Ramifications of leaving a Traditional IRA in a will
I have a traditional IRA and am planning my estate. One option, according to the lawyer, is to leave the IRA to the three children, ages 40-50. I have several questions:
Can each receive a third of the IRA (one IRA, three owners)?
If so, what are the ramifications regarding taxes, distribution, additional investments, and RMD’s when they turn 70.5? Is there a better way?
Or, can the IRA be converted to three separate IRA’s without penalty, each with a different (beneficiary) owner?
Is there a way for the three children to liquidate the IRA without penalty (I assume they would have to pay income tax on the distribution, but what about early withdrawal penalty)?
Any information you can provide or resources you could point me to would be helpful.
Thank you, in advance.
Bob R.
Permalink Submitted by Alan - IRA critic on Mon, 2018-04-16 23:24
You should name the children as direct beneficiaries unless a special situation calls for a qualified trust to be created for them. Before the end of the year following your death the children should create separate inherited IRA accounts for each and their beneficiary RMDs would then be determined based on each of their ages. They cannot wait until 70.5 because they will only be beneficiaries, not owners. They can each take as much as they wish as long as they at least distribute the RMD amount which is determined from Table I in IRS Pub 590 B. Generally, it is better to just take out the RMD and let the account grow tax deferred, although there is also a benefit to taking out more and using it to increase contributions to their own retirement plans if they are not maxing out those plans already. The taxes would usually offset to the extent they contribute more to their own plans.