IRA beneficiary options

[bobbee25]

I have a large sum of IRA and Roth IRAs. My son is the beneficiary.
Looking at the taxes he would have to pay at my demise, i.e. ira added to his income would put him high up the tax ladder.



I wonder if a good option would be in making the 2 grandsons the beneficiaries for part of it.. (Age 5 and 10.)


If so, what would be the best way of doing it, trust of some type ?

 

[Sunset]

You have no spouse ?

Would he be higher up the tax ladder than you ?

The Roth IRA would not affect his taxes at all. They are tax free.

So it's the plain IRA's that are an issue.

So far my plan has been: Don't die soon

 

[SecondCor521]

If you would split the money equally between the two grandsons (most would), then you can just put "<My son> per stirpes" as the beneficiary. When you pass away, your son could then partially or fully disclaim the IRAs. Any amount he disclaimed would be split equally between his sons.

There are various disclaimer requirements (must be in writing, must be irrevocable, must be within 9 months of death, etc.) but they're not really that difficult.

If the grandchildren were to inherit before adulthood, there would need to be a custodian of the money regardless - most likely your son. Without a trust, the grandsons would have full access at the age of majority in their state (usually between 18 and 21).

A trust can put more severe restrictions in place, but there are costs associated with trusts and the taxes are trickier.

 

[jazz4cash]

.
Looking at the taxes he would have to pay at my demise, i.e. ira added to his income would put him high up the tax ladder.

This makes it sound like the taxes would be due immediately which I don’t believe is accurate. You’re familiar witch Inherited IRA rules?

 

[bobbee25]

OH, so all these rules about withdrawing Roth IRA money is just about how long they may keep it in a Roth, no tax issues ?

 

[imbatman]

Your son would have 10 years. If your income is low (24% or lower bracket...), you could start converting portions of your IRA to Roth IRA, up to your bracket ceiling every year (i.e. paying the taxes for him now from your low tax bracket so he gets a tax-free Roth IRA).

 

[foxcreek9]

If they are under 18 at the time of death, their tax bracket will be the same as the parent, so no gain there. Leaving it in a trust means immediate taxation at death.

 

[pb4uski]

I have a large sum of IRA and Roth IRAs. My son is the beneficiary.
Looking at the taxes he would have to pay at my demise, i.e. ira added to his income would put him high up the tax ladder.



I wonder if a good option would be in making the 2 grandsons the beneficiaries for part of it.. (Age 5 and 10.)


If so, what would be the best way of doing it, trust of some type ?

I'm going through this now with inherited traditional and Roth IRAs from my Mom.

Are you of RMD age? Mom was (died at 93).

I inherited her traditional IRA. Since she was taking RMDs, I would need to take RMDs each year for at least the balance at the end of the rior year divided by the factor for my age. IIRC about 5% (I'm 68). Then no matter what the entire balance needs to be withdrawn before the 10 anniversary of her death.

If she had not yet started taking RMDs then there would be no annual RMD required, but the entire balance would need to be withdrawn before the 10 anniversary of her death.

I also inherited her Roth IRA. No RMDs required, but like the traditional IRA the Roth must be drained before the 10 anniversary of her death.

Further, distributions from the traditional IRA would likely be subject to the kiddie tax and taxed at the parent's marginal rate so I don't hink there is any benefit to be had there.

YMMV. Consult your tax advisor.

 

[MarieIG]

Be careful if you make the grands direct beneficiaries. Unless there are restrictions on their inheritance - it does some 18 year olds (not all) more harm than good to give them access to a large chuck on money at age 18.

 

[SecondCor521]

If they are under 18 at the time of death, their tax bracket will be the same as the parent, so no gain there. Leaving it in a trust means immediate taxation at death.

I thought trusts had a five year period. But I'm not 100% sure on that.

 

[SecondCor521]

I'm going through this now with inherited traditional and Roth IRAs from my Mom.

Are you of RMD age? Mom was (died at 93).

I inherited her traditional IRA. Since she was taking RMDs, I would need to take RMDs each year for at least the balance at the end of the rior year divided by the factor for my age. IIRC about 5% (I'm 68). Then no matter what the entire balance needs to be withdrawn before the 10 anniversary of her death.

If she had not yet started taking RMDs then there would be no annual RMD required, but the entire balance would need to be withdrawn before the 10 anniversary of her death.

I also inherited her Roth IRA. No RMDs required, but like the traditional IRA the Roth must be drained before the 10 anniversary of her death.

Further, distributions from the traditional IRA would likely be subject to the kiddie tax and taxed at the parent's marginal rate so I don't hink there is any benefit to be had there.

YMMV. Consult your tax advisor.

[Emphasis added.]

Mostly correct, two minor notes:

1. For inherited IRAs, you look up the divisor in the table for the first year of your own RMD from the inherited IRA. For subsequent years, you don't go back to the table; you take the previous year's divisor and add 1 to it.

2. For all references to the 10th anniversary, you do have until the end of the year containing the 10th anniversary of death. So if the original owner died today, you would have until 12/31/2034 (not 1/17/2034) to empty the IRA.

 

[pb4uski]

On the second part on the 10 years, I've seen it both ways on different websites, so until it is clear I'll stick to the more conservative alternative.

On the first part, I just would have used Schwab RMD calculator. In my case the inherited IRA was small so I just withdrew it all earlier this year because I was concerned that sometime in the next 10 years that I might forget to take an RMD or forget to drain the account. One less thing to worry about.

 

[SecondCor521]

On the second part on the 10 years, I've seen it both ways on different websites, so until it is clear I'll stick to the more conservative alternative.

Understood. I'll be in the same situation myself, so I went and researched the law myself. I am sure I'm right, but I support every person confirming things to their own satisfaction.

The IRS Pub 590-B does state this on page 11:

"10-year rule. The 10-year rule requires the IRA beneficiaries who are not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year containing the 10th anniversary of the owner’s death. For example, if the owner died in 2022, the beneficiary would have to fully distribute the IRA by December 31, 2032. The beneficiary is allowed, but not required, to take distributions prior to that date."

(https://www.irs.gov/pub/irs-pdf/p590b.pdf)

That being said, I know the IRS is working on new regulations in this area, so a person might not even be willing to rely on Pub590-B, especially since the above link is (currently) to the 2022 version.