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| Pathways Advisory Group, Inc. Jeff Karst, CFP® |
Recently, I was given an article from a client about leaving your Roth IRA to your grandchildren. We all love our children, but grandchildren are loved a little bit more (at least that’s what my parents tell me). Are there advantages to a grandchild inheriting a Roth IRA?
If your child does not need (or want) the Roth IRA, should it be left to him or her? Let’s take Mary for example. Mary knows that her only son, Bob, will inherit the majority of her assets (house, Traditional IRA, other investment accounts, etc.) She wonders what she should do with her $100,000 Roth IRA.
Let’s assume that Mary dies at age 75 when Bob is 45 (Bob’s daughter, Sarah, is only 15). Bob’s life expectancy at age 45 (according to the IRS) is 38.8 years. If Bob takes only the Required Minimum Distribution (RMD) each year and earns 10%, when he dies at 75 he will have withdrawn $468,000. The remaining balance would be $385,000, which is left to Sarah. Unfortunately, Sarah must continue withdrawing based on the life expectancy of her dad. She will continue to withdraw the $385,000 over the remaining 8 years. When Sarah is 53, the Roth IRA must be completely withdrawn.
Now, let’s assume that Mary decides to skip Bob for the Roth IRA. Sarah inherits the Roth IRA at only age 15. Mary named Bob as custodian so that he can handle the Roth for Sarah until she reaches a certain age (California allows up to age 25). At age 15, Sarah’s life expectancy (according to the IRS) is 67.9 years. This means that those early RMDs are much smaller for Sarah than they were for Bob. If we use the same assumptions (only the RMD is withdrawn and the account earns 10%), then when Sarah is 53 the account will be worth over $1.7 million. She still would have withdrawn almost $600,000 via the RMDs – all Tax-Free!
The ability to compound a Roth IRA over a longer time period adds tremendous value to Mary’s legacy. What better way to start your grandchildren in life, then inheriting a Roth IRA?
Disclaimer: Please discuss any beneficiary changes with your financial planner and/or estate planning attorney.
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