What Happens if You Leave an IRA to Your Children?
Have you saved money in an IRA or Roth IRA? Given their tax advantages, Individual Retirement Accounts can be a great tool to build wealth. You can and should name a beneficiary for your IRA. You may be wondering: Can I leave my IRA to my children? The answer is “yes”—though, there are some specific rules regarding future distributions. Here, our New Jersey estate planning lawyer explains the key things to know about leaving your IRA to your children.
What is an Individual Retirement Account (IRA)?
Broadly explained, an Individual Retirement Account (IRA) is a type of investment account that is designed to help people save for retirement. IRAs offer significant tax advantages. With a traditional IRA, the contributions are tax deductible. With a Roth IRA, the withdrawals are tax-free. Notably, IRAs have annual contribution limits and are subject to specific rules, including income eligibility requirements and minimum distributions requirements during retirement.
Leaving an IRA to a Child: What to Know About the Regulations in the SECURE Act
You have the right to leave your IRA to your child(ren). Depending on your specific financial situation, it can be advantageous to do so. With that being said, there are also some federal regulations that you should be aware of. In 2019, lawmakers passed the SECURE Act. The legislation is comprehensive and, among other things, it changed the treatment of inherited IRAs. Here is the key thing that you should know about the law:
- When a parent designates a child as the beneficiary of their IRA, the child is generally required to deplete the account within 10 years of the original account holder’s death.
In other words, the 10-year rule eliminates the prior option of “stretching” distributions over the beneficiary’s lifetime for most non-spouse beneficiaries. The rule applies to both traditional and Roth IRAs that were inherited by a child on or after January 1st, 2020.
Note: A minor child of the account holder (defined as a child under the age of 21) is exempt from the 10-year clock until they reach the age of majority. In other words, the ten-year clock does not begin until they are 21 years of age. They are not required to deplete the account until they turn 31.
Best Approach to Leave IRA to Child: Update Your Beneficiary Designation
IRAs can be an efficient estate planning tool because you can pass them to your heir using beneficiary designations. In other words, your IRA does not have to go through the probate process in New Jersey. If you have a properly designated beneficiary, you can leave your IRA to him or her outside of the probate process. Notably, you can select multiple beneficiaries for your IRA. For example, if you have two children, you could make them each 50 percent beneficiaries for your IRA.
Contact Our Monmouth County Estate Planning Attorney Today
At Poulos LoPiccolo PC, our New Jersey estate planning lawyer has the knowledge and experience that you can rely on. If you have any questions about what happens when you leave an IRA to a child, we can help. Contact us now for a fully private, no obligation initial case review. With an office in Monmouth County, we provide estate planning services throughout the region in New Jersey.
Source:
congress.gov/bill/116th-congress/house-bill/1994/text
