Selecting Beneficiaries

My household consists of myself (age 67), my wife (age 66) and our daughter (age 44). I am confident that we will continue to live together as a household for our lifetimes, so income to any one of us is all just family income. Our daughter has no income.

My retirement funds are about evenly distributed between Roth IRAs and Traditional IRAs. My retirement income situation is such that I do not foresee the need to take distributions from the IRAs other than the RMDs from the Traditional IRAs. So, I am interested in preserving as much “stretch” of the IRAs as is possible – likely for the eventual benefit of our daughter.

My question is: Who should I designate as the beneficiary of the Traditional IRAs and of the Roth IRAs?

My thinking is that it makes sense to designate my wife as the beneficiary of my Roth IRAs. She could then become the owner of these Roth IRAs upon my death and would not have to take any distributions from the Roth IRAs during her lifetime. She could then designate our daughter as the beneficiary of the Roth IRAs. Upon my wife’s death, my daughter would then take annual RMDs from the Roth IRAs based upon my daughter’s age.

Conversely, it strikes me that I should designate my daughter as the beneficiary of my Traditional IRAs. Upon my death, she would be required to take annual RMDs, but since she is considerably younger than my wife, she would not be required to draw down the Traditional IRA as rapidly as my wife would be required to do (once she hit 70.5).

Is my reasoning appropriate for setting beneficiaries? Thanks for your help.



Your thinking is sound enough. Tax brackets might also come into play here since your daughter files separately using the single status. Everything else being equal, the Roth is more valuable to the beneficiary in the higher bracket, but as you pointed out the RMDs would vary. Note that your wife does not have to take an RMD if she inherits your IRA before the year you would have reached 70.5, so perhaps you would re align the beneficiaries in about 3 years.

The other question is whether your daughter is in a situation where a special needs trust (SNT) would be appropriate or not. Those trusts can protect any Medicaid benefits from being wiped out by an inheritance. A proper one still allow a full stretch using the beneficiary’s life expectancy.

Finally, another factor to consider are complexity issues. At what point do you leave a tax efficient structure that requires all the parties to adhere to several requirements that add complexity that is tough to handle at advanced ages. In example would be the added complexity of setting up separate accounts now including some Roth and TIRA balances going to each beneficiary. Then, they would both have to deal with RMDs instead of just one of them. And if you have any basis in your TIRA, each beneficiary inherits a share of that and files an 8606 every year indefinitely.



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