Getting the most tax deferral from the traditional IRA.

• Author: Tullius, Raimond N.

The traditional IRA (individual retirement account) provides opportunities for tax-deferred investment growth, which benefits the holder and ultimate beneficiaries of the account. This article focuses on maximizing tax deferral from IRAs by illustrating how that tax deferral can continue after the death of the IRA holder.

Required Beginning Date

The tax deferral consequences depend in part on a concept called the required beginning date (RBD). The RBD is April 1 of the year after the IRA holder turns age 70 [degrees].[1] After the IRA holder's RBD, he must take certain minimum required distributions from his IRA. This is important because the tax deferral opportunities change after the IRA holder's RBD.

Naming a Beneficiary

The tax deferral opportunities offered by an IRA depend not only on the RBD of the IRA holder, but also on whom the IRA holder names as beneficiary. The least favorable tax deferral opportunities usually occur where the IRA holder names no beneficiary. It should be noted that the default beneficiary under most IRA agreements is the IRA holder's estate. Therefore, if the IRA holder names no beneficiary and the default beneficiary is the IRA holder's estate, then on the RBD, distributions will be based on the IRA holder's single life expectancy.[2] Also, if the IRA holder dies prior to his RBD, the IRA must distribute all its assets to the IRA holder's estate by the December 31 of the fifth year after the year of the IRA holder's death.[3]

Naming a beneficiary provides longer tax deferral only if the IRA holder names the beneficiary before his RBD. The naming of a beneficiary may result in distributions made over the joint life expectancy of the IRA holder and his beneficiary.[4] In this case, the minimum required distributions may be smaller. As a result, the tax deferral is greater than where distributions are made over the single life expectancy of the IRA holder. Although naming a younger nonspouse beneficiary allows for greater tax deferral, naming a younger spouse as beneficiary provides the greatest possible tax deferral.

IRA Holder Dies Before His RBD

If the IRA holder dies before his RBD and names a beneficiary, he may provide that the assets of the IRA will be distributed over the single life expectancy of the beneficiary.[5] The tax deferral is greater than under the default rule requiring that the IRA distribute all its assets by December 31 of the fifth year after the IRA holder's death.

If the IRA holder...