Estate Planning With IRAs

estate planning ira

Careful estate planning can help individuals ensure that their financial matters are handled as they wish after they die. Although having an estate plan typically takes on more importance as individuals approach retirement, certain elements of estate planning strategies can be implemented at any age – and some may be most beneficial if implemented while individuals are still saving for retirement.

An Estate Plan

Each person’s objectives for their estate plan will be different based on their family circumstances and assets, but some common goals include

•  Identifying who will receive an inheritance
•  Providing financial support and naming a guardian for dependents
•  Transferring assets outright to heirs without going through probate
•  Using a trust to control how assets are used to support heirs
•  Naming a personal representative to handle the disposition of property
•  Minimizing the tax impact when property is transferred

To accomplish these goals, most estate plans include a will. A will is a legal document that typically lists all real estate and significant personal property owned by an individual along with instructions as to who will receive each item. Trusts, transfer on death accounts, powers of attorney, and healthcare directives are other common components used to achieve specific estate planning and end of life objectives.

Avoiding Probate

After an individual’s death, the estate generally goes through probate to transfer the property. The probate process takes time, and filing fees, attorney’s fees, and notices can make the process somewhat costly, though most states have a streamlined process for small estates. All probate proceedings are a matter of public record. An individual who is concerned about keeping their financial matters private or minimizing administrative burdens for their beneficiaries may wish to explore ways to bypass probate for at least a portion of their assets.

Some types of property can be transferred upon death without involving a state probate court. Assets held jointly with another person (e.g., real estate, checking account, brokerage account) will be owned solely by the surviving joint owner immediately upon the other owner’s death. Designating a beneficiary for certain contracts or accounts is another way to bypass probate. IRAs and 401(k) plans, annuity investments, and life insurance policies are examples of arrangements that permit the account owner to name a beneficiary who will inherit the assets directly, without going through the probate court.

Estate Planning Strategies with IRAs

IRAs are an important component of many estate plans and can be used to accomplish a variety of estate planning objectives. Here are three common estate planning strategies using IRAs.

Donating tax-free to charities

IRA assets can be transferred directly to a charity upon death by naming the charity as the beneficiary of the IRA. The assets will not be included in the IRA owner’s taxable estate and will not be taxable to the charity named as the beneficiary.

IRA owners and beneficiaries age 70½ and older can also donate up to $100,000 per year from an IRA tax-free if they meet the requirements for a Qualified Charitable Distribution (QCD). Amounts sent to charities as a QCD may be used to satisfy the individual’s age 70½ required minimum distribution for the year. To be eligible, the QCD must be sent directly from the IRA to a qualified charity and must come from otherwise taxable IRA assets (i.e., generally not Roth IRA assets).

Creating tax-free income

Because Roth IRA assets are not subject to the age 70½ RMD rules, the Roth IRA can be an effective estate planning tool for allowing assets to grow tax-deferred for an extended period, and then passing the assets tax-free to beneficiaries. Roth IRAs are funded with after-tax assets or by paying the tax owed on any pre-tax retirement assets converted to a Roth IRA. Once in the Roth IRA, the assets will be distributed tax-free to the IRA owner or the beneficiary after the IRA owner’s death. Even the investment earnings in the Roth IRA will be distributed tax-free if five years have passed since the original IRA owner first opened a Roth IRA and the IRA owner is older than 59½, disabled, making a first-time home purchase or deceased.

Stretching the duration of tax-deferral

The objective of a “stretch” IRA strategy is to ensure as much of the IRA as possible remains invested for as long as possible, so the assets can continue growing tax-deferred (or in the case of the Roth IRA, tax free). To take full advantage of the stretch IRA concept, the IRA owner would take the minimum amount required from the IRA during their lifetime to maximize what’s left for the beneficiary, and the beneficiary would take only the minimum payment required each year under the life expectancy distribution option to “stretch” the payments over their lifetime. Depending on the age of the beneficiary, this could be a significant number of years. (Legislation is currently pending that would restrict this strategy to a 10-year time frame for certain beneficiaries.)

Individuals typically engage an attorney to draft estate planning documents and a tax advisor and financial advisor to assist with designing a broader tax and financial strategy.

If you have questions about IRAs or beneficiary distribution options, please contact us at 866-928-9394 or

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