By Andy Ives, CFP®, AIF®
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I just inherited my spouse’s inherited IRA (he got it from his father). He (my husband) was already taking required minimum distributions (RMDs) based on his own single life expectancy. My question is, do I have to empty that account in 10 years based on the SECURE Act? (I think this is correct, but if I don’t have to do it, I don’t want to!)
You may not want to, but I’m sorry to say you have to. Based on the beneficiary rules under the SECURE Act, you are a successor beneficiary in this situation, and successors get the 10-year rule. Since this inherited IRA was being stretched (RMDs were being taken), as a successor you get to start a fresh 10-year period. Also, RMDs cannot be stopped. You will continue the same RMD payment schedule using the same single life expectancy factor that your husband was using, minus-1 each year, for years 1 – 9. At the end of the 10th year, the entire account must be emptied.
I am a 27-year-old working individual who wants to convert a regular 401(k) into a Roth IRA. In addition to the regular tax imposed, will this transfer incur the 10% penalty usually levied on early withdrawals?
Roth conversions are not subject to the 10% early withdrawal penalty, no matter how old you are. If you have the 401(k) check paid directly to you, the plan is required to withhold 20% for taxes, but as long as you deposit the money into a Roth IRA within 60 days, it will qualify as a valid conversion and no penalty will apply. A better option would be to do a direct rollover (transfer). Have the 401(k) make the check payable to your Roth IRA custodian “for the benefit of Emile,” and the plan can send the entire balance with no 20% tax withheld. That way you get the full amount into a Roth IRA. Both of these transactions will be taxable, as you mentioned, but no 10% penalty will apply.
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In this week’s episode of the Great Retirement Debate, Ed and Jeffrey debate SECURE Act 2.0 and whether it’s big deal, or not a big deal for you, the consumer, in regards to the provisions affecting required minimum distributions (RMDs), qualified charitable distributions (QCDs) and the new 10% RMD penalty.
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