How CRNAs Can Turn Their IRA Into A Family Fortune

We’ve previously discussed the benefits of an IRA, but many CRNAs are unaware of the potential power of an inherited IRA, be it one you inherit from your parents or one you pass on to your children. Here, we’re discussing a little-known way CRNAs can make the most of an inherited IRA.

The Two Routes

There are a couple of ways to handle IRAs after one’s death. The more common approach is for the non-spouse beneficiaries to cash out the IRA. There are two unfortunate surprises that may come about. At the end of the tax year, you’ll receive a 1099-R form from the IRA provider. Suddenly, the $100,000 cashed-out IRA drops by $35,000 due to taxes. There’s also the chance that the $100,000 earned from the IRA pushed you into the next income tax bracket, so your income is taxed at a higher percentage, too.

As you can imagine, this can quickly become a tax nightmare, and many wonder how they never learned about this before cashing out the IRA. While you can’t put the money back into the IRA, there is an alternative route you can take before touching that inherited IRA. This second option is moving the money from the IRA to a Beneficiary IRA. Here’s how it works.

The Beneficiary IRA

A Beneficiary IRA can be an appropriate option if you inherit an IRA from someone who isn’t your spouse. With the approval of the IRS, you transfer the IRA funds into a Beneficiary IRA. While you are required to take distributions, on which you will be taxed, you are not required to cash out all the money at once. Just as you would with your traditional IRA, you would take out a minimum distribution, which is calculated based on your life expectancy.

The upside of this is that if you’re 35 years old, the IRS single life table for inherited IRAs says you have another 48.5 years left, meaning you would only have to withdraw a small portion of the IRA. (1) If it’s a $100,000 IRA, you would be required to withdraw roughly $2,000 for 2018.

Should you withdraw the RMD for 48.5 years, and receive an average 6% rate of return over those years, you could potentially end up withdrawing $545,915—more than five times the initial IRA amount, making for quite an investment.

The growth potential doesn’t stop there. A $100,000 IRA can potentially turn into a $2 million return on investment. Let’s say you name your newborn grandchild as the beneficiary of your IRA and he or she will withdraw the RMD over 81 years. Assuming the grandchild withdraws only the RMD for 81 years and receives an average 6% return rate, the total amount of distributions over the 81 years would add up to around $2.3 million. While these are only estimates, and it’s impossible to determine the actual rate of return over those years, it does reveal the possibilities.

The First Steps

If you are interested in providing your heirs this opportunity, there are a few steps you can take now. The first step is to designate a living person as the beneficiary of the IRA on the beneficiary form provided by the IRA custodian. Even if you state this in your will or trust, you also want to add it to this form, as this will allow your beneficiaries to “stretch” distributions and make the most of the money.

While you can’t name your unborn grandchild, the day he or she is born, the grandchild is eligible. The reason behind this is because the beneficiary must have a life expectancy, and only a living person has a life expectancy.

You can also have multiple people named as beneficiaries. Each person will be able to establish their own Beneficiary IRA and use their own life expectancy to calculate their required minimum distributions.

Regardless of how many beneficiaries they are, they must establish the beneficiary IRA by December 31 after the year of death, and the first distribution must begin by that same date. This date pushes up to September 30 if the IRA has both an entity and people named as beneficiaries.

Lastly, the beneficiaries must name a beneficiary of their beneficiary IRA.

Your Options

As everyone’s situation is unique, it’s important to speak with a financial advisor or tax professional to determine if this is an appropriate option for you and your goals.

(1) https://www.irs.gov/retirement-plans/required-minimum-distributions-for-ira-beneficiaries