Guidelines on Roth inheritance planning for 30/40 somethings.

[John G]

I just read the "Inheriting a Roth Ira" list of 11 messages and found it confusing. I don't think much has been said about inheritance issues for people in the 40s 30s that have substantial Roth IRAs. What are the key issues? Thanks

[John Olsen]

Key Issues (in my purely personal judgment):

FIRST:

1. Regular IRAs require that you begin taking distributions no later than 4/1 following your age 70 1/2. ROTH IRAs have no "must begin by" restrictions. You can elect NEVER to withdraw ANY money during your lifetime. This, combined with the fact that...

2. Regular IRAs require a MINIMUM distibution each year, once you hit age 70 1/2. ROTHs have no minimum distributions.

... means that you can, if you wish, accumulate a LOT more money in a ROTH than in a Regular IRA by the time you die at a ripe old age, if you would prefer never to touch that money during your lifetime [not a common choice, but it does happen]

SECOND:

IRAs distributions are taxable, both to the participant AND to the beneficiaries. ROTH distributions are generally not. Obviously, 'tis better to get TAX FREE income than TAXABLE income.

THIRD: ALL IRA money (like all Profit Sharing, Pension, 401(k) money, etc.) is FULLY includible in the TAXABLE ESTATE of the owner for ESTATE tax purposes, unless it passes to a charity.

FOURTH: You can GET AT your ROTH money with fewer restrictions than you can get to your REGULAR IRA money. The annual contributions you make to a ROTH can ALWAYS be withdrawn with no tax or penalty.

FIFTH: Do you want the tax break now or later?

I STRONGLY suggest that anyone who is weighing the pros and cons of a ROTH vs. a REGULAR IRA consider consulting a PRO. This CAN get VERY complicated. And a LOT of the published material is just flat WRONG!

Hope that is of some help.

John L Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

[John G]

Thanks John. Can you or anyone else comment on the issues on who are named beneficiaries. Specifically, the differences between naming your kids or your wife, from an IRA/Roth and inheritance perspective. Thanks.

[John Olsen]

For MOST folks, naming the Surviving Spouse as beneficiary is usually best. This provides the most flexibility (the surviving spouse has distribution options not available to non-spousal beneficiaries). If you name a Contingent Beneficiary (and you SHOULD) the surviving spouse can always DISCLAIM all or part of the IRA, if it appears, at that time, that it would be best for the money to pass to that contingent beneficiary.

If you have SEVERAL kids and want to name the kids, I HIGHLY RECOMMEND SPLITTING YOUR IRA INTO SEVERAL SEPARATE ACCOUNTS, giving each account its own beneficiary (AND contingent beneficiary).

There are situations in which a CHARITY, as beneficiary of an IRA, makes sense - either the charity, outright, or a Charitable Remainder Trust. However, this is not a "usual situation".

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

[John G]

John, thanks for the additional info. I have read about "disclaiming" and can see how it might give you a clever option if the wife's assets exceeded the $650K tax threshold.

Why do you suggest splitting an IRA so to match the number of children? Does this have something to do with they being able to take the funds over their lifetime? Thanks.

[John Olsen]

If you name several children as beneficiaries of a single IRA, the Required Minimum Distribution will be based on the life of the participant and the beneficiary with the SHORTEST life expectancy (which translates to the LE of the OLDEST kid). At P's death, that oldest kid's LE will determine the payout period.

By contrast, if you have a separate IRA for each kid, you can use each kid's LE. Moreover, what if one child wants to accelerate distributions but the others do not? Will the Trustee accomodate such desires?

[John G]

Good points. With two teenagers (2 yrs apart) I think the disclaim function makes the most sense. We are along way off from tapping the funds, the disclaim gives us a last second choice to push $ to them if we don't need it. Is there such a thing as a partial disclaim? Ie, keep 100K but disclaim all the rest? Thanks John Olsen -- good ideas.