Roth IRA's - RMD's for beneficiaries

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catdude
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Roth IRA's - RMD's for beneficiaries

Post by catdude »

Howdy Bogleheads -

A few years ago I mentioned to my older brother that I intended to make him and my younger brother the co-beneficiaries of my traditional and Roth IRA's. He asked me to instead leave his share to his three daughters (my nieces)... the reason being that Oregon has a significant estate tax. Anything left to him would eventually wind up in his estate and be taxed by the state. Better to give the $$$ directly to my nieces...

I set up my IRA beneficiary designations so that my younger brother gets my traditional IRA (currently about $500K, mostly in bonds), and my nieces split my Roth (currently $300K, or $100K for each niece; all of it is in stocks). (I have other assets that bring the overall split to 55% for my brother and 15% for each niece). My understanding at the time was that the kids would be able to draw down the Roth IRA proceeds over their lifetimes, whereas my younger brother would have to deplete the account within five years.

Fast forward to today. I just found out that the law has been changed so that, generally, TIRA and Roth IRA beneficiaries have to deplete their inherited accounts within 10 years. But there's an exception for beneficiaries who are within 10 years of age of the decendent (i.e., me). I'm guessing that those who qualify for that exception are allowed to take RMD's over their life expectancy. I poked around on the IRS website, but wasn't able to find much on this topic.

Can anyone confirm that my guess is correct? I'm almost 66, and my younger brother is 64. Would it make sense to change the beneficiary designation so that he gets the Roth IRA? In the event of my unfortunate demise, my brother could potentially draw down to proceeds over 25 or so years. Anybody have an opinion on this? Also, if you can point me to any IRS guidance on this topic, I'd be much obliged...

Thnx in advance...
catdude | | "I yield to the gentleman for a few feeble remarks." (Congressman Thaddeus Stevens)
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retired@50
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Re: Roth IRA's - RMD's for beneficiaries

Post by retired@50 »

There are different rules, depending on whether or not the person inheriting is your spouse or not.

In your description, nobody is your spouse, so they will all inherit under the non-spouse rules.

My quick take on the situation is that everyone will need to drain the account in 10 years, but you might consider leaving the tax-deferred IRA to the person(s) in the lowest tax bracket, so the tax burden is the smallest (lowest percentage), for whoever winds up paying those taxes.


ETA: See Kaitetsu's note below about a beneficiary within 10 years of age of the decedent, and reference to 590-B publication.

See links:
https://www.bogleheads.org/wiki/Inheriting_an_IRA

https://www.bogleheads.org/wiki/Inheriting_a_Roth_IRA

Regards,
Last edited by retired@50 on Tue Jun 08, 2021 11:31 pm, edited 1 time in total.
This is one person's opinion. Nothing more.
Katietsu
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Re: Roth IRA's - RMD's for beneficiaries

Post by Katietsu »

The OP is correct that the brother would be able to potentially spread the withdrawals out over a longer time period than the nieces. See Pub 590-B. Page 12 has the exact example.

That said, is there any reason to believe that the younger brother will outlive you by many years? Do you know that any of the beneficiaries will leave the money in the IRA for as long as possible? Do you have any expectations of how the nieces’ tax rates will compare to the brother?

All else being equal one advantage of giving the traditional to the nieces is that it will be split 3 ways. For instance, if you were to pass away with the balance still around $500k. That could mean that each child just took out about $17k a year.

Good chance that there is no compelling predictable reason to go one way or the other. I just heard a financial planner say about a similar situation that he would tell the heirs of the best choice had been made. In other words, you could not know the best choice until after the fact.
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catdude
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Re: Roth IRA's - RMD's for beneficiaries

Post by catdude »

Katietsu wrote: Tue Jun 08, 2021 8:26 pm The OP is correct that the brother would be able to potentially spread the withdrawals out over a longer time period than the nieces. See Pub 590-B. Page 12 has the exact example.

That said, is there any reason to believe that the younger brother will outlive you by many years? Do you know that any of the beneficiaries will leave the money in the IRA for as long as possible? Do you have any expectations of how the nieces’ tax rates will compare to the brother?

All else being equal one advantage of giving the traditional to the nieces is that it will be split 3 ways. For instance, if you were to pass away with the balance still around $500k. That could mean that each child just took out about $17k a year.

Good chance that there is no compelling predictable reason to go one way or the other. I just heard a financial planner say about a similar situation that he would tell the heirs of the best choice had been made. In other words, you could not know the best choice until after the fact.
Nope, no reason to think that my younger brother will outlive me by many years. I'm still pretty spry, and he could always pre-decease me (in which case all the $$$ go to my nieces). My thought was that I could choose him as the Roth beneficiary, then re-visit the issue in a few years. In fact, given the possibility of the law being changed, as it was recently, I'll probably have to pay attention to this issue on an ongoing basis.

And I have no idea whether my beneficiaries will leave the money in the IRA for as long as possible.

As far as tax rates go, my expectation is that the nieces' tax rates will be higher than my younger brother's. The kids are ages 24 to 30, and their careers are off to a good start. My younger brother will very likely be retired. He won't have a pension. I don't know how much he has in investments, but my sense is that an inheritance from me could be a big help to him.

I think your bottom line is exactly right. I'll never know if I made a good decision about this...
catdude | | "I yield to the gentleman for a few feeble remarks." (Congressman Thaddeus Stevens)
Lee_WSP
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Re: Roth IRA's - RMD's for beneficiaries

Post by Lee_WSP »

If you are in the same or lower tax bracket as your nieces, convert aggressively up to the bracket each year.

Under current regulations, they will be able to leave it in the Roth for the full 10 years and then withdraw it all at the end with no tax.

This is assuming maximum benefit to your nieces is the goal.

edit:
You and your brother are unlikely to have dissimilar life spans since you haven't disclosed any unique medical challenges faced by one but not the other. There is a reason the 10 year age difference rule exists. Congress figures you two are close enough in age that the retirement account will be emptied in about the same amount of time.
Alan S.
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Re: Roth IRA's - RMD's for beneficiaries

Post by Alan S. »

Since your discussion with brother was "a few years ago", perhaps things have changed for him financially since then. I would check with him to see if he wishes to change his request in any way. Any change in his marital status or with any of the nieces could affect his decision.

Since he was concerned earlier with OR estate tax, he must have anticipated a taxable estate over 1mm. While that threshold has not changed, his estimation of the taxable estate may have.
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