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Maximizing Inherited IRAs

It is common for spouses to name each other as the beneficiary of their IRA and their children as the successor beneficiary if they are the second spouse to die. But as Sandra Block points out in her article, “Getting the Most From Inherited IRAs”, although your children will still inherit the money, they will be required to take all of the money out of the IRA by the end of the fifth year after your death if you die before you turn 70 1/2. If you die after 70 1/2, the required payments can be based on your life expectancy which will be at most about 15 years.

A way around this problem is to name your children as the beneficiaries, not your trust. This gives your children a lot more flexibility because once they transfer the funds to an inherited IRA, they can take annual distributions based on their own life expectancies. A 50 year old heir could stretch distributions (and the life of the tax shelter) over the next 34 years. For example, a 50 year old beneficiary of a $100,000 IRA would be required to take a first year distribution of about $2900, which is about half of the amount he would be required to take if his father died at age 72 and left the IRA to the estate.

Be careful about transferring the funds. They should be transferred directly from your IRA to their inherited IRAs. There is no 60 day window to deposit the money in new accounts as there is for other rollovers.Consult your estate planning attorney for further information.

 

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