By ALAN KONDO, CFP, CLU
You probably understand that an IRA can be an effective way to save for retirement. However, you should know that it can be an effective estate-planning tool as well. It can allow you to transfer wealth to future generations while reducing, deferring, or even eliminating income taxes on your retirement savings. Transferring wealth with a Beneficiary IRA could be an ideal solution for you.
Employing the stretch technique by naming a beneficiary could provide significantly more long-term benefits than simply allowing the account balance to be paid out to your estate or living trust as a taxable lump-sum distribution. If you’re unlikely to deplete your IRA assets during retirement, advise your loved ones to create a Beneficiary IRA after you’re gone. By doing so, you could help build long-term financial security for them.
A Beneficiary IRA is a traditional IRA that passes from the account owner to a younger beneficiary at the time of the account owner’s death. Since the younger beneficiary has a longer life expectancy than the original IRA owner, he or she will be able to stretch the life of the IRA by receiving smaller required minimum distributions (RMDs) each year over his or her life span. More money can then remain in the IRA and potentially grow tax-deferred for a longer period of time.
Creating a Beneficiary IRA has no effect on the account owner’s minimum distribution requirements, which continue to be based on his or her life expectancy. Once the account owners dies, however, beneficiaries begin taking RMDs based on their own life expectancies. Whereas the owner of a Beneficiary IRA must begin receiving RMDs after reaching age 70½, beneficiaries of a Beneficiary IRA must begin receiving annual RMDs no matter how old they are. In either scenario, distributions are taxable to the payee at then-current income tax rates.
Beneficiaries also have the right to receive the full value of their inherited IRA assets by the end of the fifth year following the year of the account owner’s death. However, by opting to take only the required minimum amount instead, a beneficiary can theoretically stretch the IRA – and tax-deferred growth – throughout his or her lifetime.
Consider the implications
● The ability to name new beneficiaries after RMDs have begun means that you can include a child in your Beneficiary IRA strategy regardless of when the child was born.
● The ability to change beneficiary designations after the account owner’s death means that one beneficiary may choose to disclaim his or her own beneficiary status so that more assets pass to another beneficiary. For example, if an account owner names his son as the primary beneficiary and his grandson as the secondary beneficiary, the son could remove himself as a beneficiary and allow the entire IRA to pass to the grandson. RMDs would then be based on the grandson’s life expectancy, not on the son’s life expectancy, as would have been the case if the son remained a beneficiary. When there is more than one beneficiary, RMDs are calculated using the life expectancy of the oldest beneficiary.
● The ability of beneficiaries to base RMDs on their own life expectancy means that the money you accumulate in your IRA and leave to heirs has the potential to last longer and produce more wealth for younger generations.
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The opinions expressed above are solely those of Kondo Wealth Advisors, LLC, (626-449-7783, info@kondowealthadvisors.com) a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, LLC nor its representatives provide legal, tax or accounting advice.