IRAs have become one of the largest single assets owned by many individuals.
Roll-overs from pensions and 401(k) plans have combined with a booming
stock market to leave many people with large accumulations in these retirement
accounts. Proper planning in the selection of distribution choices and
beneficiary designations can keep these retirement accounts growing tax
deferred not only over the lifetime of the owner and his spouse, but over
their children’s or even grandchildren’s lifetimes. Continued
tax deferral can turn a modest account into millions over their lifetimes.
The government requires that individuals take minimum distributions from
their IRAs or other tax deferred accounts beginning at typically 70 1/2.
The amount you will be required to withdraw each year known as your “required
minimum distribution” is determined by dividing the value of all
of your tax deferred accounts by your life expectancy and your properly
named beneficiary’s life expectancy. The government’s intention
is that over your life expectancy you will withdraw most, if not all,
of your retirement assets for income tax purposes. Upon your death any
funds not withdrawn are subject to estate tax as well as an income tax.
There are several choices in the naming of a beneficiary of your IRA. Most
married couples name their spouse as beneficiary. This allows the surviving
spouse to “roll-over” your tax deferred accounts into his
or her own IRA delaying any distributions until the spouse reaches age
70 1/2. When the spouse “rolls-over” he or she would select
a new beneficiary, preferably a much younger one, such as a child or grandchild.
While the spouse is living, the IRS will presume that the difference in
calculating the joint life expectancy for minimum distributions purposes
is no more than 10 years. However, when that spouse dies, that child’s
actual age is used to calculate life expectancy upon which minimum distributions
are based at that point. The annual minimum distribution calculation will
continue each and every year over the child’s lifetime until the
assets have been distributed or until that child’s death. This can
result in tremendous growth within that IRA.
Sometimes it may not be advantageous to have the spouse roll-over the IRA.
If your spouse has the ability to roll-over the IRA, he or she will have
no obligation to follow your wishes if that is a concern. In the case
of a second marriage, this may well be an issue. One alternative would
be to establish a trust to receive some or all of the IRA distribution.
This will give you control over the IRA through the written instructions
contained in the trust and may allow you to keep some of the IRA out of
the surviving spouse’s estate. The minimum required distributions
will be based on the life expectancy of the oldest beneficiary of the
trust, which will still be assumed to be no more than 10 years younger than you.
Coordinating beneficiary designations on IRAs or other retirement plans
is a crucial step in completing any estate plan and can provide substantial
deferral benefits if handled correctly.