Help with Beneficiary IRA
Hi,
From help on this forum a while ago, I was successful in transferring my late brother’s 401k into a beneficiary IRA.(rightly titled) My brother wanted the money to eventually go to his minor child(now age of 9) at my discretion. I will have to start to pull the money out before end of year…my plan is to do it over many years for tax consequences.
My question is what kind of account to set up now. I’m thinking of an UTMA where my wife and I could gift 24k a year. The problem is that that my nephew would gain full control at 21. I could also just open another account in my name and then gift to him over many years…or gift all at once and have my lifetime gift exemption decreased..The total now is about $200k.
Any other suggestions or input on how this transfer can be handled?
Permalink Submitted by Alan Spross on Mon, 2007-09-03 03:29
You could take the RMD or the RMD plus additional discretionery amounts, report the taxes and contribute the net of tax figure to a 529 account which you control with the child as beneficiary. Those figures would probably be under your joint gift exclusion amounts. The 529 will continue to grow tax free as long as distributions are used for qualified education costs for the child, and would avoid a tax filing requirement for the child for many years.
If there are problems with the child that appear to make higher education inapplicable to him, you could then explore setting up a trust for the child. There are various options you would then have with respect to the 529 plan. I am assuming that your brother has left the interim decision making totally up to your judgement.
Permalink Submitted by gregg peckham on Mon, 2007-09-03 12:33
Excellent idea…..however, the ex-wife will be paying for college from life insurance proceeds. This money I’m controlling would probably be given to my nephew after he is done with college.
If put in a 529, and not used for education, would I still be in control of the money?. In your opinion, would this still be beneficial even if a penalty was applied?
Permalink Submitted by Alan Spross on Tue, 2007-09-04 01:22
You remain in control of the 529 funds until they are distributed. You can even change beneficiaries if you wish to a member of the beneficiary’s family.
Distribution for other than qualified expenses are subject to tax on the amount attributed to earnings and the 10% early withdrawal penalty (some exceptions to penalty apply). The distribution is taxable to the payee, so it depends on what bracket he is in when distributions are taken. While he would be taxed, under the new kiddie tax provisions, if you used an UTMA account, some of the current taxes could be at your tax rate until as late as his 23rd year if he is a student, and he also has a legal right to claim the account at majority in your state. When weighing the options including a trust, the amount of dollars here would be a key factor in making the decision.
Permalink Submitted by gregg peckham on Tue, 2007-09-04 01:31
the amount is $200k