By John “Jack” Kiley, CPA, PFS, CISP / Partner
MidAtlantic IRA, LLC
Self Directed Retirement Plan Solutions
With tax rates almost certain to rise, and families feeling squeezed, an old idea is getting a second look. Many people are reviewing their IRA beneficiaries as part of their estate plans. As baby boomers begin to retire and rollover their retirement plans into IRAs, it is not unusual to have more than $500,000 accumulated in these accounts. If one of your estate planning objectives is to leave something to your children, there may be a planning opportunity with respect to your IRA. Many financial planners refer to this as a legacy or stretch IRA. By naming your children, instead of your spouse, as the beneficiary(s) of your IRA, you could be leaving a fortune to your children (as well as a great retirement!). Here’s how it works.
First, name your child (or grandchild) as the beneficiary of your IRA. This should be done on a beneficiary designation form provided by the custodian of your IRA. If your Will names one person and the beneficiary designation form with the custodian lists someone else (possibly an ex spouse), the beneficiary designation will control. Additionally, if you are married, be sure that your spouse is aware that you named someone else as beneficiary and has consented to it. In some states, you cannot ‘jump over’ your spouse without written consent.
Next, be sure that the custodian of your IRA will allow your IRA to be inherited and distributed over the life expectancy of the beneficiary. Many custodians do not allow this. IRAs at MidAtlantic IRA, LLC will allow this.
At your demise, your beneficiary inherits your IRA and will take required minimum distributions annually, based on his life expectancy (not yours). These would be taxable to him but not subject to the 10% premature distribution penalty. If your beneficiary takes the total amount in the IRA in cash, this will be a distribution, taxable to them.
Let’s look at an example:
An IRA valued at $200,000 when transferred to a beneficiary 20 years old, assuming a 8% average return, would distribute $1,342,607 over the next 45 years and grow to be worth $2,179,345 (at age 65) after the distributions. Not only will this provide a steady income stream to your beneficiary; but it could provide a retirement worth ten times more than the amount of money you initially leave.
This strategy could be supercharged by converting your IRA to a Roth IRA! (a subject of a future article)
This strategy can be a powerful planning tool and should be considered as part of your overall estate plan and discussed with your financial advisors.
Jack Kiley, CPA, PFS, CISP Partner, MidAtlantic IRA, LLC and John Kiley CPA, LLC