Roth IRA Beneficiary. Should You Name Your Spouse?

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!

• Ryan carries on the tradition of service with his post on Debt to Income Ratio at the Military Wallet.
• Are You Eating Away at Your Budget? Kevin just might have your solution.
• Pinyo explains why a good credit rating is important even if you don’t use credit.
• Is making money easier than making friends? Sam answers this age-old question.
• Carnival of Personal Finance
• Carnival of Wealth
• Tax Carnival
• Carnival of Debt Reduction
• Carnival of Money Stories
• The Military Wallet explains the ramifications of having an authorized user on a credit card.
• Best of Money
• 3 Supercharged ETFs to Beat Gold Price Returns by my pal at Darwin’s Money
• Lenny P offers up some great insight on marriage and remodeling. This is funny because I’ve written about the subject and will share my ideas next week. Kismet!
• Green Panda Treehouse tells us to loosen up those purse strings and not be so tight.
• MH4C explains how to understand your Social Security statement.
• Kelly at Centsible Life helps us stock up on gluten-free foods from Amazon.
• Tom from the North provides three easy money making hobbies.
• Joe Taxpayer tells you how to withdraw from your IRA with no penalty. Don’t do it…just read it.
• Don’t plan your retirement spending without visiting my sharp-dressed buddy Mike.
• TFB considers working for money or for passion.
• I’ll have more to say on ETFs and their evil empire, but in order to get a balanced view, here’s my friend from cheery ol’ England explaining how to buy ETFs for less.
• The Digerati Life warns us about mortgage foreclosure fraud. A must-read.

photo credit Clevercupcakes, Flikr