children inheritance

Submitted by Clarence Boje on Tue, 2016-06-14 14:22

What is the procedure for our children to receive their inheritance for Traditional IRA’s and Roth IRA’s. Here are the facts:
1.My wife and I initially established Traditional IRA’s and then converted them into Roth IRA’s during 2000 and 2001.

2.We also converted Traditional IRA’s in 2014 and 2016 and will continue to convert T to R until both of us have passed.

3. When first one passes,spouse will consolidate both T and R into name of surviving spouse. and we are advising children to set up individual accounts

A. Please advise what the 4 children have to do so they are not penalized for early distribution or extra payments or fines on their individual accounts. They are currently 56, 54,53, and 46.

Government forms 590A and 590 B seem to have conflicting information and are extremely confusing.

B. What is your opinion of our plan ? Any suggestions and comments will be appreciated.



Submitted by Alan - IRA critic on Tue, 2016-06-14 18:28

  • What tax rates are you paying for these conversions? It is possible to over convert, since the more conversions you do, the lower the balance on your TIRAs becomes and the lower your taxes are on the remaining RMDs. You may or may not want to view this issue in terms of your beneficiaries as well as yourselves. When it comes to children inheriting a Roth IRA vs a TIRA, their tax rates compared to yours should be considered. In very general terms, if your children will have more assets than you do and their tax rate is therefore expected to be higher than what you are paying to convert, the more beneficial conversions will be to them. But if their tax rates will be lower than what you are paying, it is better for them to inherit a larger TIRA and the cash you would have paid for conversion taxes than a Roth IRA and none of the tax money. Main point – do not over convert.
  • Re Point 3 – in most cases it is best to have the surviving spouse roll over and consolidate the IRA accounts after the death of the other spouse. Of course, the children would not have to set up inherited IRAs until the surviving spouse passes.  By the end of the year following the year of the surviving spouse’s death, the 4 children should have established individual inherited IRA accounts. In fact, this should be done ASAP once they inherit the IRAs. This will allow each of them to use their own life expectancy for RMDs instead of all of them having to use the life expectancy of the oldest child. The only penalty they are subject to is for failing to take their RMD in time. If a beneficiary wants to take out more than the RMD, there is no penalty and no taxes on the inherited Roth IRA, but there is ordinary tax on the inherited TIRA distributions.
  • Your general plan is fine as long as you do not over convert. It is also a good idea to make sure the children know the rules for inherited IRAs. They should name their own successor beneficiaries as soon as possible after they inherit. In most cases, they should do that at the same time they present the death cert and establish separate accounts. If they inherit a TIRA, they must complete the year of death RMD if the surviving spouse has not completed it.

Submitted by Clarence Boje on Wed, 2016-06-15 00:02

We are paying income taxes in the 10% bracket Plus a 50% increase because of Social Security, (Actually 15%) while I believe  our children are in the 25%and/or the 28% bracket.    I always  stay in the 50% Social Security penalty and WILL NOT  convert  enough to get into the 85% SS penalty(actually 18.5%) I would appreciate it if you would comfim which table  to use for the surviving spouse and which table to be used for the inherited children and when to start using them. Thank you so VERY VERY MUCH FOR ALL YOUR HELP.

Submitted by Alan - IRA critic on Wed, 2016-06-15 02:20

While there are certain age related cases where the surviving spouse would maintain the IRA as inherited for a time before rolling it over, once the surviving spouse owns the TIRA, the uniform table III will apply. Of course, the Roth IRA has no RMDs for the owner. Once the children inherit and create separate inherited IRA accounts, they will use the single life table I to determine their annual RMDs for both the inherited Roth and inherited TIRA. These RMDs begin the year following the year of the surviving spouse’s death.

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