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Financial Planning / Tax Strategies


Subject:  Re: beneficiaries Date:  2/2/2010  11:21 PM
Author:  YewGuise Number:  108866 of 131788

...Assuming you mean only from a tax perspective, yes, because a Spouse can roll IRAs inhereited from his/her spouse into the first sposue's own IRA; no other beneficiary can do that...

This is my understanding; please correct me if I'm wrong:

Regarding income tax on an inherited traditional IRA:
- If the spouse inherits, s/he can roll it into his/her own IRA, and have no tax due at the time of rollover, but will still have to pay income tax on distributions later on, when the money is withdrawn.
- If the children inherit, they have to pay income tax when they inherit.

So this looks to me like a pay now vs. pay later scenario, as opposed to pay more vs. pay less. And for an inherited Roth IRA, it shouldn't make any difference, since no income tax would be due regardless of who inherits or whether it stays in an IRA.

Estate tax is a different animal (from income tax), and although estate-planning attorneys can set up trusts for married couples so that the 2nd-to-die's exemption isn't lost, this maneuver is done with house, savings accounts, and other non-IRA assets. An IRA can't be put into a trust anyway, and given the spousal rollover option, the recommendation is to name the spouse as primary beneficiary and the trust as contingent.

With a nod to Ira's comment of considering objectives other than tax minimization, I am primary beneficiary of my husband's IRA's, but the children are primary beneficiaries of mine. Because (1) he has a pension with a survivor's benefit that's less than 100%, so he won't need my IRA as much as I'd need his, and (2) if everything goes to him, and he remarries and has more children, it's possible my children would get nothing. Very highly unlikely, but just in case, I feel better knowing they'll just get something right away.
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