What is a Multi-generational IRA?
Multi-Generational IRA is a wealth-transfer strategy, passing assets to younger beneficiaries, to extend the period of tax-deferred earnings on IRA assets. Individual Retirement Arrangements or IRAs serve two primary functions in retirement planning: income or legacy. One may contribute to an IRA over lifetime with intention of deriving income in retirement; a supplement to Social Security or other investments. Other investors may be able to sustain their lifestyles and meet obligations without needing their IRAs. For those who have heirs, the unused portion of the IRA could be passed to their spouses, children, or grandchildren; that is a legacy strategy.
Multi-Generational IRA is a strategy designed for investors who won’t need money in account for their own retirement needs. A multi-generational IRA strategy allows you to pass your IRA to a beneficiary down one or several generations.
Illustrating how multi-generational IRA works, let’s consider Mary, a 60-year old woman who’s ready to retire. She has $300,000 worth of retirement assets in three employer-sponsored retirement plans and two IRAs. Two of these accounts were inherited from her deceased husband. She wanted to leave some of these to her favorite charity and the rest to her children, Patty and John. Here’s how she can use the multi-generational IRA strategy in her state planning. When she retires, she’ll roll over her retirement plan benefits into traditional IRAs, consolidating her assets so that she has three IRAs of $100,000 each. For as long as she has the plan trustees transferred to the new IRAs, there will be no tax consequences. The three IRAs are named to Patty, John, and the charity respectively. She decides to postpone distributions from the accounts having all three IRAs continue to grow tax deferred until she reached 70 ½ of age. Tax law requires traditional IRA owners to begin receiving required minimum distributions based on the life expectancy by April 1 of the year after they turned 70 ½. By the time the distributions began, the IRAs have grown to $250,000 each, $750,000 in total for the three.
Based on her life expectancy, Mary would have to withdraw $27,000 in minimum required distributions at 70 ½ from the three IRAs. The custodian of her IRAs will determine for the minimum required distribution needed to be taken from the IRA annually. After her death, her children could continue to receive annual distributions from the IRAs based on their life expectancy. They shall pay income tax on the payments but those taxes would be spread out over the years the payments are received. The charity then can withdraw all of the assets from the IRA without paying income tax. Most charities are tax exempt having them free of any tax on the distributions received from the donor’s retirement plan.
