Ask the Expert: Grandma wants to help with college
My mother, who's in her 80s, wants to use her sizable IRA to pay for my 13-year-old daughter's college education. How should she set this up so my daughter isn't limited to yearly mandatory withdrawals based on her own life expectancy, which wouldn't much help with college expenses? Should she pull money out of the IRA now and open a 529 account for my child? Mom lives in Florida, which has no state income tax. However, hopefully she'll be alive when my daughter goes to college.
No matter how long your mother lives, she can accomplish her goal simply by making your daughter her IRA beneficiary. That's a better plan than taking a taxable IRA withdrawal to fund a 529 account. (Remember, Florida residents do pay federal income taxes.)
To leave an IRA to a minor child, it's best to leave it to a trust for the child's benefit, naming an adult as the trustee. If correctly worded, the trust is just a conduit: The minimum annual required IRA distributions are based on the child's life expectancy; and all the IRA distributions that pass promptly out of the trust to pay the child's expenses are taxable at the child's rate.
You've misunderstood the mandatory minimum distribution rule. The minimum is just that -- a minimum. You can't withdraw less from the IRA every year -- but you can certainly take out more if you wish. There's no maximum distribution.
If your mother lives through your daughter's college years, she can tap her IRA to pay for them herself. If not, as your daughter's trustee, you can take the necessary IRA withdrawals. Either way, until then, the IRA will keep growing on a tax-deferred basis.
The bottom line There's no maximum annual IRA distribution for IRA owners or for IRA beneficiaries.
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