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Showing posts with label minor beneficiaries. Show all posts
Showing posts with label minor beneficiaries. Show all posts

Minors as IRA Beneficiaries

We frequently see situations where minors are the intended beneficiaries of IRA accounts or employer plans. It could be that grandparents want to benefit their minor grandchildren or it could be single parents who want to provide for their minor children. No matter what the circumstances, there are some issues when minors inherit retirement assets.

Minors cannot sign the paperwork to open an inherited IRA. They cannot manage the investments. There are required distributions that must be made to a beneficiary and minors cannot request a distribution from the account.

Advance planning can avoid these problems. Some IRA custodians may allow you to name a guardian for the minor child on the beneficiary form or may recognize a guardian you name in your will. Other custodians may require an appointment from a probate or surrogates court. You need to know this in advance, so check with your custodian.

For smaller account balances, an UGMA or UTMA (uniform gift or trust form minors) account can be used. This account would be named on your beneficiary form along with a trustee for the account. It could be established at your death and funded with the required distributions from the retirement account. Each state has its own standard language for these trust accounts.

Both of these options have the minor child coming into control of the retirement assets at the age of majority in your state.

For larger account balances, a trust for the benefit of the minor could be established and named on the beneficiary form. Required distributions from the inherited IRA then go to the trust each year and are distributed to the minor in accordance with the terms of the trust. The trust could stipulate at what age the minor has full control over the assets. The trust must be carefully drafted to comply with the IRA distribution rules. Make sure the attorney drafting the trust has experience in this area.

The trustee or guardian for the minor should understand that any checks payable to the beneficiary are taxable. The total IRA should never be transferred into a trust or other custodial account. Only required distributions should go from the inherited IRA account to the beneficiary. If there is any doubt on what should be done at the death of the account owner, the trustee or guardian should consult with an advisor with experience in IRAs. You can find a listing of Ed Slott trained advisors on our website, www.irahelp.com.

-By Beverly DeVeny and Jared Trexler

RMDs and Roth IRA 5-Year Rules Highlight Mailbag

This week's Slott Report Mailbag includes questions on required minimum distributions (RMDs) (what to take from what accounts) and the ever-popular Roth IRA 5-year rules...seriously, we get several questions on these ordering rules each week. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.
Send questions to [email protected]


If you have multiple accounts, (401(k), Thrift Savings Account (TSA), IRA) do you have to segregate your RMD from each account or can you take the sum of the RMD due from one account?

You can never take an RMD for one type of account from a different type of account. You will have to take the 401(k) RMD from the 401(k), the TSA RMD from the TSA and the IRA RMD from the IRA. If you had multiple IRAs, then you could combine the IRA RMDs and take them from any account.


I have several Roth IRA accounts that were created in different years. Can I combine a six-year-old account with a one-year-old account and a three-year-old account? How will that affect my ability to withdraw tax-free earnings? I am 66 years old.



For distribution purposes, all of your Roth IRAs are considered one account and there are ordering rules for Roth distributions. Your annual contributions are distributed first, even if you take the distribution from an account that contains no contributions. These are always distributed tax and penalty free. Then your converted amounts come out on a first in, first out basis. If you are under age 59 ½ and the conversion has not been held for five years, then the early distribution penalty would apply to any amounts that were taxable at the time of the conversion. Once all of your contributions and converted amounts are distributed, and then your earnings come out. If you have had any Roth account established more than five years ago and you are over age 59 ½, then the distribution of earnings is tax and penalty free. In your case, since you have an account that is more than five years old and you are age 66, any distribution you take from any of your Roth accounts will be tax and penalty free. (Editor's Note: We have an easy-to-understand pamphlet on the Roth 5-Year Rules available here.)


What procedure, documentation and/or forms are required for properly setting up separate accounts for the beneficiaries of my traditional IRA? Currently, I have two daughters listed, each at 25%, and four grandchildren, each at 12.5%. What I want to accomplish is the stretch where each can use their own life expectancy table.

Secondly, I am contemplating eliminating my daughters as beneficiaries from the IRA account since I have provided adequately for them with life insurance and designating the four grandchildren at 25% each. My question is: Can I do this, they are currently all minors and I have been told that they as minors cannot inherit my IRA. True or False? I am seeking accurate information on this and will appreciate your response.

Thank you,
Marla Fett

You can separate your accounts now and name individual beneficiaries on each account. Just make sure that your IRA custodian will recognize your separate beneficiaries. Some custodians may allow multiple accounts but require that you have the same beneficiary on all accounts. Or, you can do as you have and name multiple beneficiaries on your account. Then, at your death, your beneficiaries will have until December 31st of the year after your death to establish their own inherited IRAs. They will have to fill account paperwork with the IRA custodian and the funds will have to be moved in a direct transfer from your account to the inherited accounts.

Any check payable to a non-spouse beneficiary, such as your children and grandchildren, will be taxable to them. You should check with your IRA custodian to see if they will allow this type of transfer, as not all custodians will. Minors can inherit IRAs, but they cannot legally sign the IRA paperwork, they cannot request the annual required distributions and they cannot make investment decisions. You have some options, but they all have their drawbacks.

1) You can name a trust for the benefit of the minors as the IRA beneficiary. This type of trust must be carefully drafted to ensure that it complies with both the trust rules and the IRA rules. A properly drafted trust can use the age of the oldest trust beneficiary for calculating required distributions after your death.

2) You can name an UGMA or UTMA (uniform gift to minors) trust as the beneficiary of the IRA. This type of trust transfers the asset to the child when the child reaches the age of majority.

3) If state law and your IRA custodian allow, you can name a guardian or trustee for the child in your will to handle the IRA and its distributions.

If your IRA has a large balance, it would be best if you consulted an IRA expert to determine the best course of action for leaving your IRA to your grandchildren. You can find a listing of Ed Slott trained advisors on our website, www.irahelp.com.

-By Marvin Rotenberg and Jared Trexler

Minor Beneficiaries Q and A

There are many questions and circumstances to discuss when dealing with minor beneficiaries. This question-and-answer session is aimed to fill in some of the blanks and start a discussion with your financial advisor based on a foundational depth of knowledge.

Question: Can I leave my IRA to a minor beneficiary?
Answer: Yes. There is no minimum or maximum age required to be an IRA beneficiary. In fact, an IRA beneficiary doesn’t even have to be a person. It could be a charity, trust or other entity, though the post-death distribution rules that apply are vastly different.

Question: Should I name a minor child directly or should I name a trust?
Answer: This is a personal decision and depends on a number of factors including the size of your IRA and how much post-death control you want to have over the account. If you only need to have minimal control over the inherited IRA until the beneficiary reaches the age of majority (18 or 21, depending on state law), you can name a UTMA/UGMA account as the beneficiary. If you want to exercise greater levels of post-death control or wish to have some control over the inherited IRA beyond the minor’s age of majority, a trust may be necessary. Using a trust as an IRA beneficiary can be complicated though, and should be discussed with your estate planning attorney, tax professional and financial advisor.

Question: Are there any tax advantages to naming a minor as the beneficiary of my IRA?
Answer: Yes, provided the inherited IRA custodian will allow “stretch” IRA distributions. Beneficiaries named on the beneficiary form and certain trust beneficiaries can stretch distributions from inherited IRA accounts over their life expectancies (stretch IRA). The younger the beneficiary, the longer their life expectancy and therefore, the smaller the annual required minimum distributions (RMDs) and longer the account can grow on a tax-favored basis.

Question: Can I name more than one child as the beneficiary of my IRA?
Answer: Yes, provided your IRA custodian accepts multiple beneficiaries. There is no minimum or maximum number of beneficiaries required under the law. In general, if you have more than one child as the beneficiary of your IRA, all your children must use the age of the oldest child to calculate RMDs. However, there’s an exception to this rule that would allow each of your children to use their own life expectancy to calculate RMDs provided they split the inherited IRA into separate inherited IRAs by December 31st of the year after they inherited the account.

-By Jeff Levine and Jared Trexler


Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

You recently said that a 401(k) distribution would add to your MAGI (modified adjusted gross income) for the purpose of determining if you are subject to the 3.8% healthcare surtax. What about Roth IRA distributions? Would they also count towards your total MAGI income for surtax purposes?


IRA distributions are exempt from the 3.8% surtax, but taxable distributions from IRAs can push income over the threshold amount, causing other investment income to be subject to the surtax. Because Roth IRA distributions are generally tax-free, they don’t count towards your total MAGI.