Using Your IRA as Part of Your Wealth Transfer Legacy

I’d like to thank Michael J. Garry, CFP®, JD/MBA for today’s post about Using Your IRA as Part of Your Wealth Transfer Legacy. Michael is a Certified Financial Planner practitioner (CFP®) and financial advisor in Newtown, PA. His firm, Yardley Wealth Management, LLC, performs comprehensive financial planning and in-house investment management.  I highly recommend if you’re in that area you reach out to Michael for further financial tips and help!
 

One way of extending the life of your wealth through generations is by implementing a stretch IRA strategy. By designating the beneficiaries with the longest life expectancy the IRS will have lower imposed required minimum distributions for the inherited IRA. The asset base that is left is larger which will help it grow more quickly.

Factors to Consider

It is important to take into account important factors before making this type of decision:

  • If you need to withdraw more than the RMD amount, review how much the projected remainder of your IRA will be in the future.
  • If you are married, and wish to implement this strategy, but list your spouse as the primary beneficiary and then, those in later generations as secondary beneficiaries.

When making the choice to implement this strategy, you name one or more individuals with the longest life expectancy as beneficiaries. Ideally, you would take only the required minimum distributions during your lifetime. This will leave the largest remainder possible to grow tax-deferred while you’re still alive.

Distribution Options for Beneficiaries

Depending on whether your beneficiaries are spousal or non-spousal and whether or not you had begun taking RMDs, beneficiaries will have several options for distribution from their inherited IRA.

They may include:

  • Taking a lump sum.
  • Transferring the account balance to an inherited IRA with a five-year time limit to start distributions.
  • Transferring the account balance to an inherited IRA that will distribute assets according to the beneficiary’s life expectancy.

Spousal beneficiaries have the additional option of requesting a spousal transfer, which allows them to roll over the account balance into an IRA in his or her own name.

The Benefit of a Roth IRA

Roth IRA contributions are not tax-deductible, your investments grow tax-free, earnings can be withdrawn income-tax-free if you’re at least 59½ and have had the Roth at least five years, and there are no RMDs at age 70½.

Spouses essentially are able to treat the Roth IRA as if they were the original owner because they not only do not have to pay taxes on it, but they are not required to take distributions either.

Change is possible

As with any estate-planning technique, your plans may evolve over time. All IRAs give you the flexibility to begin taking penalty-free distributions as early as age 59½. In addition, you can change the beneficiary at any time should your beneficiary’s needs change.

If your ultimate goal is preserving wealth for future generations, a stretch IRA strategy will generally allow you to grow your assets for a longer period of time and allow them to continue to grow after you pass.