Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Monday, June 9, 2014

Making Your IRA Last Longer

Last longer

As more and more baby boomers retire and roll their 401(k)s into IRAs, the amount held in IRAs will grow.  While retirees will use money accumulated by their IRA, most of it will be left for heirs.  Below are tips to making an IRA last longer for your family.

  1. Beneficiary Forms. The beneficiary forms you fill out control who gets your IRA.  File an amended form if you want to change your beneficiary.
  2. Different Rules for 401(k)s and IRAs. Your spouse automatically inherits a workplace plan unless they sign a waiver.  If a 401(k) balance has been rolled into an IRA, the IRA rules apply.
  3. Non-Spouse Heirs Must Take Yearly Payouts. Non-spousal IRA heirs must withdraw a minimum amount each year.
  4. Heirs and Owners Can Extend Withdrawals. The longer the withdrawals can be extended, the longer money will grow tax deferred or tax free (in the case of a Roth IRA).
  5. Young Beneficiaries Have Longer Stretch. The younger the beneficiary, the less he or she must take out each year since RMDS are based on average life expectancy.
  6. Handle Inherited IRAs With Care. A nonspousal heir cannot withdraw the money and roll it into his or her existing IRA.  The IRA should be kept intact and given the special designation of “inherited” IRA.
  7. Spouses Are Special. A spousal inheritor can keep the IRA as an “inherited” account or roll it into their own IRA.
  8. Estates Make Poor Beneficiaries. If you want to maximize the stretch-out, never name your estate as the beneficiary.  If you do this, all IRA funds may be withdrawn within five years of your death. 
  9. Name Contingent Beneficiaries. List contingent beneficiaries on the form you file with your IRA’s custodian.  This way if your primary beneficiary dies before you do, the contingent beneficiary can stretch out the life of your IRA.
  10. Carefully Mix Generations In A Trust.  If you leave your IRA to a trust, the required minimum distributions might be based on the age of the oldest beneficiary.  This could sacrifice decades of tax benefits.
  11. Beware of Income Tax. With a traditional IRA, the owner or beneficiaries may be required to pay federal income taxes each time they withdrawal funds.  When you convert a traditional IRA to a Roth, you pay tax now, but eliminate the need for you or your heirs to pay income tax on future distributions.
  12. Roth Delays Distributions. With a Roth IRA there is no requirement to take yearly minimum distributions once you reach age 70 ½.  This allows for more flexibility. 
  13. Roth Does Not Eliminate Estate Tax. Converting a traditional IRA to a Roth eliminates income tax when making withdrawals, but does not do away with federal estate tax.  Depending on where you live, state estate tax may apply as well. 

See 13 Tips To Make An IRA Last Longer, Forbes, June 4, 2014.    


Estate Planning - Generally, Income Tax, Non-Probate Assets | Permalink

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