The Individual Retirement Account (“IRA”) continues to be one of the best savings and tax deferral options: it allows one to defer the income tax on investment earnings until at least age 59½ and until as late as age 70½, when required distributions must begin.
Required minimum distributions are calculated based on the life expectancy of the owner of the IRA and the beneficiary, using the IRS tables. Most people name their spouse as the primary beneficiary and their children as secondary beneficiaries. During the owner’s lifetime, the owner must take minimum required distributions based upon the joint life expectancies of the owner and the spouse, the primary beneficiary, in accordance with the IRS tables. If the owner dies prior to beginning the required minimum distributions, the spouse is permitted to roll the IRA over into a new account and name the children as the primary beneficiaries. The same rules apply when the surviving spouse reaches age 70½.
If the spouse has or will inherit assets of his or her own such that he or she will not be required to withdraw from an inherited IRA to live, there is a substantial benefit for the plus age 70½ owner in bypassing the spouse and setting up separate IRA accounts for children or grandchildren who can spread out the distributions over their life expectancy so long as the owner has attained age 70½. The tax-free compounding of the assets in the IRA over the stretched-out distribution period can be substantial.
Even if separate IRA accounts have not been established by the IRA owner prior to his or her death after age 70½, it may still be possible for the beneficiaries of the IRA to establish separate required minimum distribution schedules in order to stretch the distributions for the longest permissible time. Multiple beneficiaries of an inherited IRA have until December 31 of the year after the account owner dies to split the inherited IRA into individual accounts so they may use their own life expectancies to calculate the required minimum distributions; otherwise the required minimum distribution of the IRA will be calculated using the oldest beneficiary's life expectancy.
Alternatively, a child can be named as beneficiary and a grandchild as a contingent beneficiary. The beneficiary will be able to use his or her respective life expectancy in determining the required annual withdrawal. If the child doesn’t need the income from the IRA, the child will have nine months to decide to accept or disclaim the IRA in favor of the grandchild.
If there is some concern about a child’s or grandchild’s financial savvy, or if there is a desire to include minor, disabled or subsequently born grandchildren, a trust could also be named as beneficiary. The trustee will receive the required minimum distribution based upon the age of the oldest beneficiary and then make a distribution to the beneficiaries in accordance with the provisions of the trust. Better yet, separate trusts for each beneficiary could be created so that each individual beneficiary’s life expectancy can be used to keep assets in trust fro each beneficiary for the longest possible time.
Planning for IRA distributions requires careful analysis and consideration of family needs and dynamics. Please telephone us if you have questions about beneficial IRA planning strategies, or if you need assistance with your IRA or other estate planning matters.