✪ The Tale of Three IRA's
Once upon a time, there lived an older gentleman that was blessed with three children.
Mortimer*, a widow in his 80’s, has three adult children. Ariel*, Sebastian*, and Belle*.
Mortimer was a good saver and had amassed the following three accounts:Save Post
- A Traditional IRA worth $1,000,000
- A Roth IRA worth $600,000
- A Deferred IRA Annuity worth $800,000
Mortimer has completed his Estate Plan and wants to leave his assets to his three adult children equally.
On face value, this seems pretty simple. Mortimer can name each of his kids on these various accounts as equal Primary Beneficiaries. When he passes, they would each inherit 1/3 of the value of these accounts.
He also has a choice of who to name as Contingent Beneficiaries. The Contingent Beneficiary would come into play if one (or more) of the Primary Beneficiaries were no longer alive.
Let’s say for example, Sebastian and Mortimer were on a fishing trip together and the boat capsized, and they both died.
If no Contingent Beneficiary were named, his share could be split between his surviving siblings.
If, however, a box “per stirpes” was checked next to Sebastian's name on the beneficiary form, his share would actually go to his children and not his siblings.
Rick’s Tip: Since a beneficiary form can supersede one’s wishes in their Will, it is important to make sure one’s wishes are aligned between all documents and beneficiary forms.
Let’s throw another wrinkle into Mortimer’s plan.
As a retired CPA, Mortimer is well versed in taxes. So much so that even though long retired, he still wants to pay the least amount in taxes as possible and he wants this to extend to his children.
In fact, the assets in Mortimer’s Roth IRA used to live in his Traditional IRA. Years ago, he worked with his Certified Financial Planner™ practitioner to determine the optimal amount to convert to a Roth IRA. By doing so, he removed a fair sum from his IRA which was subject to required minimum distributions (taxed as ordinary income) and moved these assets to a Roth IRA that has no required minimum distributions and money coming out, is not subject to any taxes.
His daughter Ariel is a leading thoracic surgeon. His other daughter Belle is a well-known hedge fund manager, and Sebastian works as a physician assistant.
Should Mortimer leave his money equally based on his kid’s professions?
Well, since Mortimer is so focused on tax implications, he may want to think about which assets are left to who.
Since the Roth IRA is a tax-free asset, it may make sense to leave that to his child with the highest taxable income.
Since distributions will be required upon Mortimer’s death, (Although, only the Roth account would enjoy tax free distributions and carry a different rule), the Traditional IRA and the Annuity IRA both will require distributions to be added in as ordinary income on the kid’s tax returns.
Even though Sebastian earns a good salary as a PA, it probably is much less than his two sisters.
And, because Mortimer really wants to provide an equal and equitable division of his assets, a dollar from the Roth IRA does not equal a dollar from the Traditional IRA or Annuity.
Therefore, he will need to do a calculation based on the kid’s tax brackets to divide these accounts up fairly.
Conclusion: One doesn’t necessarily need to be as persnickety as Mortimer when deciding what accounts to leave to whom, but in the case where one beneficiary’s income has a large disparity over another’s, it can be worth some thought.
If you recently inherited an IRA, check out my other blog article, Have you inherited an IRA? HERE
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All the best.
Rick Fingerman, CFP®, CDFA™, CCPS®
617-630-4978
Rick@PlanWithFPS.com
*Names and details have been changed.
Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, medical, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS