Imagine you’re 30-years old and you inherit a $50,000 Roth IRA from a grandparent. Take a wild guess as to how much tax-free income you could potentially take off that Roth IRA over your lifetime?
Well, assuming the IRA grows 8% each year and you only take the Required Minimum Distribution (RMD), you could possibly take nearly $700,000 in tax-free income over your lifetime!
It comes from the fact that a beneficiary of an IRA can stretch required minimum distributions (RMD) over their lifetime. Using the Single Life Expectancy Table from IRS Publication 590, a 30-year old’s life expectancy is 53.3 years.
To calculate the RMD, you divide the IRA’s balance ($50,000) by the life expectancy (53.3). For this example, the first-year RMD is $938.
Here’s a look at what it would look like over a 30-year old’s lifetime:
It’s important to note that I used a linear 8% rate of return, which we know would not be the case in the real world. Some years the IRA would lose money and other years it would earn more than 8%. Also, this example assumes that only the annual RMDs are withdrawn from the IRA. If the beneficiary were to take more than the RMD, then these numbers would change drastically.
Finally, these numbers don’t look nearly as good once you factor in inflation, but an inherited Roth IRA could still help out the beneficiary if it is managed properly. A stretched Roth IRA could make it easier for the beneficiary to afford to work in a field like teaching, where the income isn’t the best.
If you’re a grandparent or will be a grandparent in the future, this is something you should look at setting up for your grandkids. Start by reading Ed Slott’s book, Parlay Your IRA Into a Family Fortune*, which goes into more detail on stretching IRAs. Definitely worth looking into!