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What you should consider before leaving your IRA to grandkids

On Behalf of | Nov 26, 2021 | Elder Law

As you’re doing your estate planning, you have no idea how much money will be left in your individual retirement account (IRA) when you pass away. However, you’re considering leaving it to your grandchildren. Is that a good idea or are there a lot of potential complications? Possibly, both things can be said.

First, it’s important to consider how old your grandchildren are. Children can’t inherit money directly until they’re at least 18. It may be higher depending on what state they live in at the time of the inheritance. 

If your grandchildren are still young, it would probably be best to name a custodian such a parent to be responsible for any assets you intend to leave them until they reach the legal inheritance age. Otherwise, that will need to be done by the probate court if they’re not yet legally adults.

Be aware of tax implications

A second factor to consider is that under the law, most beneficiaries are required to have taken full distribution of inherited IRAs within ten years. There’s a 50% penalty on any assets remaining at that time. 

Further, your grandchildren would need to pay income taxes on those distributions. If they’re applying for college financial aid while they’re taking distributions from an inherited IRA, that extra income can affect their eligibility. 

If you have a Roth IRA, you will have already paid the taxes on the money, so they wouldn’t have that issue. As long as the Roth IRA is opened at least five years before your death and they’re old enough to directly inherit it, they can begin taking distributions immediately without paying income tax on them.

Another solution is to designate that your IRA funds go into a trust for each grandchild. Trusts, when set up with clear directions and managed by a reliable trustee, can be a sound way to help protect your wealth while handing it down to future generations. It’s wise to consider all of your options as you develop your estate plan. 

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