Getting the Most Tax Deferral From the Traditional IRA

You can save money on taxes by putting money in a traditional IRA. After you turn 70 ½, you have to start taking out a certain amount of money each year. If you die before that, naming a beneficiary for your IRA can help them keep getting payments over a longer time, which means they pay less in taxes. If you don’t name a beneficiary, the money may have to be paid out faster. If you have an IRA and you die, if you name your spouse as the beneficiary, they can keep the IRA and continue to let it grow without having to take out money until they reach a certain age. This can help save on taxes. They can also choose who will get the IRA after they die. If you name someone else as the beneficiary, they have to start taking money out of the IRA sooner and can’t roll it over into their own IRA. So, it’s better to name your spouse as the beneficiary if you want to maximize the benefits of your IRA. Harold has an IRA and when he dies, his wife Samantha can roll over his IRA into her own. She can then name their daughter Debbie as the beneficiary of her IRA. This means Samantha will receive distributions from the IRA over her and Debbie’s joint life expectancy, allowing for greater tax deferral. There is a rule that complicates things in the short term, but after Samantha passes away, the tax deferral for Debbie may be even greater.

Roth IRAs are different because the holder is not required to take distributions during their lifetime. When a Roth IRA holder dies, the beneficiary can choose to receive distributions over their own life expectancy, allowing for tax-free investment growth. This is better than the default rule, which requires all Roth IRA assets to be distributed within five years of the holder’s death. If someone with a Roth IRA passes away, the person they named to get their money has to start taking it out by the end of the next year. If the person named is their spouse, they can wait longer or take the money out earlier. If the spouse takes the money out and puts it in their own account, they can name someone younger to get the money when they pass away. This is a good way to avoid paying a lot of taxes on the money. It’s becoming more popular as more people retire and the stock market goes up.

Source: https://www.floridabar.org/the-florida-bar-journal/getting-the-most-tax-deferral-from-the-traditional-ira/