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Roth IRA Beneficiary. Should You Name Your Spouse?

by Neal Frankle, CFP ®, The article represents the author's opinion. This post may contain affiliate links. Please read our disclosure for more info.

Who should be your Roth IRA beneficiary? Some time ago, I received this question from Darren, a loyal Wealth Pilgrim reader:

Isn’t there a provision to name your spouse as the Roth IRA beneficiary, have them roll it over to their own Roth IRA, and then avoid RMDs during their life?

Can’t they then name their youngest beneficiary, and thus prolong withdrawals even more?

Darren, this is a very important IRA FAQ. In fact you couldn’t come up with a better strategy…for some people. It’s a fantastic way to maximize retirement income (for your spouse). Here’s why.

If you name your spouse as the beneficiary of your Roth IRA, he can continue to treat that money as if he started the Roth from the get-go. Your money (at this point…his) will continue to grow tax-free, and withdrawals can be made tax-free too. Of course the best news (and the most crucial consideration) is that your spouse won’t ever be forced to take any distributions from the Roth IRA.

This is super important because it allows him to let the money grow tax-free. And he can name a young beneficiary (hopefully, your daughter or son) who will continue to make out on this deal. True, the new beneficiary will have to take some distributions based on her life expectancy. But if the beneficiary is very young, those distributions will be small and they won’t be taxable. (Read “IRA Restrictions.”)

This is all fine and good in theory, but let’s take a look at the real world. In reality, your spouse might be a spendthrift. If he spends your Roth as soon as possible, your young beneficiaries won’t get the benefit of all that tax-free growth. And let’s get even closer to the edge. You can’t control who he names as beneficiary. It might be (gasp) his new bimbo wife.

If these are your fears, try to get your spouse to sign a beneficiary designation allowing you to name someone other than him as your beneficiary. (IRA beneficiary rules state that if you name anyone other than your spouse as beneficiary, he needs to give you permission to do so.)

Since you know he’s going to spend the cash if he gets his hands on it, why not give other assets that may be harder to spend (like real estate)? Bottom line: if you have a spendthrift spouse, give him anything but the Roth…and put him on a budget now.

Now let’s think about the grandchildren. Again, this is a case where theory doesn’t help all that much. There is no way you’re going to leave all of your Roth to one grandchild and leave the others out in the rain. No way.

If you want to split up the Roth between all the grandchildren, your best bet is to split the Roth IRA into many Roth IRAs now. One for each grandchild. Name each one sole beneficiary of each account. This way, distributions will be based on his or her own age.

If you’re afraid that the grandchildren are just going to run through the money and not take advantage of the tax-free growth, you can set up an Inherited IRA Trust.

This will give you more control over the money and make sure they get all the tax benefits. What’s your Roth beneficiary strategy?

While you ponder that…let’s move on to the Pilgrim Parade of Posts for the week!

Well…the Pilgrim Pick of the Pack has to go to Matt Jabs. Check out this video. He is truly a Pilgrim in every sense of the word. He’s taking a bold change of course in his life. Here’s why and where. He wants to get out of debt and serve. Yeah, baby!

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photo credit Clevercupcakes, Flikr

 

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User Generated Content (UGC) Disclosure: Please note that the opinions of the commenters are not necessarily the opinions of this site.

Comments

  1. Mary says

    October 15, 2010 at 11:24 AM

    As far as conversion Vanguard Group (mutual fund site) has a nifty calculator to determine whether you benefit from a conversion. For us it was a big no.

    As far as beneficiary designations are concerned – from a practical stand point I designated my spouse at time of death first, my estate secondly. You can now name your estate as beneficiary. I know as people get older they sometimes become a little less diligent about financial issues. By naming the estate you don’t need to update your beneficiary it will follow the instructions in the will. Also notice “spouse at time of death” which is also an allowed designation. This way during times of stress (divorce and death) you again do not have to remember to change your beneficiary.

    Reply
    • Neal@Wealth Pilgrim says

      October 15, 2010 at 11:29 AM

      Mary….I am SO NOT a fan of naming an estate as beneficiary. It accelerates the Required Minimum Distributions. Have you checked w/your CPA on this?

      Reply
      • Mary says

        October 15, 2010 at 12:16 PM

        I agree it is not the most tax advantaged strategy. But having dealt with elderly relatives finances for quite a number of years I realize that naming the estate is a safeguard against financial neglect and may prevent an ex spouse from inheriting an IRA or similar undesired affect. Many people designate their beneficiary when they create the IRA and may never go back to update.

        But your article certainly was right on for someone who manages their finances throughout their life.

        Reply
  2. neal says

    October 9, 2010 at 7:08 PM

    Joe…..another reason why I am fortunate to call you a brother Pilgrim.

    YES….you are so right. The IRA money provides a great opportunity for clever estate planning and estate tax savings. The only issue is you have to be clear on objectives. One strategy attacks the estate issue. Another strategy might be better for spousal income. As always, it’s a trade off.

    Thanks man.

    Reply
  3. JoeTaxpayer says

    October 9, 2010 at 4:32 AM

    Neal, as always, excellent writing.
    One point we shouldn’t miss – estate tax issues.
    For simplicity sake, let’s assume the pre-Bush $1M exemption. It’s not tough between retirement accounts, home, and insurance to exceed this number. If I leave it all to my wife, when she passes, there might be an enormous estate tax bill due. If possible, good planning would have either of us leave that first million to kid and/or grandkid when the first of us goes.
    We don’t know what even the 2011 rules will be, but history shows that you usually will have a limit on non-spouse beneficiaries, and the first death is the time to not lose that.
    Let’s not give away all the potential savings of RMD avoidance to a crazy estate tax structure.

    Reply
  4. Working mom of 2 says

    October 8, 2010 at 9:26 AM

    In “The Gospel of Roth- The Good News About Roth IRA Conversions and How They Can Make You Money” by John Bledsoe it clearly states in the book that NO ANALYSIS is needed and that everyone should convert to a Roth IRA regardless of income. There is NO risk! The IRS is giving us a year to recharacterize or “undo” the conversion. This book gives the ins and outs for Roth IRAS! It really helped answer all my questions.

    Reply
  5. Neal@Wealth Pilgrim says

    October 8, 2010 at 10:01 AM

    Hey Working Mom….

    I’m not a fan of doing something w/out thinking about it or doing any analysis. I’ve seen Bledsoe and he’s a very clever fellow of course. My personal favorite is Ed Slott….the King of All Things IRA

    Reply

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I'm a CERTIFIED FINANCIAL PLANNER™ Professional with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim.
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Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement.  We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

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Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement.  We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement. We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

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Retirement Crusaders

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