Leaving A Legacy

Ed Slott & Company

Using IRAs to provide for your children and grandchildren

Posted April 12, 2011

By Ed Slott & Company

Traditional IRA owners assume that they will exhaust their entire account balance over the course of their lifetime. That’s because Congress requires owners of traditional IRAs to take required minimum distributions each year starting at age 70½. However, the size of that distribution is based on IRS life expectancy tables, which do not take into consideration a person’s lifestyle, current health or family genetics. As a result, these tables generally extend over a longer period than your actual lifetime. That means there is a greater possibility that some of your IRA assets will remain when you die if you take only the minimum required amount each year.

Many individuals name their spouse as beneficiary of their IRA when in fact the spouse may not need that money to live on because they have access to other assets. In these cases IRA owners, should consider naming their children or grandchildren as their IRA beneficiaries. Then, whatever remains in their IRA at their death will pass to a younger generation, providing the opportunity for a longer spend-down period and significantly greater growth potential when the life expectancies of those younger heirs are factored in.

Of course the children or grandchildren could thwart this wealth generating opportunity by withdrawing the IRA assets too rapidly, but there are ways to avoid this from happening, such as using a trust as beneficiary to control the payment flow to heirs.

Two important issues to keep in mind when contemplating naming children or grandchildren as IRA beneficiaries are the following:

1. Beneficiary designations are revocable, so if a couple’s financial situation changes and it turns out the spouse will need the IRA assets after all, switching back to the spouse as beneficiary can be made any time up until the IRA owner’s death.

2. Generation-skipping tax issues could be a factor if one or more grandchildren are named as IRA beneficiary either directly or through a trust. A consultation with a tax advisor is recommended in those cases, particularly if the account owner has substantial assets in total.

Whether you own a traditional IRA or a Roth IRA, your heirs have to take mandatory distributions after your death that are based on their individual life expectancies; these could last for decades in some cases. One great aspect of a Roth IRA is that no minimum distributions are required during the owner’s lifetime. This means more money can accrue inside the account to be passed along when compared to a traditional IRA, provided you don’t need that money to live on. And, unlike a traditional IRA, payments made to your heirs from a Roth IRA will always be tax-free provided certain conditions are met.

A boiled egg is hard to beat, and so are tax-free Roth IRA distributions, which can be a great way to provide for your children and grandchildren.

Ed Slott and Company has been called "The Best" source for IRA advice by The Wall Street Journal, and "America's IRA Experts" by Mutual Funds Magazine. Ed is a widely recognized professional speaker and author. Get more IRA information from America's IRA Experts.