Inherited IRAs- A Poor Gift

People have been led astray, or at least that is my opinion when it comes to traditional IRAs, 401Ks, 403Bs, or any other retirement plans. Yesterday, I was reading an article in The Wall Street Journal about the inheritance of traditional IRA plans, which is the vast majority of the plans that are out there. The problem is the rules; the rules keep on changing. You think you are at one point, but then the line moves and it doesn’t move ahead or back, it moves sideways. In fact, even the IRS does not know (the rules); they have not decided exactly how this is supposed to play out. So, I’m going to be reading bits and pieces from The Wall Street Journal article that is titled Heads Spin Over Inherited IRAs.

Why am I talking about Inherited IRAs? When I discuss IRAs with my clients, I tell them to spend their money! Oftentimes, people don’t spend the money though and it’s basically for two reasons: the 1st reason is the fear of running out of money. I get it, but it has also been my experience that these thrifty individuals typically do not run out of money. In fact, I have seen time and time again, day after day that people in retirement will oftentimes still save money. In fact, I laugh to myself. Sometimes, I will laugh in front of clients because they are saving for their old age. I remember telling a woman once who was 83 years of age that she ‘had arrived’ and she no longer needed to save for her old age. Instead, she had arrived and it was time to spend. So, that’s number one: people are fearful; they are fearful of running out of money. For those people who don’t have much in assets maybe that should be a real fear that they have.

On to number 2, and this becomes a bigger and bigger play as people get older: the sense of making sure your kids get something when they die. Here’s the deal: your kids are going to get something either way. It might be your house. It might be other valuables. It might be what’s in your bank account, brokerage account, or other investments. If I were to leave something, the worst thing, in my mind or my opinion, to leave would be a traditional retirement plan. The reason being that oftentimes the biggest beneficiary of those accounts is the United States government. They are first in line because they want their money. They are first in line before any money is paid out.

Hence the confusion over the rules because the rules keep on changing. Would you buy something if you knew the rules were going to be adjusted time and time again. So, from the article Heads Spin over Inherited IRAs, it says, “Figuring out the most efficient way to navigate the tax impact from inheriting Individual Retirement Accounts has gotten so complicated since the Internal Revenue Service first issued proposed (Notice the word here) new rules in February”. By the way, they’re coming up with new rules all the time. These are just the most recent rules this last February.

They last changed in 2019 because of the Secure Act, which actually doesn’t make me feel that secure because before if you inherited a traditional IRA, you could use the rest of your lifetime to slowly take money out and hopefully make less of an impact regarding taxes, and you didn’t have to shoot the whole load at one time. It could actually last for a period of time that you could use it. Now there is a 10-year rule for inherited IRAs and 401Ks. They used to be spread out over their lifetime, but now 10 years/one decade is the period of time to pull the funds. That might seem like a long period of time, but if you are inheriting something like this at the age of 40 or 50 you might have wanted that to last in to your own retirement, but that is a no go any longer.

The revision was actually put into place in May of 2021 in publication 590-B. Here is the fun part: it’s a 69-page guide for IRA distributions. With 69 pages it would not be light-reading. Then this February the IRS issued new guidance that would require heirs to, instead of just taking the money by the time that 10 years had passed, now they’re saying they want to see annual withdrawals in cases where the original owner has died and it wasn’t a spouse who inherited the IRA, but instead it was maybe the kids. Of course, the annual distributions are going to be based on a formula. I don’t know about you, but I have a hard enough time cooking in the kitchen with a recipe, which is nothing more than a formula.

So, now they have a formula and new guidance. Here’s the deal as well because we’re talking about the government, but your employer, who has your 401K, oftentimes has already set even more restrictive payout rules. So now you’ve got to worry about the government and you’ve got to worry about your employer and what are the rules from one to the other. The article says, “Payouts from a traditional inherited IRA are taxed like wages”. That would be called ordinary tax. There is no capital gains treatment. Obviously because they are not earned income you don’t have to worry about FICA and Medicare taxes, but all at once you’ve got to worry about Federal and you’ve got to worry about State taxes. If you are inheriting this as a son or a daughter, you are likely inheriting this from your parents at a time when you yourself may be in the highest income tax bracket of your life. You’re already there, so why not add in the gift that your folks wanted to give you and all of a sudden you are going from taxes in one bracket to taxes in another bracket.

This is not the gift that keeps on giving. Of course, unless you are Uncle Sam. There is a certified public accountant in Plymouth, MN who actually wrote a book about these topics. His name is Michael Jones, and he is quoted in the article as saying, “this is just horribly complex”. The article goes on to say that, “tax payers who fail”, and we’ve known this for a long time, “to take the required distribution are then going to be hit with a tax penalty as much as half the amount that should have been taken out”, but wasn’t. So, you don’t want this calculation to be wrong. You don’t want the formula to be neglected because in the tax additional you may now have a 50% tax penalty. Now we’re getting close to almost 100% of the money being taken, or so it feels like it anyways.

A woman from Ann Arbor, MI who handles the tax filing for her family is quoted in the article as saying, “I was an IT professional before I retired and I can run a spreadsheet, but even this is making my head spin”. When people ask me for advice on this, I have to say that I’ve got to wait to see how this will play out because as of right now, we are in August of 2022, experts are saying that we need to wait until closer to the end of the year to see what the IRS does or to see if Congress is going to make any changes because of course rules are not etched in stone; they keep on changing.

Why am I talking about these traditional IRAs? Well, because of the number 2 factor. I said number 1 was when you’re worried about running out of money. Number 2 is when you want to be able to leave something for your kids. This is not a good asset to leave to your kids. In my opinion, one of the best assets if not The Best asset is whole life insurance. I know what the value is going to be. I know I don’t have market risk. I know that, if done correctly, which is going to be done 99.99% of the time, the vast majority of people are going to see tax-free benefits. Do what I do; I own a lot of tax-free life insurance assets, the whole life kind. The kind that lasts the whole of your life as opposed to something that is just going to be a term of time, and you’re hoping you’re going to die during that term of time. That is not the way that I want it to play out. I have a contract that will last until the day I die or until age 121, whichever comes first and I am eyeing ages way out there.

It's about living your life fully. Life insurance allows you to live your life fully. Wouldn’t it be wonderful if you could spend all of your IRA and maybe even do it in a lower tax bracket during your life because you can plan it out. As opposed to hoping that you die at the right time, with the right rules, and the right formulas, and your kids make the right decisions so they are impacted the least amount? My life insurance asset is going to come in to play where if someone from my family walks into the life insurance company with a certificate of death with my name on it after I’m old and have lived a long and enduring life, within 10 days that tax-free money has been deposited in their bank account.

The only rule here is that they need to have a death certificate that says that Mark went on the big trip. So, as long as I go on the big trip or the dirt nap, it’s good to go. So, I can spend all of my IRA and other assets. Instead of having a saving mentality that I have to keep on saving and keep on saving, I can use my money more wisely and spend it during my lifetime. Not just on me and not just on my spouse, but also on my kids and on charities. I can make an impact, and I can see with my own eyes how it played out. I can see the benefits that I was able to give to others during my lifetime. Instead of being a scrooge and a miser, I can live my life helping others live their life fully as opposed to waiting until the day that I die, and people getting my assets out of my cold, dead hands. I don’t think that is the way I want my life to play out. I want it to play out fully. I want to be able to make an impact!

Life insurance is just that: it’s a replacement of my other assets because what I would really like…shh...don’t tell anyone… I would like for the day that I die to be overdrawn at the bank. That tells me that I lived my life fully. I would like to be overdrawn at the bank. I would like the last check that I write to be to the IRS, and I would like it to bounce. That means that I lived my life fully. Then, 10 days later, I would like all the money that I spent to come back. Some people may say he spent his money frivolously. No, because I spent it on other people. I spent it on life. I spent it on enjoyment. I spent it on experiences. I spent it on charities, and 10 days later, all the money that I had spent ‘frivolously’ will be recreated income-tax free and it is then deposited into the accounts of the people that I love. Without any income taxes. Without any rules. Without any formula saying it’s got to be withdrawn over 10 years or it’s got to be withdrawn annually. Instead, I will allow my loved ones and the charities that I remember, I will let them make the choices as opposed to the government dictating to them how the money should be spent.

So, if you have boatloads of money, as a lot of people do in their IRAs, is this the wisest thing for you to be doing? Now, the answer is yes. It’s an important thing to have. It’s one of your assets, but it’s not going to be the end all do all. It’s a crappy asset to die with. Instead, you want to live with it. But If I have a whole life insurance policy that is going to be there for me later on, what that becomes is a permission slip for me to be more creative in the things that I can do today.

By the way, since we’re talking about death here, my life insurance policy is like a house. It has a value that is going to be going to someone else at some point in time, but inside this house there is equity that I am going to be building up year after year that has a good, solid, safe rate of return that is predictable. I no longer need to have any fear about what’s going on with the market with the highs and lows and backwards and forwards and left and right and what’s going on in the world. I know year to year what it is going to be looking like and I know it’s not going to be going backwards because I programmed it the right way.

So, if I need to access cash, I know that that is going to be available as well because here is the safety belt to my system that anybody can do: let’s say I spent more in my retirement than I should have, maybe I have spent it all, but now I have my best, last asset that I wanted to pass on, and I still can, but it also has money that I can access in the event that I need it for myself.

Or, if in my young age that I’m in right now, I want to access it to be able to do some more creative things, I can. Now, I don’t think this is money that you should use to go to Disney Land, but maybe it’s money that would be appropriate to buy Disney stock. The reason I’m wording it that way is because I believe that the money that is in a whole life insurance policy is money that can be used for opportunities that come along the way. An opportunity is not going on a vacation, I should be able to handle that myself. Opportunities are things that can make me more money. So that later on I can spend… more money. To be able to have a more fulfilling life for myself and for the ones I love.

It's also there in the event of an emergency. I call that the ‘crap factor’ because crap happens along the way and all of a sudden because you have money tied up someplace else, you might not have the accessibility to access the money that you need. I have ways to access the money inside of my whole life insurance policy. Because I’ve had these over an extended period of time, I’ve got money sitting there for the days when there might be an emergency or there might be an opportunity that I want to take advantage of.

I wanted to discuss this with you today because of formulas and rules and head spinning and Congress not even realizing what they should be doing and who knows if they will even agree by the end of the year, and will the IRS realize that they’ve created some additional problems because they don’t even know, and everyone is holding off wondering what they should do. This is just money and now your beneficiaries, and this is just one of the reasons, remember number two. Number one was running out of money before running out of life. Number two was wanting something to give to your kids later one. Why would you give them something that basically has a huge tax bill on it before they get it? If somebody gave you a gift like that, wouldn’t you be a little bit peeved? I would. So, think of a better way to do it.

For more information about me and for more information about my book, explore my website at If you want to immediately get my book, go to Amazon or Barnes and Nobles. If you want to listen and don’t want to read, this is one of the few ways you can shut me off as I do the audio book version, you can go to iTunes or Audible. If I have impressed upon you enough how important this is, perhaps now is the time that you need to be thinking about your best, last asset. Don’t wait until it is your last moment to do something. I was looking at some baby policies recently that were put together on children 30 years ago, whole life insurance policies. Huge amounts of equity have been built up inside of these policies, but if you are in your 30s, your 40s, your 50s, your 60s, no matter the age, it may still not be too late to do the planning that can impact your life the most.


Ebeling, Ashlea. “Heads Spin Over Inherited IRAs.” The Wall Street Journal. 1 Aug. 2022.

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