I am naming my 2-year old grandchild as beneficiary of one of my Roth IRA accounts.
As I understand it, the account will have to be dissolved 5 years after the grandchild reaches age 18.
I assume this is all legal?
Outside of the facts that the grandchild would have full ownership of the funds on their 18th birthday, and someone aged 18 might not have the best ideas on what do to with the money, and it might affect their chances of getting financial aid for college…is there anything else I’m missing here?
Outside of the facts that the grandchild would have full ownership of the funds on their 18th birthday, and someone aged 18 might not have the best ideas on what do to with the money, and it might affect their chances of getting financial aid for college…is there anything else I’m missing here?
There’s one reference. My youngest is 34 so it’s been awhile since I have dealt with money for minors but I suspect the child may need a custodian to be named as beneficiary.
The SECURE Act recognizes two groups of persons as primary beneficiaries to IRAs: Designated Beneficiaries and Eligible Designated Beneficiaries. Your grandchild will be a DB. For a Roth IRA, this would mean beginning the year following the year of your death, the grandchild, at any age, will have 10 years during which any amount including no amount may be withdrawn at any time, but at the end of the 10th year, the account must be fully withdrawn. This is called the ‘10 year rule’ where there are no RMDs until the 10th year.
The rules for a traditional IRA are a little different and in fact with the recently released IRS ‘proposed regulations’, have gotten a bit more complicated for beneficiaries of those who die after their required beginning date. Fortunately, the Roth does not have a RBD and so it does not matter the age of the RIRA owner at death.
Was there a recent change in the law? Someplace I found what appeared to be a reliable source that said a non-spouse beneficiary of a Roth IRA had 5 years to withdraw all funds from the account, bu the 5 year clock would not start until the beneficiary was 18. So was that incorrect, or did some laws change?
Yes, this does get fuzzy, which hopefully this ‘proposal’ period will get the IRS a lot of feedback to simplify this. But this is how I understand the new rules.
For those who died 2020 or later, if a beneficiary is a dependent child under age 21 they would be an EDB and so they can take RMDs under the old rules, meaning over life expectancy or the 5-year rule, and if the money isn’t needed it would make the most sense for the RIRA dependent child beneficiary to take RMDs over life expectancy. However, the year the child attains 21 (no longer 18), the child becomes a DB and so must switch to the 10 year rule (not 5 year rule). However, per the latest IRS proposal, it appears that RMDs must be taken based on life expectancy over those 10 years and then the account emptied by the end of the 10th year.
At least that’s how I read others interpretation of the new inherited IRA rules from those like Ed slott and Michael Kitces.
Your grandchild will be a DB. For a Roth IRA, this would mean beginning the year following the year of your death, the grandchild, at any age, will have 10 years during which any amount including no amount may be withdrawn at any time, but at the end of the 10th year, the account must be fully withdrawn. This is called the ‘10 year rule’ where there are no RMDs until the 10th year.
Not exactly. There is an exception for beneficiaries under the age of majority when they inherit. From IRS Pub 590-B 2021 Publication 590-B (irs.gov)
For a beneficiary receiving life expectancy payments who is either an eligible designated beneficiary or a minor child, the 10-year rule also applies to the remaining amounts in the IRA upon the death of the eligible designated beneficiary or upon the minor child beneficiary reaching the age of majority, but in either of those cases, the 10-year period ends on December 31st of the 10th anniversary of the eligible designated beneficiary’s death or the child’s attainment of majority.
So, if the grandchild is under the age of majority (18 in most states, but is dependent on the state) at at the time of @blacktreechaser’s death, the 10 year clock won’t start until they reach the age of majority.
AJ, I have to say that I am relieved to see you active on the new system. There isn’t any Fool whose posts I have dreaded the possibility of loosing more than yours. Thanks for everything!
I was a bit annoyed that the transition took longer than they said it would, but I’m giving it a try. It is a bit confusing, but I guess we’ll all get used to it.
No, I think you’re confusing grandchildren and children. The former are DBs and the latter are EDBs up until the year they attain age 21, and this age is not dependent on the state. For a Roth, the EDB has the option of life expectancy or 10 years. As I said above, a grandchild, of any age, will be DB and so subject to the 10 year rule.
The excerpt you’ve pasted from 2021 590-B will be a bit dated, as the IRS proposed regulation was issued Feb of this year and has several differences with Pub 590. The reference to 590-B identifies the end of the 10 year period for the successor beneficiary, whoever that successor may be (i.e. EBD does not apply) and the 10 year period that begins with the EDB child attaining age 21.
Doesn’t the state’s Uniform Gift to Minors law apply? If you buy them stock, the law applies and parents or guardians technically control the asset until they reach age of majority.
I should think that would apply to inherited IRAs in most states.