Traditional IRA Funds: Passing Them On To Your Loved Ones

Contributed by: Lynn Kasch, CPA, Supervisor

A traditional IRA fund is a common savings vehicle that investors pass on to loved ones as part of their inheritance. If you plan to leave a traditional IRA fund to your loved ones, it’s important to know some of the specific considerations that may come into play to optimize value for the person who will inherit this investment.

One key principle to remember is that these funds have never been taxed. As a result, a traditional IRA fund is taxable to those that receive them. At Leone, McDonnell & Roberts, we work with our clients to develop a plan that distributes them out in a way, so they are taxed at the lowest tax brackets possible.

Some possible scenarios to consider:

Any Traditional IRA’s can be easily rolled over into the spouse’s own Traditional IRA’s and subject to the spouse’s distribution rules and tax rates when distributed.

Children (Heirs)
Current rules require that all funds be distributed within ten years. The funds will be taxed at children’s tax rates based upon the amount distributed in that year.

Try to avoid making a trust or an estate the beneficiary of your Traditional IRA. The funds must be distributed within five years, and careful attention needs to be paid to further distribute to beneficiaries so as to not have them taxed at the trust/estate rates.

Leone, McDonnell & Roberts Develops Strategy With Clients for IRA Funds
At Leone, McDonnell, we partner with our clients to devise compliant strategies to maintain the value of their IRA funds. If possible, and you are currently in a relatively low bracket, consider converting portions of your Traditional IRA’s to Roth IRA’s annually and paying the tax on the portion converted. Doing this is a way to help ensure that annual portions do not push you into a higher tax bracket.

If you plan to leave a portion of your estate to charity, consider making the charity(ies) the beneficiary(ies) of your Traditional IRA. You then have the option of leaving other, non-taxable assets to your children (heirs).

Finally, if you find that a loved one, who has recently died, has Traditional IRA’s, PLEASE consult your tax advisor before doing anything.