IRAs as Inheritance Vehicles

Over the course of a lifetime, IRA assets can potentially grow to a significant sum — sometimes even more than the owner can use during his or her retirement. If you would like to pass all or part of your IRA to your heirs, you may want to learn more about multi-generational or "stretch" IRAs. Thanks to recent tax law changes, this strategy gives you the flexibility to extend an IRA’s tax-deferred status from one generation to the next, greatly enhancing the long-term growth potential of your legacy.

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Beneficiary tax benefits of a qualified plan: IRA, 401k

To set up a multi-generational IRA, you name one or more young relatives (children or grandchildren, for example) as beneficiaries of the account. When you pass away, your beneficiaries can elect to take their share of the IRA distributions either in a lump sum or in increments spread over the course of their lifetimes. If they choose the second option, the bulk of the asset will continue to accumulate tax deferred even as they draw down income each year. The younger the beneficiary, the longer the asset may remain tax deferred, and the larger it could potentially become over time.

Remember that regardless of instructions in your will, IRA assets will pass directly to the beneficiaries named on your account. If you die without having named primary and secondary beneficiaries, your IRA assets will be paid out (possibly over a period as short as five years). And if these assets are used to pay your estate taxes, it subjects the funds immediately to income taxes as well. To help ensure that your money goes to the intended recipient(s), keep your beneficiary designations up to date.

Plan IRA, 401k giving carefully

Setting up a stretch IRA may require some careful planning. But using the strategy appropriately creates an opportunity to significantly increase the legacy you leave to your loved ones.

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Remember that:

  1. Distributions from a traditional IRA are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10 percent federal income tax penalty. Mandatory withdrawals must begin by April 1 of the year after the year in which you reach age 70½. You should consult your tax and legal advisors for specific guidance regarding your situation.
  2. Whether your IRA assets are included in your probate estate or passed via a beneficiary designation, the amounts are included in your taxable estate for the purpose of calculating the amount of estate tax due.

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