining life expectancy. If you elect to do that, you can take the distributions however you’d like over those five years — for example, no distributions in years 1-3 and everything in year 4.
Successor Beneficiary RMDs
If a beneficiary dies before the account has been fully distributed, the new inheriting beneficiary is known as a successor beneficiary.
If the original account owner died in 2020 or later and the original beneficiary (i.e., the first person to inherit the IRA) was a “non-eligible” beneficiary, then the successor beneficiary will have to keep using the same distribution schedule. That is, the successor beneficiary will have to distribute the account within 10 years of the original owner’s death.
Conversely, if the original account owner died before 2019 and/or the original beneficiary was an “eligible” beneficiary, then the successor beneficiary will have to distribute the account over 10 years, but it’s a new 10-year period, beginning with the date of the original beneficiary’s death (rather than beginning with the date of the original owner’s death).
Tips for Non-Spouse Beneficiaries
3. Inherited IRA: Multiple Beneficiaries
If multiple beneficiaries inherit an IRA, they’re each treated as if they were non-spouse beneficiaries, and they each have to use the life expectancy of the oldest beneficiary when calculating RMDs. This is not a good thing, as it means less ability to “stretch” the IRA.
However, if the beneficiaries split the IRA into separate inherited IRAs by the end of the year following the year of the original owner’s death, then each beneficiary gets to treat his own inherited portion as if he were the sole beneficiary of an IRA of that size.
This is a good thing, because it means that:
To split an inherited IRA into separate inherited IRAs:
Some parting thoughts
When you inherit an IRA, it is imperative that you take the time to learn the applicable rules before doing anything. Don’t move the money or make any changes until you understand all of the potential implications because simple administrative mistakes can be very costly.
-Paul R. Rossi, CFA
Before we can answer that, lets first define what a “value stock” is and what is considered a “growth stock.”
Keep in mind, the following definitions are not hard and fast rules, but rather broad ideas/principals, and investors will have slightly different definitions or thresholds as to which bucket a stock should be placed.
Some key characteristics of value stocks are-
The key characteristics of growth stocks are-
In addition to looking at and understanding the value vs. growth question, investors also need to consider whether to purchase individual stocks, mutual funds, or ETF’s to implement these strategies.
Some general rules of thumb-
Growth may be right for you if you’re comfortable with larger price movements and you aren’t in need of current income (by way of dividends). However, you might prefer value if you’re looking for more stable investments that regularly pay dividends. There’s also a case to be made for including both value and growth in your portfolio to smooth out times of volatility and capture the best of both worlds.
Value vs Growth, which is better for you?
Your preference for, or belief in, value vs. growth typically comes down to your investment objectives, risk tolerance, and time horizon. You may prefer to achieve exposure to growth or value, or some combination of both. Again, these are broad strokes, the devil is in the details, so doing a thorough analysis (as always) should be done prior to any investment decision.
-Paul R. Rossi, CFA
The United States civil war lasted 4 years (1861-1865) and caused more than 1 million casualties. The war accounted for more American deaths than in all other U.S. wars combined.
Now imagine a civil war lasting well over a 100 years.
The period in Japan known as the Sengoku period from 1467 – to roughly 1615 was just such a period. During this time, Japan was in near constant civil war, causing social upheaval, and never-ending political instability. Many regional daimyo (local lords) were continually fighting, vying for land, power, and control during this period, costing countless lives.
In the late 1560’s Oda Nobunaga, a powerful daimyo began to consolidate and control a large portion of central Japan through a series of successful sieges and battles. And for the first time in over 100 years, he brought some stability to this part of Japan. While his ultimate goal was to unify all of Japan under his control, he succeeded in conquering a portion of Japan before his untimely death, but was unable to accomplish his ultimate goal.
In 1582, taking over where Nobunaga left off, Toyotomi Hideyoshi a top general of Nobunaga, over the next decade continued the process of unifying of Japan, ultimately bringing relative stability to Japan. However, in 1598 Hideyoshi died without leaving an heir who could immediately take over, leaving a vacuum in power that many wanted to fill.
Following Hideyoshi’s death, Tokugawa Ieyasu, a former vassel of Hideyoshi, masterfully positioned himself to seize power and eventually lead the way for him to become Shogun (supreme leader) of Japan, bringing peace to a country that had only known war. He was able to complete the unification of Japan and outlast all the other great leaders of the time by employing several qualities that enabled him to rise to power. He was both careful and bold—at the right times, and in the right places. He was also calculating and subtle; Ieyasu switched alliances when he thought he would benefit from the change. Serving along-side and under both Nobunaga and Hideyoshi, he understood the power of patience. He acted only when the odds were in his favor.
Under his consolidation of power, he used his remaining years to create and solidify what became known as the Tokugawa shogunate which would rule Japan for the next 260 years.
He is thought to have fought in 90 battles throughout his lifetime.
Later in life he took to introspection and said, “The strong ones in life are those who understand the meaning of the word patience. Patience means restraining one's inclinations. There are seven emotions: joy, anger, anxiety, adoration, grief, fear, and hate, and if a man does not give way to these, he can be called patient. I am not as strong as I might be, but I have long known and practiced patience. And if my descendants wish to be as I am, they must study patience.”
Some things just take time. Knowing when to act and when not to act is a powerful skill.
Investing can be thought of similarly. Warren Buffett has said, “Time is the friend of a wonderful company, and the enemy of a mediocre one,’ and “You can’t produce a baby in one month by getting nine women pregnant.”
Warren Buffett also understands the value of patience.
Understanding and appreciating these two quotes by arguably the greatest investor of all time and employing the active patience Ieyasu was so masterfully able to do, will serve you well.
-Paul R. Rossi, CFA
Paul R. Rossi, CFA