Q: Can my family inherit my traditional individual retirement account (IRA)? If so, how do I make sure it passes to them?
Aaron Skloff, AIF, CFA, MBA
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A: The answer to the first part of your question is yes. By designating your family as beneficiaries of your IRA, you not
only give them access to the funds in the account, but you "stretch" the tax sheltering benefits of an IRA beyond your own
life.
To do so, you must be sure to legally designate your family members as the account's beneficiaries. Also, the Internal Revenue
Service mandates required minimum distributions (RMDs) from your IRA each year once you turn 70 ½ years old. The amount of
the RMD is determined by a "life expectancy factor" that the IRS publishes annually. Forget to take the RMD, and you or your
heirs will pay a penalty of 50% on the amount that should have been withdrawn.
Let's look at an example: a $300,000 IRA that grows and stretches into $2,139,189 over 3 generations, based on a 7% annual
rate of return. Harvey, age 70, names his wife, Myrna, as his sole beneficiary and over 2 years takes RMDs of $22,649 until
passing away at age 71. Myrna, age 66, treats Harvey's IRA as her own, names her son Marc as her sole beneficiary, and over 8 years takes RMDs of
$156,123 until passing away at 77. Myrna can treat Harvey's IRA as her own because she is his spouse. Once it becomes hers,
she is able to delay RMDs until she turns 70 ½ years old.
Marc, age 53, maintains the account as an inherited IRA, names his son Logan as his sole beneficiary, and takes RMDs totaling
$933,576 (based on his own remaining life expectancy of 32 years) over the course of 23 years until passing away at age 75.
Logan, 41, takes RMDs of $1,026,841 (based on Marc's remaining life expectancy until assets are divested) over the course
of 9 years. Logan takes RMDs for 9 years because his father had taken RMDs for only 23 of his 32-year life expectancy (32-23=9).
Total withdrawals are $2,139,189 over 3 generations.
To fully realize the benefit of stretching your IRA in this way, you must avoid early withdrawals. Unfortunately, some investors
view their IRAs as piggy banks, breaking them open whenever unexpected expenses arise.
From a financial standpoint this is a serious mistake, one that should be avoided if at all possible. Not only do you face
a 10% penalty for withdrawals (under most circumstances) before the age of 59 ½ and income taxes, but withdrawals from your
IRA are difficult to replace due to IRS-mandated annual contribution limits.
So to recap: Try to delay withdrawals from your IRA until required by the IRS. Designate appropriate beneficiaries, and instruct
them to withdraw at the pace required by the IRS. Take these steps, and your family can continue to reap the benefits of your
IRA over multiple generations.
Send your money management questions to medec@advanstar.com
Answers to our readers' questions were provided by Aaron Skloff, AIF, CFA, MBA, chief executive officer of Skloff Finanial
Group, Berkeley Heights, New Jersey.
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