Ask the Expert: Smart giving to adult kids from your IRAs

My wife and I each have traditional IRAs and Roth IRAs, in addition to a joint regular stock account. We’re just entering our 80s. We’d like to start distributing some of these funds to our two adult sons instead of leaving it all to them upon our passing. I know each of these accounts is subject to different tax rules. Which account would it make more sense to withdraw the funds from?

Last week’s column addressed making gifts from your stock account. Today, let’s talk about your IRAs.

It makes more sense, both for you and for your sons, to draw funds from your traditional IRAs than from the Roth IRAs.

True, they must empty inherited IRAs — both traditional and Roth — within 10 years of your deaths. But there’s still a big difference. “Your sons will have to pay taxes on annual required minimum distributions (RMDs) from your traditional IRAs in years one through nine, and then pay taxes on distribution of the remaining balance at the end of year 10,” said Ed Slott, a Rockville Centre tax accountant.

By contrast, they can let inherited Roth IRAs grow tax-free for 10 years, and withdraw the balance tax-free at the end of year 10.

His advice: Consider giving the kids your RMDs from your traditional IRAs — money you must withdraw anyway. If you need the RMDs to cover your living expenses, after taking them, convert some of the remaining traditional IRA balance into Roth IRAs.

By shrinking your traditional RMDs, you will have reduced your future RMDs. You’ll have set up a future gift by increasing the amount your sons will inherit in tax-free Roth IRAs. And in the meantime, the Roth IRAs will be available to you for unanticipated future expenses.

The bottom line

Most beneficiaries must now empty inherited IRAs within 10 years. Traditional IRA distributions are taxable, but Roth distributions are tax-free.

More information

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