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Ask the Expert: Leaving an IRA to a minor beneficiary, Part 3

What's the best way to leave my IRA to my 2-year-old grandson? (Part 3)

Under new rules, your grandchildren must empty their inherited retirement accounts at the end of the 10th year following the year of your death. The result: If you leave a big IRA to a small child, at age 18 he may inherit a substantial sum … and a huge tax bill.

You could leave the IRA to a discretionary trust for his benefit. But trusts are expensive — and IRA funds held in a trust are subject to trust tax rates, which far exceed those paid by individuals and married couples. (In 2020, trusts pay a 37% rate starting at $12,950 of income. Individual rates and rates for couples filing jointly only reach 37% at $518,400 and $622,050 of income, respectively.)

Alternatively, you could convert the IRA to a Roth IRA in a series of taxable annual conversions and leave the Roth to a trust for your grandson's benefit, says Ed Slott, a Rockville Centre tax accountant: "An inherited Roth IRA must also be paid to its trust beneficiary within 10 years of your death. But the payout from the Roth to the trust is tax-free."

A heads-up: Roth conversions are more attractive this year because the new stimulus act says you don't have to take 2020 RMDs. Let's say your RMD is $2,500 and you want to convert $10,000 from your traditional IRA to a Roth IRA. Normally, you'd have to take your RMD before doing the conversion. The upshot: You'd pay taxes on $12,500, but deposit only $10,000 into the Roth IRA. This year, you can convert the full amount, says Slott — paying taxes on $12,500, and depositing $12,500 into the Roth.

The bottom line

Inherited IRAs are subject to new rules.

More information

nwsdy.li/KitcesIRAStretchElim

nwsdy.li/InvestopediaSECUREAct

TO ASK THE EXPERT Email questions to act2@newsday.com. 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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