2 smart ways of leaving your IRA to your heirs

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Create a strategy that not only serves you throughout your retirement but also helps protect the inheritance of future generations.

Key points

  • Because of special rules surrounding the inheritance of IRAs, they can be a particularly valuable way to leave assets to your heirs
  • With a multigenerational approach, you can maintain greater control of your assets during your lifetime and beyond and possibly do so in a tax-efficient way
  • Leaving a Traditional IRA or a Roth IRA to a younger beneficiary may provide them with both an inheritance and the potential for the assets to grow on a tax-favored basis
  • Use our Roth IRA Conversion Calculator to see if converting to a Roth IRA is right for you
IRAs are designed with a specific goal — to provide an additional income stream that will be available during retirement. But what happens if there are still funds left in your account after you're gone?
Having a strategy that includes clearly designated IRA beneficiaries can help beneficiaries avoid probate court proceedings that can be time-consuming and costly. As you consult with your tax and estate advisors to create an estate plan that both accomplishes your wishes and helps protect your heirs' inheritance, here are a pair of strategies to consider that can help you pass IRA assets to your heirs.
With a multigenerational IRA strategy, money has the potential to continue growing over time and also to provide income to your beneficiaries.
— Debra Greenberg, director,
Personal Retirement Solutions,
Bank of America Merrill Lynch

Maximize the value of your IRA by giving it to a younger family member

You've probably already named one beneficiary (or more) to your IRA — your account provider will most likely have required it. But you're generally free to change beneficiaries at any time, and you can name several for one account. That gives you the flexibility to consider naming a child or grandchild — or a niece or nephew — instead of, or in addition to, your spouse or partner.
"With a multigenerational IRA strategy, money has the potential to continue growing over time and also to provide income to your beneficiaries," says Debra Greenberg, director, Personal Retirement Solutions, Bank of America Merrill Lynch. "By stretching out the life of the IRA, any growth your investments experience can compound for many more years."
Your young beneficiaries usually will start receiving income from the IRA shortly after your death, because when an IRA is inherited the recipient generally must take Required Minimum Distributions (RMDs) every year. But for the most part they get to do so based on their longer life expectancies, so their annual withdrawals will be small compared with an older IRA beneficiary's required distributions. As a result, the assets in the IRA have more time for potential tax-favored growth. This strategy should be carefully coordinated with your overall estate plan.Footnote 1
This image provides a broad overview of how to calculate a required minimum distribution. Take the account balance on December 31 of the previous year, divide it by the beneficiary's life expectancy, and the resulting dollar amount is the required minimum distribution to the beneficiary.
Source: Merrill Edge, 2018

Convert to a Roth IRA

If you don't expect to tap your Traditional IRA during your retirement, you could swap it for a Roth IRA. Then when you pass the Roth IRA on to your beneficiaries, they'll be able to take federal tax-free distributions from the inherited account, often throughout their lifetimes.Footnote 2
Another advantage: "With a Roth IRA, there are no required minimum distributions for you," Greenberg notes. You can leave it intact, with the account assets benefiting from any compound growth for as long as you live. "Upon your passing, the entire Roth IRA would go to your named beneficiaries, but at that time it would be subject to RMD requirements," Greenberg says.
A Roth IRA conversion isn't right for everyone. You'll generally have to pay income tax on the value of any previously untaxed Traditional IRA assets you convert — whether that outlay makes financial sense depends in part on how long you expect to live. By converting as early as possible and setting aside funds to pay the taxes, you have the potential to maximize the tax benefit to future generations.
When you pass the Roth IRA on to your beneficiaries, they'll be able to take federal tax-free distributions from the inherited account, often throughout their lifetimes.
Using either of these strategies, you could use your IRA to provide tax-deferred income (or federal tax-free income, if received in a qualified distribution from a Roth IRA) and growth potential for years to come. Perhaps even better, knowing that the future is accounted for can allow you to relax and enjoy the present — and the time you spend with those you love — all the more.
Next steps

Footnote 1 As an alternative, the individual can elect to treat the IRA as his or her own, and leave the IRA to the spouse who can then name the children — or other young heirs — as beneficiaries.

Footnote 2 For a distribution from a Roth IRA to be federal (and possibly state) income-tax-free, it must be qualified. A qualified distribution from your Roth IRA may be made after a five-year waiting period has been satisfied (this period begins January 1 of the tax year of the first contribution or the year of conversion to any Roth IRA) and you (i) are age 59½ or older; (ii) are disabled; (iii) qualify for a special purpose distribution such as the purchase of a first home (lifetime limit of $10,000); or (iv) are deceased. If you take a nonqualified distribution, any Roth IRA investment returns are subject to regular income taxes, plus a possible 10% additional tax, unless an exception applies. A special provision applies for converted assets. If a withdrawal is made within five years of the conversion, the earnings withdrawn may be subject to income tax, and an additional tax described above and the principal that was originally converted may also be subject to a 10% additional tax, unless an exception applies.

Previously untaxed distributions from a Traditional IRA are subject to ordinary income tax. In addition, a federal 10% additional tax may apply to withdrawals taken before age 59½ unless an exception applies.

Bank of America Merrill Lynch is a marketing name for the Retirement Services businesses of Bank of America Corporation.

U.S. Trust, Bank of America Private Wealth Management operates through Bank of America, N.A. and other subsidiaries of Bank of America Corporation.

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