A reader who doesn't want to be named asked me what the tax consequences would be if she left her Individual Retirement Account to her children instead of her husband.

I don't want to get mixed up in this marriage. But if taxes are the only issue, naming a spouse as beneficiary is the better choice. If you die, the spouse can make the IRA his own deferring taxes for as long as he has the account.

But think about this: Your spouse can name new beneficiaries. If you're worried that he won't name your children (maybe he'll favor the children of a former marriage), then maybe you'd rather forget the tax question and leave your IRA directly to your kids.

Your kids cannot roll the money into an IRA of their own. They'll have to withdraw it and pay the income taxes due.

If you die before starting mandatory withdrawals (that's prior to age 70 and a half), your child can take the money in one of two ways: First, withdraw it all, within the five years after your death; or second, withdraw it over his or her life expectancy, with the money taxed as it's taken out. The latter decision has to be made within the calendar year after your death.

Two or more children generally can divide the IRA, so they can withdraw the money in different ways.

The rules are different, however, if you're over 70 and a half, when the law requires you to make withdrawals. If your children inherit now, the size of their tax will depend on how you decided to take the money out.

It's especially important to think this through if you're leaving your IRA to your spouse, with your child as second beneficiary. This arrangement sometimes sticks your children with a major income-tax bill. Here are the rules:

After 70 and a half, you have to take enough money out of your IRA, every year, to eliminate the account during your expected lifetime. When your spouse is your beneficiary, you make withdrawals over your joint life expectancy.

If a child is your beneficiary, you use the joint life expectancy of you and the child. But you can't use a young child's actual age. The tax rules assume that the child is no more than 10 years younger than you are.

Now the big question: How do you calculate the size of the annual withdrawal? You have two options:

(1) You can use a fixed life expectancy. That way, you take the money over a fixed number of years.

If you die, your child can continue to take out the money on the schedule you set. For example, if you died in the fourth year of a 15-year life expectancy, they could withdraw the money over the following 11 years, paying taxes each year.

Given their druthers, this is the method children would prefer. They can take the money faster if they want, but the choice is up to them.

(2) You can recalculate your own life expectancy every year. This method stretches out your personal withdrawals (and taxes) over a longer period of time. Couples often do this, to assure that their IRA won't run out.

But let's say it's your IRA, left to your spouse with your child as second beneficiary. You were recalculating life expectancy. Suddenly your spouse dies.

At that point, you can't change your mind about how withdrawals should be made. When you die, your child will have to take all the remaining money within the year after your death, says accountant Ed Slott, publisher of Ed Slott's IRA Advisor, Rockville Centre, N.Y.

Potentially, that's a big slug of taxable income. It might propel the child into the top tax bracket. Almost 40 percent of your IRA would then go to the IRS.

Ironically, if you died first and your spouse inherited the IRA, your spouse could start a new IRA and change everything, so the child wouldn't face the risk of a giant tax.

With recalculated withdrawals, your tax depends on who dies first and how soon.

One more point: If your child is your first beneficiary, you can recalculate your own life expectancy but the child has to use a fixed term.

When you die, the child has to take out the money faster than if you had used a fixed life expectancy for yourself. But the difference isn't great, Slott says.

If your main concern is to minimize the tax on your beneficiary, Slott suggests withdrawing IRA money over a fixed term. He recommends recalculation, if your main concern is making the IRA last for life. Either way, you need an expert to help you decide.

Caring for elders

It sounded like a great idea, when President Clinton announced it at the start of this month: a $1,000 tax credit for people needing long-term care, or for the relatives taking care of them at home. It's a down payment on the burgeoning issue of how to support the elderly infirm, while helping families with younger disabled members, too.

The House Republicans floated a similar, $500 tax credit in their 1994 Contract With America, although it never made it into law. With both parties behind it, a tax credit should pass. Estimated cost of the Clinton version: $5.5 billion over five years.

Caregivers deserve a place in heaven. On this earth, an income-tax credit appears to be the equivalent. But as a way of addressing the growing national cost of long-term care, it's not the best idea.

First of all, the federal government has embarked on a $112 billion cut in the growth of Medicare by 2002. One result: A number of HMOs have withdrawn from the Medicare market, because they say they're no longer getting paid enough. Payments have also been slashed to services that treat Medicare patients at home. Does it make sense to allot $5.5 billion to long-term care if far more might have to be taken from Medicare?

Secondly, starting a $5.5 billion program suggests that the government will eventually pay more. That lessens people's incentive to plan for themselves.

Unless people use their own resources, the needs of the elderly will eventually crowd out everything else.

Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.

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