Suze Orman's Master Class On Navigating Inherited Pretax Retirement Accounts – What You Must Know

The rules for inheriting pretax retirement accounts such as IRAs, 401(k)s, 403(b)s, and TSPs can be complex and nuanced. Suze Orman recently offered a master class in her "Women and Money" podcast, breaking down what beneficiaries need to know to navigate these accounts effectively.

Don't Miss:

• The average American couple has saved this much money for retirement — How do you compare?
• Can you guess how many Americans successfully retire with $1,000,000 saved? The percentage may shock you.

Orman begins by categorizing beneficiaries into two primary groups: eligible designated beneficiaries and non-eligible designated beneficiaries. The distinction between the two is important because it determines how and when you must withdraw funds from an inherited account.

Trending: Founder of Personal Capital and ex-CEO of PayPal re-engineers traditional banking with this new high-yield account — start saving better today.

According to Orman, eligible designated beneficiaries are typically classified into the following categories:

• Surviving Spouse: The surviving spouse enjoys the most privileges. They can treat the inherited account as their own, allowing flexible withdrawal options and continued tax-deferred growth.
• Minor Children: A minor child of the decedent also falls into this category. However, this privilege extends only until the child reaches the age of majority. At that point, the account must be managed according to other rules.
• Individuals Close in Age: Anyone within 10 years of the decedent's age qualifies as an eligible designated beneficiary. For example, if the decedent was 80, a 75-year-old beneficiary qualifies.
• Chronically Ill or Disabled Individuals: Those who are chronically ill or disabled are also considered eligible designated beneficiaries. 

If you fall into one of these categories, you have more flexibility than non-eligible designated beneficiaries. However, your withdrawal options depend on whether the decedent had started taking the required minimum distributions (RMDs).

RMDs are a critical factor in determining how to handle an inherited IRA. Individuals must start taking RMDs from their pretax retirement accounts at age 73. However, these distributions’ required beginning date (RBD) is April 1 of the year after they turn 73.

See Also: IRS Finalizes 10-Year Rule For Retirement Withdrawals, Making Things ‘Even More Insanely Complicated’

For instance, if you turn 73 this year, your RMD is based on the balance of your IRA as of Dec. 31, 2023, but you don't have to take it until April 1, 2025. If you inherit an account from someone who passed away before their RBD, your options differ based on whether you are an eligible or non-eligible beneficiary.

Orman lays out the withdrawal strategies based on the beneficiary category: 

• Eligible Designated Beneficiaries: If the decedent died before their RBD, you can either stretch distributions over your lifetime or follow the 10-year rule, which mandates full withdrawal by the 10th year after death. This flexibility is a significant advantage if you are younger and can benefit from extended tax-deferred growth.
• Non-Eligible Designated Beneficiaries: If you are not an eligible designated beneficiary or the decedent died on or after their RBD, you must follow the 10-year rule. The account must be depleted within 10 years of the decedent's death.
• Non-Designated Beneficiaries: If the decedent named a charity, estate, or non-see-through trust as the beneficiary, different rules apply. If the decedent died before their RBD, you have five years to withdraw the funds. If they died on or after their RBD, distributions can be stretched over the decedent's life expectancy.

Trending: Can you guess how many retire with a $5,000,000 nest egg? –How does it compare to the average?

Navigating inherited pretax retirement accounts requires a solid understanding of these categories and withdrawal rules. As these regulations can significantly impact your financial strategy, consulting a financial advisor is highly recommended to ensure you make informed decisions and optimize your inheritance.

Read Next:

• A billion-dollar investment strategy with minimums as low as $10 — you can become part of the next big real estate boom today.
• This billion-dollar fund has invested in the next big real estate boom, here's how you can join for $10.