An
Inheritance That Keeps On Giving
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.1
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.
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.2
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.
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.
© 2003 Emerald Publications
