Usually,
people do not consider age as a factor when choosing their retirement plan beneficiaries.
However, the age of a the beneficiary will likely have a dramatic impact on the
amount of wealth ultimately received, after taxes and minimum distributions.
For example, let’s say that John Smith has an IRA valued at $1Million and that
he leaves the IRA to his 50 year old son, Robert Smith, in year 2012. Assuming
8% growth and current tax rates, as well as ongoing required minimum
distributions, the IRA will have an ending balance of $117,259 by year 2046. At
that time, Robert will be 84 years old.
Now instead, let’s
assume that John Smith leaves the IRA to his grandchild, Sammy Smith, who is 20
years old in 2012. Assuming the same 8% rate of growth and any required minimum
distributions, the IRA will grow to $6,099,164 by year 2051. At that time,
Sammy will be 54 years old. Which would you prefer? Leaving your $1 Million IRA
account to a grandchild, which could potentially grow to over $6 Million over
the next few decades, or, leaving the same IRA to your child and fofeiting the
potential tax-deferred growth in the IRA over the same time period?
By
the way, the numbers do add up in the preceding paragraph. The reason why the
IRA account grows substantially more in the grandchild’s hands is because the
required minimum distributions for a grandchild are significantly less than
those of an older adult. The worst scenario in terms of minimum distributions
would be to name a very old adult as the beneficiary of a retirement plan, such
as a parent or grandparent. In such a case, the entire plan may have to be
withdrawn over a few years. This would result in significant income tax and a paltry
potential for tax-deferred growth.
If you have more questions, contact our Silicon Valley Estate Planning attorneys.
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