Investors and advisors are concerned about IRAs, especially when it comes to leaving these assets to heirs, and Ed Slott provides the answers.
IRAs and RMDs
I understand that for an inherited IRA, assuming it is appropriately titled, the beneficiary can take withdrawals over the beneficiary’s lifetime. If the deceased had already started RMD’s, must the beneficiary continue, even before the beneficiary’s age 70 ½? What table is used to come up with the RMD? \
A non-spouse designated beneficiary must begin taking RMDs from a properly titled inherited IRA by December 31st of the year following the year of the IRA owner’s death when using the life expectancy method (stretch IRA). The distributions are calculated using the Single Life Table, which is the table used by all beneficiaries. If the deceased IRA owner had already started taking RMDs, the beneficiary must take the RMD the IRA owner should have taken in his year of death if he had not done so already. All future distributions will be based on the beneficiary’s own life expectancy though.
A spouse that chooses to remain as a beneficiary also uses the Single Life Table, but there are special rules that might allow the spouse to avoid RMDs for a period of time.
Leaving an IRA to an Heir
If I have an IRA which I will never need and plan on leaving it to my heirs, would it be better to convert to a Roth IRA so not subject to RMD if I live past 70 1/2 but heirs subject to RMD on the inherited Roth IRA which is taxable to them (?) or leave as an IRA and heirs will take taxable income distributions over their lifetime? Which is more advantageous?
In general, a Roth IRA is a great way to leave a legacy to children or other beneficiaries. Distributions to those beneficiaries will generally be tax free and there are no RMDs that would otherwise erode the account during your lifetime. That being said, each case is different and must be looked at on its own merit because there are so many factors that impact the decision making process. For example, what is your tax rate? What are your beneficiaries’ tax rates? Do you have other money to pay the tax on a conversion? Do you plan to leave the account outright to your beneficiaries or through a trust? Because of the complexity and the seemingly infinite factors that play a role, its generally best to explore the “to Roth or not” question with an advisor who specializes in this area.
Passing an IRA On
I have an IRA. My wife is my first beneficiary and my son is the non-spousal beneficiary. When my wife and I have passed and the IRA goes to my son, your last television broadcast said something regarding trust to trust transfer. I don't have a trust. Are you saying I should have a trust, because if my son gets the IRA without a trust, the taxes will eat up the IRA. I want to do this right so uncle Sam doesn't take the entire IRA.
Good question. On my public television show, I refer to what’s known as a trustee-to-trustee transfer. This is where money is moved directly from one institution to another, without the beneficiary ever physically taking control of the funds. All beneficiaries should move IRA money this way if possible, but non-spouse beneficiaries must move IRA money this way. There is no such thing as a 60-day rollover for a non-spouse beneficiary. A trustee-to-trustee transfer does not mean you need a trust, so unless there’s some other reason you would, you're A-OK naming your son on the beneficiary form.