26 Dec How can I maximize my kids’ inheritance from these IRAs?

Q. I inherited an IRA years ago — so I’m not stuck with the 10-year rule — I only take smaller RMDs that are required. I’m still working at age 62, and I also save to my 401(k). I think I won’t have to touch the inherited IRA to fund my eventual retirement. I have two kids. What is the best way to give them their inheritance when I die? I’m thinking that I don’t want them to have to empty the retirement accounts in 10 years, so are they grandfathered in from the IRA I inherited?
— Planning

A. The rules that cover inherited IRAs have a lot of specifics.

Based on what you shared, we think we have good news.

It appears from your question that the original owner passed away before 2020, said Jody D’Agostini, a certified financial planner with The Falcon Financial Group in Morristown.

If that’s the case, the old rules — before the passage of the SECURE Act — apply.

“This means you can take distributions using the old `stretch IRA’ rules,” she said. “This means you can take required minimum distributions (RMDs) over your life expectancy. This should have commenced the year after the original IRA owner’s death.”

For any successor beneficiary such as your children, they will need to comply with the Secure Act and will have to take distributions of the entire balance within 10 year following the death of the account holder, she said.

D’Agostini said she also wanted to address legacy, which seems to be top of mind.

“I would choose the Roth 401(k) option for all your savings in the current 401(k) plan,” she said. “You won’t get the upfront tax deduction, but once inherited, your children’s inheritance from this will be tax-free. Further, they can let the inherited Roth value grow for 10 more years, tax-free, and then take out and invest that amount.”

Also, if you don’t need the money as you suggested, she said she would take your RMDs and invest it in a brokerage account.

“Over time, this will be a nice bequest. Even with growth, this non-retirement account will get the `step-up’ in cost basis at the date of death which allows the beneficiaries to assume the account at the current fair market value of the owner’s (your) death,” she said.

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This story was originally published in December 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.