“Smart Strategies for Your IRA- Part II”

Last week, I began this two-part series with three smart strategies for your IRA.  To review those strategies, visit the Resource Center at www.WelchGroup.com and click on ‘Stewart’s Commentary’.

Strategy #4: Split out multiple beneficiaries.  Typically, a parent will name multiple beneficiaries such as children and grandchildren.  Left unchanged, each of the beneficiaries must use the age of the eldest beneficiary for purposes of Required Minimum Distributions.  If your goal is to ‘stretch’ out your share of the IRA as long as possible, you should split out each beneficiary’s share into their own Inherited IRA account which now allows each to use his or her own life expectancy for RMD purposes.  This must be done by December 31st of the year following the year of death of the IRA owner (parent, in this example).

Strategy #5:  Skip a generation or take a pass.  Think about your next generation beneficiaries.  For example, if your children don’t need your IRA, consider making the beneficiary your grandchildren.  This will allow the grandchildren to use their much longer life expectancy to stretch out the IRA Required Minimum Distributions while also taking those distributions in (presumably) a much lower income tax bracket.  An alternative would be to name your child as the primary beneficiary while naming your grandchild as the ‘contingent’ beneficiary.  At your death, if your child didn’t need the money, he or she could ‘disclaim’ (in part or whole) the money and your grandchild would step in your child’s place.

Strategy #6:  Give your IRA to charity.  Oftentimes, people will make a gift to a charity or religious organization through their will (called a specific bequest); leaving everything else to family members.  Instead, consider naming the charity as a beneficiary under your IRA.  By doing so, you’ll have given the charity money that income taxes have never been paid on versus after-tax cash.  The charity doesn’t pay income taxes so they are happy and your family members receive the after-tax cash versus the IRA money which they must eventually pay income taxes on.

Strategy #7: Pay out non-person beneficiaries.  Under strategy #6 above, the beneficiary designation might look something like this: “$20,000 to the American Cancer Society; balance split equally between my three children (named)”.  If among your IRA beneficiaries there is an organization (non-person), the organization’s share must be paid out by September 30 of the year following the year of death of the IRA owner.  Otherwise, the ‘people’ beneficiaries will lose the right to ‘stretch’ the Required Minimum Distributions.

Strategy #8:  Roth IRA’s can be even better!  If you have a Roth IRA, Strategies 3, 4 and 5 work very well since the distributions are not taxable.  With the Roth IRA, securing the stretch strategy is even more important.  Why?  Assume your forty-six-year-old son inherits both your $100,000 IRA and your $100,000 Roth IRA and begins timely Required Minimum Distributions based on his life expectancy.  Under each account, he’d be required to withdraw approximately $2,600 in year one.  Assuming he’s in a 25% income tax bracket, he’d owe $650 of taxes with the regular inherited IRA but no taxes with the inherited Roth IRA.  Every year the amount of the required withdrawal rises and more taxes are due under the traditional IRA while none are due under the Roth IRA.  Over his life expectancy, the difference can be enormous.

While I’ve focused on IRAs, these strategies also work for your 401k, SIMPLE, SEP and other qualified retirement accounts.  Be sure to consult with your own financial advisor about how to best use these strategies for your family.  For an excellent ‘IRA Distribution Rules Chart’, CLICK HERE.