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IRA
Extending Your IRA's Life
By Roger Wohlner
CERTIFIED FINANCIAL PLANNER™ Practioner, Asset Strategy Consultants
Individual retirement accounts (IRAs) are typically viewed as retirement planning vehicles. But with increased contribution amounts and the ability to roll over 401(k) balances to a traditional IRA, many IRA owners are finding they won't use their entire balance for retirement. Thus, IRAs are quickly becoming major estate planning tools. When used for estate planning, the goal is to extend the IRA's life as long as possible so beneficiaries can benefit from the tax-deferred (for traditional IRAs) or tax-free (for Roth IRAs) growth.
For instance, assume you have a large traditional IRA balance, which includes a rollover from your 401(k) plan. You don't have to start taking distributions until after age 70 1/2. Then, you only take required minimum distributions calculated based on your age. When you die, you leave the IRA to your spouse, who rolls the balance over to his/her own IRA and names his/her own beneficiaries, perhaps your children or grandchildren. Your spouse then delays distributions until age 70 1/2 and then only takes required distributions. When your spouse dies, your children inherit the IRA, which can be divided into separate IRAs for each child. Each child can then take distributions based on each of their life expectancies. By taking only minimum distributions when required, the balance can continue to grow on a tax-deferred basis for years or even decades.
The concept can be expanded further by converting a traditional IRA to a Roth IRA. Although income taxes will have to be paid on any amounts that would have been taxable when withdrawn (e.g., contributions and earnings in a traditional IRA and earnings in a nondeductible IRA), the income taxes can be paid with funds outside the IRA, leaving the IRA balance intact. Then, you would not have to make any withdrawals during your life. Since your spouse can roll the balance over to his/her own IRA, he/she also would not have to take withdrawals during his/her lifetime. When your spouse dies, your heirs would then have to take distributions over their life expectancies, but those distributions would be federal income tax free, provided the distributions occurred after the five-tax-year holding period.
Don't lose sight of the fact that your IRA's main purpose is to fund your retirement. It should only be used for estate planning purposes if you don't need the funds for retirement.
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