To Whom Are You Leaving Your IRA?
Thursday, January 21, 1999
NEW YORK A reader, who doesn't want to be named, asked me what the tax consequences would be, if she left her Individual Retirement Account to her children instead of her husband.
I don't want to get mixed up in this marriage. But if taxes are the only issue, naming a spouse as beneficiary is the better choice. If you die, the spouse can make the IRA his owndeferring taxes for as long as he has the account.
But think about this: Your spouse can name new beneficiaries. If you're worried that he won't name your children (maybe he'll favor the children of a former marriage), then maybe you'd rather forget the tax question and leave your IRA directly to your kids.
Your kids cannot roll the money into an IRA of their own. They'll have to withdraw it and pay the income taxes due.
If you die before starting mandatory withdrawals (that's prior to age 70 1/2), your child can take the money in one of two ways: First, withdraw it all, within the five years after your death; or second, withdraw it over his or her life expectancy, with the money taxed as it's taken out. The latter decision has to be made within the calendar year after your death.
Two or more children can generally divide the IRA, so they can withdraw the money in different ways.
The rules are different, however, if you're over 70 1/2, when the law requires you to make withdrawals. If your children inherit now, the size of their tax will depend on how you decided to take the money out.
It's especially important to think this through if you're leaving your IRA to your spouse, with your child as second beneficiary. This arrangement sometimes sticks your children with a major income-tax bill. Here are the rules:
Now the big question: How do you calculate the size of the annual withdrawal? You have two options:
When you die, the child has to take out the money faster than if you had used a fixed life expectancy for yourself. But the difference isn't great, Slott says.
If your main concern is to minimize the tax on your beneficiary, Slott suggests withdrawing IRA money over a fixed term. He recommends recalculation, if your main concern is making the IRA last for life. Either way, you need an expert to help you decide.
Jane Bryant Quinn welcomes letters on money issues and problems
but cannot offer individual financial advice.
© Copyright 1999 Washington Post Writers Group