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|Subject: Re: Protecting your heirs||Date: 7/8/2000 4:44 PM|
|Author: SuzanneSLO||Number: 23181 of 74485|
Laurie: I have to respectfully disagree with your statement that "the tax consequences with the IRA are OK passing to spouse, but when they pass to children really get 'zonked'"
The non-spouse beneficiary can usually delay distribution of the traditional IRA over a long time. In the meantime, the IRA continues to grow tax-free.
For someone like NoelXX, who is already taking mandatory distributions from his IRA, as long as he named a beneficiary in his IRA prior to 4/1 of the year after he turned 70 1/2, his non-spouse beneficiaries will have the life expectancy of the oldest beneficiary in which to withdraw the funds. If he has not elected to re-calculate his own life-expectancy, then it is based on the longer period of the joint life expectancy of NoelXX and his oldest bene.
For example, my husband's father died at age 75 and my husband was his oldest beneficiary at age 50. The pay-out period is 33 years. As a result, the largest mandatory distributions will come at a time when my husband has already retired and may be greatful for the income.
Yes, the benes will have to pay taxes when the funds are distribtuted to them, but the original owner will also have to pay those taxes (and sooner) if he accelerates his distribtuions.
Still, such acceleration may make sense in some situations. For example, my FIL's income was so low that he could have taken additional distributions from his IRA, contributed the funds he didn't need currently to a Roth and still have paid no current income taxes.
In most cases, however, the decision to accelerate distributions also means an acceleration of taxes and may no be so easy to make.
There is, however, one easily avoidable situation in which the non-spouse beneficiary really gets "zonked."
It's when the IRA owner failed to name a beneficiary.
Then, the best case is that distribtuion will have to made over 5 years. Worst case is that they will have to be made by the end of the year following the death.
If you are the beneficiary, you need to protect yourself agianst this possiblility by keeping a copy of the bene designation that the owner filed with his or her IRA custodian. I understand that there is at least one case where the IRS ruled against a daughter who couldn't prove she was the named-beneficiary because the Bank who was custodian of her mother's IRA had gone thru a number of mergers and could no longer find a copy of Mom's bene designation.
The daughter had to take the funds in a lump sum instead of spreading out her payments over many years. As a result, she paid more taxes, she paid the taxes sooner and the money was not left to compound on a tax-deferred basis.
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