Dear Savvy Senior,
What are the rules regarding inherited IRAs? My brother and I recently inherited our father’s IRA when he passed away late last year and would like to know what we need to do to handle it properly.
— Oldest Sibling
Dear Oldest,
I’m sorry to hear about the loss of your father, but you’re smart to be planning ahead. Inheriting an IRA from a parent comes with a unique set of rules. Understanding them can help you make the most of the money you inherit and avoid an unpleasant surprise at tax time. Here are some basics you should know.
Setting It Up
Many people assume they can roll an inherited IRA into their own IRA, but that’s not allowed for most beneficiaries. If you inherit an IRA from a parent, sibling, or anyone other than a spouse, you cannot treat the account as your own. Instead, your share must be transferred into a newly established inherited IRA, properly titled in the deceased owner’s name —for example, John Smith, deceased, for the benefit of Jane Smith.
If your father named multiple beneficiaries, the IRA can be split into separate inherited accounts. This allows each beneficiary to manage withdrawals independently, as if each were the sole beneficiary.
You can open an inherited IRA at most banks or brokerage firms, although the simplest option is often to set it up with the firm that already holds your father’s account.
The 10-Year Withdrawal Rule
Under the SECURE Act, signed into law in December 2019, most non-spouse beneficiaries must withdraw all the money from an inherited IRA by the end of the 10th year following the original owner’s death. This rule applies if the owner died in 2020 or later.
If your father had already begun taking required minimum distributions (RMDs), you generally must continue taking annual RMDs while also emptying the account within 10 years. If he had not yet started RMDs, annual withdrawals aren’t required, as long as the entire IRA is withdrawn by the end of the 10-year period.
You may take withdrawals faster if you choose, but distributions from a traditional IRA are taxable as ordinary income in the year taken. Roth IRA withdrawals, however, are usually tax-free, provided the account has been open at least five years.
If you fail to take a required RMD, or don’t withdraw enough, the penalty is 25 percent of the amount you should have taken. That penalty can be reduced to 10 percent if the mistake is corrected within two years.
Exceptions to the Rule
Several beneficiaries are exempt from the 10-year rule, including a surviving spouse, a minor child, a disabled or chronically ill beneficiary, or someone who is within 10 years of age of the original IRA owner. These beneficiaries may be allowed to stretch withdrawals over a longer period.
Minimize Your Taxes
As tempting as it may be to cash out an inherited IRA in a lump sum, or take large withdrawals over just a few years, proceed carefully. Doing so could trigger a hefty tax bill. Withdrawals from a traditional IRA are generally taxed as income at your regular tax rate.
For many heirs, spreading distributions over the 10-year period can help manage taxes and reduce the risk of being pushed into a higher tax bracket. Other strategies may make sense if your income fluctuates or you’re nearing retirement.
To help navigate these decisions, consider working with a financial advisor. If you don’t have one, you can find a fee-only, fiduciary financial planner through the National Association of Personal Financial Advisors at napfa.org.
Medicare Can Help Older Smokers Kick the Habit
Dear Savvy Senior,
Does Medicare offer any coverage that helps beneficiaries quit smoking?
— New Beneficiary
Dear New,
If you’re ready to quit smoking, Medicare can indeed help! Medicare Part B covers up to eight face-to-face counseling sessions per year to help you kick the habit, and if you have a Medicare Part D prescription drug plan, certain smoking-cessation medications are covered as well. Here’s a guide to help you get started.
It’s Never Too Late
According to the Center of Disease Control and Prevention (CDC) 8.3 percent of Americans age 65 and older still smoke. Many older smokers indicate that they would like to quit, but because of the nicotine, which is extremely addictive, it’s very difficult to do.
Tobacco use is the leading cause of preventable illness, responsible for an estimated one-fifth of deaths in the United States each year. But research shows that quitting, even after age 65, greatly reduces your risk of heart disease, stroke, cancer, osteoporosis and many other diseases. It also helps you breathe easier, smell and taste better, and can save you money. An $8 pack-a-day smoker, for example, saves about $240 after one month without cigarettes, and nearly $2,880 after one year.
How to Quit
The first step you need to take is to set a “quit date,” but give yourself a few weeks to get ready. During that time, you may want to start by reducing the number or the strength of cigarettes you smoke to begin weaning yourself.
Also check out over-the-counter nicotine replacement products — patches, gum and lozenges — to help curb your cravings (these are not covered by Medicare). And just prior to your quit day, get rid of all cigarettes and ashtrays in your home, car and place of work, and try to clean up and even spray air freshener. The smell of smoke can be a powerful trigger.
Get Help
Studies have shown that you have a much better chance of quitting if you have help. So, tell your friends, family and coworkers of your plan to quit. Others knowing can be a helpful reminder and motivator.
Then, get some counseling. Don’t go it alone. Start by contacting your doctor about smoking-cessation counseling covered by Medicare and find out about the prescription antismoking drugs (bupropion and varenicline) that can help reduce your nicotine craving.
You can also get free one-on-one telephone counseling and referrals to local smoking cessation programs through your state quit line at 800-QUIT-NOW or call the National Cancer Institute free smoking quit line at 877-44U-QUIT.
It’s also important to identify and write down the times and situations you’re most likely to smoke, and make a list of things you can do to replace it or distract yourself. Some helpful suggestions when the smoking urge arises are to call a friend or one of the free quit lines, keep your mouth occupied with some sugar-free gum, sunflower seeds, carrots, fruit or hard candy, go for a walk, read a magazine, listen to music or take a hot bath.
The intense urge to smoke lasts about three to five minutes, so do what you can to wait it out. It’s also wise to avoid drinking alcohol and steer clear of other smokers while you’re trying to quit. Both can trigger powerful urges to smoke.
For more tips on managing your cravings, withdrawal symptoms and what to do if you relapse, visit 60plus.SmokeFree.gov. There are also a variety of helpful quit-smoking apps you can download like EasyQuit, QuitNow and Quit Genius.
Send your questions or comments to questions@savvysenior.org, or to Savvy Senior, P.O. Box 5443, Norman, OK 73070.
