I'm 78 years old, and I now take monthly withdrawals from my IRA. I've named my three children, ages 50, 45 and 35, as my beneficiaries. What options are available for them to avoid paying taxes on their inheritance?


None. IRA beneficiaries must pay taxes on their withdrawals from an inherited account. But they can minimize the annual tax bite -- and significantly increase their inheritance -- by stretching the withdrawals over their own life expectancies.

By law, your three kids must start taking annual withdrawals from your IRA no later than Dec. 31 of the year following your death. That's also the deadline for dividing the account into three Inherited IRAs. If this is done correctly, each child can take annual required minimum distributions, better known as RMDs, based on his or her own life expectancy, says Barry C. Picker, a Brooklyn tax accountant.

When the time comes, your children should make sure the IRA custodian doesn't list them as the owners of the Inherited IRAs. The new accounts must still bear your name. If you're John Smith, your daughter Wendy's Inherited IRA is correctly titled "John Smith IRA (deceased) for the benefit of Wendy Smith." This isn't just a technicality. If a nonspouse beneficiary is listed as the owner of an inherited IRA, the account is immediately taxable.

Your children's annual RMDs will be taxable, but their Inherited IRA account balances will keep growing, tax-deferred. Over time, that tax deferral can dramatically boost an inheritance. For example, let's say a 50-year-old and a 35-year-old each inherit a $100,000 IRA, take RMDs based on their respective life expectancies and earn a 6 percent average annual return on the account balances. By the time the 50-year-old is 65, says Picker, his Inherited IRA will have grown to $139,100 -- and he'll already have withdrawn $69,200 in RMDs over those 15 years. When the 35-year-old is 65, her IRA will be worth $231,600, and she'll already have withdrawn $168,000.

The bottom line IRA beneficiaries can't avoid income taxes on their withdrawals from an inherited account.

advertisement | advertise on newsday

Websites with more information 1.usa.gov/hvSGbn and 1.usa.gov/14p2jOD

TO ASK THE EXPERT Send questions to Ask the Expert/Act 2, Newsday Newsroom, 235 Pinelawn Rd., Melville, NY 11747, or email act2@newsday.com. Include your name, address and phone number. Questions can be answered only in this column. Advice is offered as general guidance. Check with your own advisers for your specific needs.