What happens to my IRA when I'm gone?[ Edited ]
I am retired and am not in the best of health, may have another 10 years. My wife and I have a large amount of traditional IRA's and I am wondering what happens when I turn 70 1/2 and am required to make minimum withdrawals from the IRA's. Cannot imagine having to draw down large amounts when not needed and having to pay taxes at higher rates. I am wondering if there is a way to leave the IRA's to my spouse and children. What am I required to do when I turn 70 1/2 with my IRA's? Thanks. dmk0004
I'm sorry to hear about your health issues, but I think I have some pretty good news on the financial front. While you'll definitely have to make your required minimum distribution, it may not be as onerous as you are anticipating. My friend and co-worker Scott Halliwell reviews the mechanics and details of your first required distribution in this post. Before I get to my rationale for why the required distributions may not be too painful, let me touch on the second part of your question.
When you established your IRAs, you had an opportunity to name a beneficiary. So, check with your IRA custodian(s) to determine who is currently listed and, if necessary, update those beneficiary designations ASAP. When you ultimately pass away, the IRAs will be distributed to the named beneficiaries. Typically, folks will name their spouse as the primary beneficiary and their kids as a contingent or second beneficiary on their IRAs. That, of course will depend on your overall game plan and wishes. If you do not name a beneficiary, your will (or state laws if you don't have a will) dictates who receives the money. Remember, a beneficiary designation will supersede anything directed in your will. As beneficiaries, your spouse and kids will have a number of options as to how they set up the accounts--they'll want to discuss their approach with a financial planner/tax advisor. Make sure you get your paperwork in order and you'll help avoid a lot of headaches for your family.
Now back to the RMD. The reason I say it may not a huge deal is that the first required distribution is roughly 3.6% of the value of your IRA. So, if you have an IRA worth a quarter of million dollars, the RMD would be $9,000. Sure you'll have to pay taxes on money you might not need, but it's probably not a tax catastrophe. If you logon to usaa.com you can access a RMD calculator and if you need help getting it set up call one of our advisors at 800-771-9960. In the end, you might consider reinvesting the funds from your RMD in a non-retirement account so they remain available to your spouse and kids.
Best of luck.