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Enhancing an Inherited IRA

Enhancing an Inherited IRA

August 02, 2022

One of my clients came in to see me the other day.  We were working on her financial plan and one of her accounts was a beneficiary IRA that she inherited from her grandmother who had passed away.  While she must take required minimum distributions every year from the account, one of the things she told me was she didn’t want to include that IRA in her financial plan because she wanted to leave it to her son when she passes away. 

I have another client who has a very similar situation.  He inherited an IRA from his father, and he must take the required minimum distribution each year.  Both of these people died prior to 2020.  In the year 2020, there was a new law called the Secure Act of 2019 that changed the rules for inherited IRA distributions.  I’ll discuss this in a little bit.

I also run into situations where people have IRAs, and they are required to take their RMDs but they don’t really need that money to live on.  I want to share an idea that might be helpful in situations like these.  Everybody has different needs, but this might be an idea that can help you.



I thought you were going to talk about how I could double my IRA. Maybe I can invest in some top-secret strategy known only to the wealthy and members of the Secret IRA Society (this doesn’t exist).  Now you want to talk about insurance?  What?  Hear me out.  This is actually pretty good. 

Here’s what I am proposing in the first situation where the client has to take the required minimum distribution but wants to leave the remainder for her teenaged son if she were to pass away.  Instead of taking the RMD and saving it in her savings account or spending it, I have a better idea.  Let’s take the distribution and use it to buy a permanent life insurance policy with a long-term care rider.  When she does eventually pass away, instead of there being the remainder of the inherited IRA, there will be an income tax free death benefit for her son in addition to whatever is left in the inherited IRA.

If she were to need long term care assistance, instead of dipping into savings or other investments, they can have access to part of the life insurance death benefit and pay for long term care expenses.  In addition to this, if they needed money for some other reason prior to one of these events, they could access the cash value of the policy. 

For the second couple, their situation was similar but a little bit different.  The husband inherited money from his dad.  Some of it was in an IRA and the other part was in a taxable account.  This guy also had more of a traditional life insurance need versus just wanting to leave something for the kids.  While the concept is the same, we’re taking the RMD and buying a permanent life insurance policy.  This policy is designed more for greater cash accumulation so they can supplement their retirement income in the future.  Like the other policy, this one has the long-term care rider, so they don’t have to use assets to pay for any long-term care needs.

In the last situation, we have a person who has an IRA and is starting to take distributions but doesn’t really need the money to live on.  With someone like this, it is similar to the first situation where we are buying a life insurance policy.  Since the person in these situations is generally older, we will probably buy a policy that is more focused on the death benefit and the long-term care rider. 



Other people’s money.  I often read stories about rich people using other people’s money to invest in companies or apartment complexes or buying Twitter.  If you think about it, insurance is a form of using other people’s money.  When you buy life insurance, you pay a premium and create a pool of money that will be paid out, income tax-free when you die.  With the long-term care rider, you have access to a portion of the death benefit that can be used to pay for long-term care expenses.  With a permanent policy, there is a cash value that grows over time and can be used for pretty much anything you want. 

Stretch IRAs


I focused on IRAs because this has come up several times lately when I have been speaking with my clients.  If someone died prior to 2020, there was an estate planning tool called a Stretch IRA.  This allowed a non-spouse beneficiary to extend the tax-deferred benefits of an IRA.  In a Stretch IRA, the non-spouse beneficiary is required to tax distributions based on their age rather than the age of the original IRA owner. 

If the original IRA owner died on or after 1/1/2020, this falls under the SECURE Act rules.  In general, it means that a non-spouse beneficiary must withdraw all of the assets of the IRA or 401(k) plan by December 31st of the 10th year following the IRA owner’s death. 

The key to this is the non-spouse beneficiary which is just what it says.  A beneficiary other than the spouse.  Usually, the spouse beneficiary will roll over the proceeds to their own IRA then take distributions when they are required to take them.  That’s what happened with my mother after my father passed away. 

My idea of purchasing a life insurance policy with the required minimum distributions will work with either a Stretch IRA or under the new rules of the SECURE Act.  You can always take the distributions and invest them in a different investment as well.  Every situation is different and there are a lot of factors that need to be considered. 

In conclusion….


Here’s what I have been seeing lately.  People in their 40s and 50s are inheriting money after their parents or grandparents, in some cases, have passed away.  Sometimes they need the money to live on.  But other times, they are taking the minimum distribution that is required by law and want to pass along the IRA to their kids.  By using the distribution to purchase a permanent life insurance policy, they are creating an income tax free insurance benefit that could possibly have a way to assist with long term care needs and still provide access to the cash value if someone wanted or needed money at some point in the future.

It might not work for every situation.  Nothing ever does.  But in some cases, this is a great idea that a lot of people don’t know about.  If you have questions or want to talk to me, feel free to schedule a time to reach out to me HERE.  As always, thanks for reading.  KB