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Ask the Expert: Leaving an IRA to a minor beneficiary, Part 2

What's the best way to leave my IRA to my 2-year-old grandson? (Part 2)

It depends on the size of the IRA and on how old your grandson will be when the account must be emptied. That’ll be on Dec. 31 of the 10th year following the year of your death.

Let's say he inherits a $50,000 IRA at age 8, for example. It can grow tax-deferred until he's 18. His parents could gradually empty the account over those 10 years, spending the withdrawals on his school tuition and summer camp fees, or saving them in a tax-free college 529 account. Those withdrawals would be taxable at your grandson's rate (or at his parents' rate, depending on their size) but not big enough to trigger major tax bills.

But what if he's going to inherit a $1 million IRA?

In that case, you may want to create a trust with a reliable trustee as your IRA beneficiary, making your grandson the trust beneficiary.

Any funds withdrawn from the inherited IRA would go into the trust, says Ed Slott, a Rockville Centre tax accountant. If the trust promptly paid them to your grandson, they'd be taxed at his rate (or at his parents' rate, depending on the amounts and his age). Within 10 years of your death, any remaining IRA balance would go into the trust. The upside: You could limit the distributions to your grandson until he reaches any age you choose. The downside: Funds retained in the trust are taxable at trust tax rates, which far exceed those on individuals and couples.

Next week, I'll describe another option: Converting your IRA into a Roth IRA, and leaving the Roth to a trust for your grandchild.

The bottom line

There's no perfect strategy for leaving an IRA to a minor.

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TO ASK THE EXPERT Send questions to Ask the Expert/Act 2 to Include your name, address and phone numbers. Questions can be answered only in this column. Advice is offered as general guidance. Check with your own consultants for your specific needs.

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