Extending your inherited IRA
As a recipient of an IRA from a deceased account holder you may be taking over a large account. By maintaining the tax-deferred status for as long as possible you can stretch your IRA for many years' worth of income.
The following illustration is a hypothetical scenario where a 51 year old man, Alex, inherits his father's (Jay) IRA.
When Jay started withdrawing his required minimum distributions (RMDs) at age 70½, his account balance was worth $200,000. Jay's son Alex was designated as the sole beneficiary on the account.
Despite systematic withdrawals of the minimum distributions every month, Jay's account continued to grow with market appreciation and dividend yields. Jay died at the age of 84, with his IRA account worth approximately $300,000.
As the sole designated beneficiary, Alex has two courses of action:
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Option A — Withdraw the IRA balance in full; or
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Option B — Withdraw RMDs based on his own life expectancy, which is 33.3 years.
By withdrawing only the RMD, Alex can supplement his income and allow the IRA to continue growing tax-deferred.
Alex chooses Option B and consequently stretches out the life of the IRA for another 33 years. Alex names his daughter as his sole designated beneficiary. His initial RMD amount is $9,311, with his largest RMD being $145,435. The total value of Alex's IRA distributions, during the 33 years since his father's passing, exceeds $1.5 million. Alex dies at age 84.
In this scenario, Alex's last distribution was $29,529 in 2053. However, had Alex died prior to the expiration of his life expectance, his daughter Alexis would have inherited the IRA (as sole) designated beneficiary.
In such event, Alexis would have similar options that her father faced:
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Option A — Withdraw the IRA balance in full; or
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Option B — Withdraw RMDs based on the remaining life expectancy of her father.
Although you always have the ability to take a bigger distribution from the IRA, allowing the tax-deferred growth to compound will provide a longer income stream.
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