Leaving TIRAs to kids vs.spouse and vs. Roth conversions

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tealeaves
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Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by tealeaves »

I've been doing minor Roth conversions for a couple of years for all the conventional reasons (i.e, belief that my tax rate at RMD time will be higher, etc.), but also for easing the future tax burden on my heirs. Between taxable investments, a joint survivor pension annuity, and her own TIRA, my DW will be fine financially when I pass. In addition I am confident that my adult children will be in lower tax brackets than her in the future. Given that, I am changing the primary beneficiaries for my TIRAs to my children and cutting back somewhat on my Roth conversions. Any comments on whether this strategy is sensible or not?
Last edited by tealeaves on Sun Jan 26, 2020 12:01 pm, edited 1 time in total.
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TomatoTomahto
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by TomatoTomahto »

I guess a lot depends on the details. My wife and I are doing something similar. She won’t need my tIRAs to provide for her, and we are giving them directly to the heirs.
I get the FI part but not the RE part of FIRE.
Topic Author
tealeaves
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by tealeaves »

TomatoTomahto wrote: Sun Jan 26, 2020 8:52 am I guess a lot depends on the details. My wife and I are doing something similar. She won’t need my tIRAs to provide for her, and we are giving them directly to the heirs.
Thanks. And given this decision are you not doing (or doing less in) Roth conversions from your tIRAs?
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TomatoTomahto
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by TomatoTomahto »

tealeaves wrote: Sun Jan 26, 2020 9:00 am
TomatoTomahto wrote: Sun Jan 26, 2020 8:52 am I guess a lot depends on the details. My wife and I are doing something similar. She won’t need my tIRAs to provide for her, and we are giving them directly to the heirs.
Thanks. And given this decision are you not doing (or doing less in) Roth conversions from your tIRAs?
As it happens, after considerable reluctance, I have begun doing Roth conversions (see viewtopic.php?f=10&t=296337&p=4906060&h ... a#p4906060). The devil is always in the details, and furthermore there are a great many unknowns, but I think the Expected Return of some conversions is favorable.

While one of our heirs is already at the maximum tax rate, the others will probably be at more moderate tax rates, but I don't want to bet against my kids :D

We are also gifting the annual gift tax exclusion to our heirs.
I get the FI part but not the RE part of FIRE.
dcdowden
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by dcdowden »

We have our children as contingent beneficiaries of our IRA's with the spouse as primary. Our IRA's are at Fidelity and I verified with them that the surviving spouse can disclaim all or part of the IRA with the balance going to the contingent beneficiaries. This allows the surviving spouse to make a final decision when the time comes, but our current plan would be to pass the TIRA on to the children but retain the Roth IRA for the surviving spouse. We are also doing Roth conversions before we hit 72.
lakpr
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by lakpr »

dcdowden wrote: Sun Jan 26, 2020 9:42 am We have our children as contingent beneficiaries of our IRA's with the spouse as primary. Our IRA's are at Fidelity and I verified with them that the surviving spouse can disclaim all or part of the IRA with the balance going to the contingent beneficiaries. This allows the surviving spouse to make a final decision when the time comes, but our current plan would be to pass the TIRA on to the children but retain the Roth IRA for the surviving spouse. We are also doing Roth conversions before we hit 72.
Respectfully, I think you should reverse the order. The surviving spouse, even when single, is likely to be in a lower tax bracket than the kids while working, so at the time of the second spouse passing it would be a tax bomb for the kids. Especially with the SECURE act, when the entire tIRA should be emptied within 10 years.

Kids should be the primary beneficiaries for Roth, and spouse should be the primary beneficiary for the tIRA.
cadreamer2015
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by cadreamer2015 »

I'm pretty sure that the primary beneficiary of an IRA can disclaim. If that's the case, then your spouse could be left as the primary beneficiary and could disclaim (let the IRA flow to the secondary beneficiary) if that seems more appropriate upon your passing. This depends, of course, on the primary beneficiary knowing that they could disclaim and understanding when it might be appropriate for them to do so.
De gustibus non disputandum est
infotrader
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by infotrader »

lakpr wrote: Sun Jan 26, 2020 9:57 am
dcdowden wrote: Sun Jan 26, 2020 9:42 am We have our children as contingent beneficiaries of our IRA's with the spouse as primary. Our IRA's are at Fidelity and I verified with them that the surviving spouse can disclaim all or part of the IRA with the balance going to the contingent beneficiaries. This allows the surviving spouse to make a final decision when the time comes, but our current plan would be to pass the TIRA on to the children but retain the Roth IRA for the surviving spouse. We are also doing Roth conversions before we hit 72.
Respectfully, I think you should reverse the order. The surviving spouse, even when single, is likely to be in a lower tax bracket than the kids while working, so at the time of the second spouse passing it would be a tax bomb for the kids. Especially with the SECURE act, when the entire tIRA should be emptied within 10 years.

Kids should be the primary beneficiaries for Roth, and spouse should be the primary beneficiary for the tIRA.
This is the best approach.
Alan S.
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by Alan S. »

While the Secure Act delivers a major blow to the stretch, the beneficiary decision should be primarily based on the facts and circumstances of both the surviving spouse (if any) and the non spouse beneficiaries. And there are a few issues the IRS needs to clean up, and release guidance. I assume there is massive pressure to get on this ASAP, since many estate plans have been left in limbo.

Particularly for a Roth IRA if the surviving spouse is financially independent and does not need to draw down the Roth IRA (or will not leave it to a new spouse), the Roth can grow without RMD drag and the 10 year rule will not begin until the surviving spouse passes.

With respect to the children, if they are minors and higher education students, their 10 year rule may not begin until the mid 20s. If disabled or chronically ill, they are "eligible beneficiaries" for the LE stretch. Otherwise, the 10 year rule starts right away. Eligible beneficiaries are subject to annual RMDs and possibly kiddie taxes. 10 year beneficiaries do not have annual RMDs but will be forced to manage distributions to avoid a large taxable lump sum at the end of the 10 year period for inherited TIRAs.

Disclaimers still work as before, the disclaimant is treated as if they pre deceased the account owner. Disclaimers can be either full or partial. The beneficiary that benefits by a disclaimer can be "eligible" on their own merits for a stretch, or will be subject to the 10 year rule..

Therefore, several variables need to be considered for each set of circumstances, so generalizations are difficult. Creditor protection is also an issue. The beneficiary situation is also not "all or none". A retirement account can be left partially to the spouse and children.

The worst mistake of all continues to be leaving a qualified retirement plan to your estate, because the estate will not even get the 5 year rule, it will get a lump sum distribution.
dcdowden
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by dcdowden »

Actually, in our particular case each spouse has enough in their own TIRA to place them in the 35+% tax bracket as a surviving individual when RMD's kick in with pensions, social security and taxable investment income. At least one of our two children will be in a much lower tax bracket because teachers just don't make that much money. That's what's nice about the use of disclaimers because the survivor can decide what's best at the time. In the meantime, we are making generous annual gifts to each child and funding 529's for grandchildren, so we will have to see what's left in the hopefully distant future.
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Watty
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by Watty »

tealeaves wrote: Sun Jan 26, 2020 8:48 am I've been doing minor Roth conversions for a couple of years for all the conventional reasons (i.e, belief that my tax rate at RMD time will be higher, etc.), but also for easing the future tax burden on my heirs. Between taxable investments, a joint survivor pension annuity, and her own TIRA, my DW should be fine financially when I pass. In addition I am confident that my adult children will be in lower tax brackets than her in the future. Given that, I am changing the primary beneficiaries for my TIRAs to my children and cutting back somewhat on my Roth conversions. Any comments on whether this strategy is sensible or not?
"Should" is not will be.

By far the best thing you can do for your kids, and yourself, is to be sure that you have enough funds to be able to support yourself even in extreme situations like if you live to be 105, in a prolonged bear market, double digit inflation, and need to live in assisted living or a nursing home for 10+ years.

If you are not clearly in this situation then I would not change the beneficiaries. When you die your wife can disclaim the IRA(with a lawyers advice) to let your kids inherit them if it makes sense then.

If you are well off enough to cover this situation then you really need professional estate planning and you might want to start transferring money to them now at a low enough level ($15K?) that you will not have to fill out the gift tax forms.
elainet7
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by elainet7 »

why should anyone worry about gifting more than 15k/yr The exemption is 11M per spouse
elainet7
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by elainet7 »

For Large Iras the secure act is a massive tax bomb for kids
Best to spread the inherited Ira among the most beneficiaries where possible
lots of work for lawyers, cpas and insurance companies might prosper selling annuities and more life insurance
Roth conversions mandatory with these low tax rates
in florida 300k-effective tax rate is 18%; 400k 20.7% MFJ
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TomatoTomahto
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by TomatoTomahto »

elainet7 wrote: Sun Jan 26, 2020 11:07 am why should anyone worry about gifting more than 15k/yr The exemption is 11M per spouse
1. Not in all 50 states.
2. Not after 2025.
3. The exemption has a big bulls eye on it.
I get the FI part but not the RE part of FIRE.
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Watty
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by Watty »

elainet7 wrote: Sun Jan 26, 2020 11:07 am why should anyone worry about gifting more than 15k/yr The exemption is 11M per spouse
It has been as low as $1 million as recently as 2003.

https://www.thebalance.com/exemption-fr ... es-3505630

There is also nothing engraved in stone that says that the capital gains stepped up cost basis will always exist. I do not know if there future legislation is pending(and we could not talk about it anyway) but abolishing that has be proposed multiple times in the past.

If you have kids that are old enough to be above the kiddie tax but still in the 0% federal long term gains tax bracket then giving them $15K of appreciated stock would be an option to consider.
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by Dottie57 »

dcdowden wrote: Sun Jan 26, 2020 9:42 am We have our children as contingent beneficiaries of our IRA's with the spouse as primary. Our IRA's are at Fidelity and I verified with them that the surviving spouse can disclaim all or part of the IRA with the balance going to the contingent beneficiaries. This allows the surviving spouse to make a final decision when the time comes, but our current plan would be to pass the TIRA on to the children but retain the Roth IRA for the surviving spouse. We are also doing Roth conversions before we hit 72.
I agree the tIRA to kids and Roth for spouse. Single people have bigger tax rates on same money as a couple has. Roth is extremely beneficial. Roth should help simplify taxes planning too.
MathIsMyWayr
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by MathIsMyWayr »

elainet7 wrote: Sun Jan 26, 2020 11:07 am why should anyone worry about gifting more than 15k/yr The exemption is 11M per spouse
Filing and keeping paper work is needed for gifting more than $15k/year/person.
Retired2013
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by Retired2013 »

I thought I read once that if the Primary beneficiary declines the asset, then it would go back to the estate? It was noted that the declining beneficiary doesn't get to choose the next beneficiary? So if the parent declines the funds as primary beneficiary, it might not just go to the second beneficiary, since the first beneficiary is not deceased?
elainet7
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by elainet7 »

with these low tax rates you gotta be crazy not to do massive roth conversions especially if married filing jointly and living in an income tax free state like florida
with the secure act you gotta plan who gets the roth and who gets the traditional
most experts feel rates will go up in 2026
we can have an effective tax rate of 20% on 400k of income
we have no problem paying the tax
Topic Author
tealeaves
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by tealeaves »

dcdowden wrote: Sun Jan 26, 2020 10:38 am Actually, in our particular case each spouse has enough in their own TIRA to place them in the 35+% tax bracket as a surviving individual when RMD's kick in with pensions, social security and taxable investment income. At least one of our two children will be in a much lower tax bracket because teachers just don't make that much money. That's what's nice about the use of disclaimers because the survivor can decide what's best at the time. In the meantime, we are making generous annual gifts to each child and funding 529's for grandchildren, so we will have to see what's left in the hopefully distant future.
OP here. My situation as well. I should have clarified that my "children" are adults that (through personal career decisions they have made) will be in lower brackets than their parents.
Topic Author
tealeaves
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by tealeaves »

elainet7 wrote: Sun Jan 26, 2020 3:33 pm with these low tax rates you gotta be crazy not to do massive roth conversions especially if married filing jointly and living in an income tax free state like florida
with the secure act you gotta plan who gets the roth and who gets the traditional
most experts feel rates will go up in 2026
we can have an effective tax rate of 20% on 400k of income
we have no problem paying the tax
OP here, Agree except I'm in a high tax state with a possibility of moving to a low or no tax sate after 2026
Topic Author
tealeaves
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by tealeaves »

Dottie57 wrote: Sun Jan 26, 2020 12:56 pm
dcdowden wrote: Sun Jan 26, 2020 9:42 am We have our children as contingent beneficiaries of our IRA's with the spouse as primary. Our IRA's are at Fidelity and I verified with them that the surviving spouse can disclaim all or part of the IRA with the balance going to the contingent beneficiaries. This allows the surviving spouse to make a final decision when the time comes, but our current plan would be to pass the TIRA on to the children but retain the Roth IRA for the surviving spouse. We are also doing Roth conversions before we hit 72.
I agree the tIRA to kids and Roth for spouse. Single people have bigger tax rates on same money as a couple has. Roth is extremely beneficial. Roth should help simplify taxes planning too.
OP here; agree that this is probably the best course of action in my case
Topic Author
tealeaves
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by tealeaves »

Watty wrote: Sun Jan 26, 2020 11:03 am
tealeaves wrote: Sun Jan 26, 2020 8:48 am I've been doing minor Roth conversions for a couple of years for all the conventional reasons (i.e, belief that my tax rate at RMD time will be higher, etc.), but also for easing the future tax burden on my heirs. Between taxable investments, a joint survivor pension annuity, and her own TIRA, my DW should be fine financially when I pass. In addition I am confident that my adult children will be in lower tax brackets than her in the future. Given that, I am changing the primary beneficiaries for my TIRAs to my children and cutting back somewhat on my Roth conversions. Any comments on whether this strategy is sensible or not?
"Should" is not will be.

By far the best thing you can do for your kids, and yourself, is to be sure that you have enough funds to be able to support yourself even in extreme situations like if you live to be 105, in a prolonged bear market, double digit inflation, and need to live in assisted living or a nursing home for 10+ years.

If you are not clearly in this situation then I would not change the beneficiaries. When you die your wife can disclaim the IRA(with a lawyers advice) to let your kids inherit them if it makes sense then.

If you are well off enough to cover this situation then you really need professional estate planning and you might want to start transferring money to them now at a low enough level ($15K?) that you will not have to fill out the gift tax forms.
OP here. Thanks and understood. I edited the post to say "will be."
Topic Author
tealeaves
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by tealeaves »

Alan S. wrote: Sun Jan 26, 2020 10:27 am While the Secure Act delivers a major blow to the stretch, the beneficiary decision should be primarily based on the facts and circumstances of both the surviving spouse (if any) and the non spouse beneficiaries. And there are a few issues the IRS needs to clean up, and release guidance. I assume there is massive pressure to get on this ASAP, since many estate plans have been left in limbo.

Particularly for a Roth IRA if the surviving spouse is financially independent and does not need to draw down the Roth IRA (or will not leave it to a new spouse), the Roth can grow without RMD drag and the 10 year rule will not begin until the surviving spouse passes.

With respect to the children, if they are minors and higher education students, their 10 year rule may not begin until the mid 20s. If disabled or chronically ill, they are "eligible beneficiaries" for the LE stretch. Otherwise, the 10 year rule starts right away. Eligible beneficiaries are subject to annual RMDs and possibly kiddie taxes. 10 year beneficiaries do not have annual RMDs but will be forced to manage distributions to avoid a large taxable lump sum at the end of the 10 year period for inherited TIRAs.

Disclaimers still work as before, the disclaimant is treated as if they pre deceased the account owner. Disclaimers can be either full or partial. The beneficiary that benefits by a disclaimer can be "eligible" on their own merits for a stretch, or will be subject to the 10 year rule..

Therefore, several variables need to be considered for each set of circumstances, so generalizations are difficult. Creditor protection is also an issue. The beneficiary situation is also not "all or none". A retirement account can be left partially to the spouse and children.

The worst mistake of all continues to be leaving a qualified retirement plan to your estate, because the estate will not even get the 5 year rule, it will get a lump sum distribution.
OP here. Thanks - good perspective. Especially for the Roth will leave spouse as primary beneficiary.
mhalley
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Re: Leaving TIRAs to kids vs.spouse and vs. Roth conversions

Post by mhalley »

Lange has long advocated a what he calls the cascading beneficiary plan. You might review it and see if that would fit your needs. It goes like this:
Primary Beneficiary: The Spouse
Secondary Beneficiary: A unified credit shelter trust (the B trust)
Tertiary Beneficiary: The children equally
Quarternary Beneficiary: A well-drafted qualifying trust for the grandchildren.

https://www.whitecoatinvestor.com/lange ... iary-plan/

https://paytaxeslater.com/reading/idealsolution/
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