Announcer:
It is time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly.
Registered representatives securities offered through Cambridge Investment Research, Inc. a broker/dealer, member of FINRA, SIPC. Investment advisor representative, Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now, here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate Kreinbrink, bringing you today’s show. October moving right along. We are into the second week here. And again, as I said, it’s flying right by, just has the previous nine months so far this year have done. We’ve gotten, I think, a taste of fall weather, cooler nights that we’ve had. Although, again, you start looking at the end of the week’s forecast and some of those high temperatures, looks like we’re back up into the mid-80s. Cooler in the evenings, but again, tasting some of that warmer temperatures, but yet no real precipitation in forecast.
Again, for those Friday night football games and weekend activities, soccer games, whatever it may be, looks like they should be dry and continuing on, but I think you can say fall’s here. Leaves are starting to change. You’re starting to kind of feel the different air I guess you would say as it’s coming in, and then knowing that the seasons are changing. And sooner or later we will be getting into some of that colder stuff. And again, with 80 degree temperatures will make it feel a little less like the middle October, like what it is. But again, we’ve had years where, again, October has been a little cooler, a little wetter, a little white stuff falling. So we’ll see what we get.
And continuing on, it’s transition time. Playoff baseball, if you have any teams that are still in it, is on and exciting as ever. Football, again, getting ready for what those seasons bring. Winding up some of the high school seasons with football, volleyball, soccer, golf, those teams are kind of winding up, homecoming season. So again, it’s a fun time, exciting time, and again, as we transition into the next season per se, it’s important just to enjoy the weather that’s out there and what each one of those seasons bring. It’ll be trick-or-treat time here before we know it.
Wanted to get into topics today with the program. And again, talk a little broad level with some of them, but again, something that will impact more than likely each and every one of you out there right now and again into the future, and that’s, one, beneficiary designations with your accounts that you may have. And then on the flip side of that, talking a little bit about if you inherit accounts after someone has passed away and you were named a beneficiary.
So each flip side of those, again, there’s some changes that are coming along and that we want to make sure that we know what we have listed, make sure they are up-to-date. Continuously check them, and how it goes through and how that process plays itself out in the unfortunate event that someone passes away and assets and accounts are passed on to another individual.
Starting with beneficiaries. This applies to a lot of the accounts that are considered retirement accounts, so your 401(k) at work, your 403(b) through your employer, an IRA account, a Roth account. This also applies to annuities, to life insurance policies, things along in that vein that, again, you can name beneficiaries to it. So if you pass away, this is who I want this money to be passed to.
With that, you have a primary and a contingent beneficiary. Primary is the first one that it would go to. Contingent comes into play if you and your primary beneficiary who is listed both pass away together, then it goes to that contingent one. Now again, you can also list multiple primary beneficiaries. You can list multiple contingent beneficiaries. Listing different percentages, how you want that money to be divided between those people that you have listed, again, upon your passing.
When we look at these, we look at it from, again, who is the one that we are listing as a beneficiary. If you are a primary beneficiary and you list your spouse, so a husband lists his wife, wife lists her husband, then that account would go to that surviving spouse and basically be treated as it is an account in their name. They can open up an account, just like the one that the deceased had opened, and basically transfer that into an account in their name like it is their own money. Again, if a husband has an IRA account, lists his wife as the primary beneficiary, he passes away, that IRA would go into an IRA account directly held in the wife’s name. Basically, again, like I said, it’s as if it was her money.
Now that applies only when you have a spouse that is inheriting money. Again, whether it’s a Roth account, whether it’s a 401(k), whether it’s an IRA, whatever it may be, if you list a spouse, if a spouse inherits money, it is treated as if the account from the deceased is basically now a full account in the surviving spouse’s name.
Where it gets a little different, again, is if you list a non-spouse as a beneficiary. Again, let’s say for instance, you list … You’re single, you have two kids that are primary beneficiaries. If you pass away and that money goes to the kids, that money would need to be put into a beneficiary designated account in the kids’ names, depending on whatever percentage you have. Again, in that same instance, if you had an IRA account, you had two surviving kids, you listed each one of those as 50% beneficiary. Half of your IRA account after you pass away would go into one of the kid’s name. The other half would go into the other kid’s name into a beneficiary designated account.
Now with this, there’s some laws that apply as far as how soon that they need to take that money out. Up until 2020, you were able to take that money out and stretch it out a little bit each year based off of your life expectancy. Again, you could essentially take that tax deferral and stretch it out over your whole entire lifetime if you so choose to do that. Now again, if you have an IRA and you inherit it and you take money out of it, it is still taxable to you. That 10% penalty is waived so we don’t have to worry about that like you would a regular IRA in your own name if you’re under age 59 1/2. But if we are a non-spouse and we inherit an IRA, if we take money out, it is going to be taxable to us in the year that we take it out.
Now, after 2020, there was a new law that was put into place. So now what we have as far as if you inherit a retirement account, you have 10 years to basically take that money out of that account. And starting next year, you have to take a little bit of money out each year during those 10 years. From 2020 up until the end of this year in 2024, there was really no clear guidance to whether or not you had to take it out. You had to still take it out by the end of the 10th year, but there was no guidance and no clear-cut verbiage saying that you had to take something out.
So again, if I inherited an account in 2020 from a non-spouse that is an IRA, I could not take money out over the last four years if I so choose to do that. Now again, I’m shrinking that 10-year window, so I only have six years left then to take that money out of the account. By the end of the 10th year, 100% of that money has to come out of that beneficiary-designated IRA account.
Again, when you start looking at that, if you are a beneficiary of an account that is a non-spouse one, again, when does it make sense to take it out? If it’s an IRA, I just mentioned, it is going to be taxable to you. So do I want to spread this out a little bit each year to spread it out over the 10 years, or up until this point, you could delay that all the way to the 10th year.
Well, again, they continue to revise some of these things. So starting in 2025, that 10-year window still applies, but you have to take out a small amount each year. Even if you don’t need it, you have to start taking out a little bit each year. Now again, if you do that, take a little bit out each year, you’re still going to have a bigger chunk left over in year 10. But laws now state that you have to start taking a little bit out each year.
Now again, these same rules do apply to a Roth account, should I inherit one of those. Again, it still needs to be out of that account within 10 years. The only difference is, and again, one of the main differences of the Roth, is that money was put in by the original owner after tax. You got that tax-free growth. Well, that tax-free growth is extended to the beneficiary as well. So if I inherit a Roth account from a non-spouse owner, that owner passes away, I inherit that Roth. I still have to take it out within 10 years, but it’s still not taxable to me.
Again, I could take it out and then put it into an account, if I’m eligible, into a Roth account in my own name. If I’m able to from income and qualifications, whether I have earned earnings, whether I’m still able to put some money in, I could do that. But again, it still has to come out within that 10-year window a little bit, starting next year will have to come out each year. However, it will still not be taxable to you.
Again, when you start looking at that, that’s where you want to look at it to say, “Okay, do I want to pay taxes before I pass away? Do I need to go to the beneficiary? Who’s going to be in the higher tax bracket, who may be in a lower tax bracket? If I do inherit an account, is it going to be taxable to me. Again, am I going to retire in five years? Well, maybe I want to take out the minimum each year and then defer some of that taxable distributions to a time when, again, I am retired, I have lower income”. So again, maintain some of those tax requirements.
Again, life insurance policies, you still list beneficiaries, but again, life insurance proceeds are generally tax-free to the beneficiary. Again, it does not apply a little bit differently. But again, when you look at that, you just want to … Again, from both sides of the spectrum, if I’m starting to list my beneficiaries, who do I want to list as primary? Who do I want to list as contingent, to what percentages? There’s another box on there on most forms as far as checking the per stirpes box. What that means is basically if one of the people that I have listed as beneficiaries pass away, do I want their share to go to their blood descendants. So if I list a child of mine, that child of mine has kids, so my grandkids, do I want that share that was going to go to my child to go to my grandkids, or do I want it to be divided up between the other beneficiaries that I have listed.
Again, every situation is different. Every situation requires it to go through the different scenarios and play that what-if game. Again, we always say you want to plan for the worst and hope for the best. Always not the most pleasant discussions to have, but knowing that you have it set up to go where you want it to go to should the unfortunate happens, gives you a little bit of a peace of mind to know that things are in place.
Again, this is very high level as far as beneficiaries, but again, hopefully it gives you something to think about. If you haven’t checked your beneficiaries in a while, make sure they’re updated. Make sure they’re still listed as who we want them to go to. And again, set anything that you can do to make it easier should the unfortunate happen of your passing, we want to make sure that we can do that while we still able to.
Again, if you have questions, give us a call, we’d be happy to help. I did want to mention real quick though before I run out of time, that every Friday, NelsonCorp Wealth Management and NelsonCorp Tax Solutions are wearing jeans for charity. Money raised in the month of October will be donated to the Mississippi River Eco Tourism Center at the Rock Creek Marina.
Again, this is Nate Kreinbrink with NelsonCorp Wealth Management, bringing you this week’s Financial Focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly.
Registered representative securities offered through Cambridge Investment Research, Inc., a broke/dealer, member of FINRA, SIPC. Investment advisor representative, Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.