| Pension & Retirement / Help for Clients Who Failed to Make Appropriate IRA Distribution Choices by Their Required Beginning Date |  |
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If you have begun taking required
distributions from your IRA and haven't named a designated beneficiary,
or if you are unhappy with the choice of distribution method you chose,
it's too late to reverse those things. Your action or inaction will
reduce the potential long-term tax advantages of your IRA for your
beneficiaries. However, there are a number of strategies that may help
to improve your IRA payout situation. One possible strategy is to convert
to a Roth IRA. If you are taking required distributions over only your
own life expectancy because you did not name a designated beneficiary,
and you don't need the current income, you may want to consider
converting your IRA to a Roth IRA, for which lifetime distributions
aren't required. Then you can name children (or others) as beneficiaries
of the Roth IRA, allowing income-tax-free distributions to be made to
them over their lifetimes following your death. The cost of this strategy is that it
causes acceleration of income tax on the IRA funds. You must weigh that
negative factor against the benefit of years of future tax-free buildup
within the Roth IRA and tax-free distributions. If your beneficiaries
can extend distributions over many years, with initial distributions
being very low, this strategy can pay off in a big way. Not everyone can take advantage of
this strategy, however. It is available only in a year when your
adjusted gross income is $100,000 or less (excluding the income from the
conversion, itself). Income from required minimum distributions is
included in AGI for this purpose. However after 2004, income from
required minimum IRA distributions won't be included in AGI for this
purpose, which may help some IRA owners qualify to convert to Roth IRAs.
Another strategy to consider to
avoid the tax disadvantages of a quick IRA payout to your eventual
beneficiaries is to name a charitable remainder trust as beneficiary of
the IRA. The trust is exempt from income tax, and the estate gets an
estate tax deduction for the value of the remainder interest. Income
beneficiaries of the trust (your children or others you name) get to
take distributions and spread the tax out over the annuity period. This
may result in larger total payouts and less tax than distributing the
IRA account over a short time period. Where a charitable remainder trust
is named as death beneficiary of an IRA, the estate tax that is
attributable to the annuity interest or unitrust interest that is being
paid to noncharitable beneficiaries must be paid from assets other than
the trust assets. The estate tax could be paid from other estate assets
or by the beneficiaries. Otherwise the trust won't qualify as a
charitable remainder trust. Where distributions have begun and the annual recalculation method was chosen, the account owner can reduce the income tax impact of having the remaining account balance distributed by the end of the year following the year of death by naming multiple beneficiaries, such as children and grandchildren to keep the income taxed in as low a tax bracket as possible. (Beneficiaries can be named or changed after the required beginning date, but the change won't increase the distribution period.) Alternatively, you could name your estate as beneficiary of your IRA as a conduit to distribute the account balance to multiple estate beneficiaries. If the estate elects a fiscal year, distributions (and tax) can be spread over three tax years. |
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