Traditional IRAs Are Not Like Other Assets in Your Estate. Here’s Why. | Rodgers & Associates
Blog

Traditional IRAs Are Not Like Other Assets in Your Estate. Here’s Why.

6 significant differences between IRAs and other financial assets.

Tradi­tional IRAs are subject to a unique set of complex rules. Here are 6 signif­icant differ­ences between IRAs and other financial assets:

  1. Unless payable to an estate, IRAs do not pass through the will.
    Your IRA account has a benefi­ciary, who will receive your IRA at death, regardless of what you state in your will or living trust.
  2. Unless payable to an estate, IRAs are not subject to probate.
    This can be a signif­icant time and cost savings in states where probate is arduous.
  3. IRAs receive no capital gains treatment.
    Any distri­b­u­tions from an IRA are taxed as ordinary income and not at lower capital gains tax rates.
  4. IRAs receive no step-up in cost basis upon death.
    Most other assets owned by an individual receive a step-up in cost basis upon the death of the person, elimi­nating all capital gains on those assets up to that point in time. But not IRAs. The benefi­ciary of your IRA will pay ordinary income tax on any distri­b­u­tions at his or her rate.
  5. In most cases, IRAs cannot be gifted.
    If you want to give some of your IRA to an individual or organi­zation, you must first take a distri­b­ution, pay the income tax and any applicable penalties, and then make the gift. There is an exception to this rule, called the Qualified Chari­table Distri­b­ution (QCD), for those over age 70½ giving $100,000 or less to a qualified charity. If all criteria is met for the QCD, the distri­b­ution is then excluded from your taxable income.
  6. Tradi­tional IRAs are the only asset in your estate subject to Required Minimum Distri­b­u­tions (RMDs).
    RMDs apply to you and your benefi­ciary at your passing. The rules for RMDs are partic­u­larly complex, and depend on whether the benefi­ciary is your spouse, your age difference (if the benefi­ciary is your spouse), and whether you had started taking your RMD before your passing. While the IRS is content for you to have deferred growth in your IRA for many years, in the year in which you turn 72 (70 ½ if you reached 70 ½ before January 1, 2020), you are required to take a portion of your IRA and pay ordinary income tax on it. These RMDs continue annually there­after.