The good news: Your mother loves your daughter very much and has set up an UGMA/UTMA for her. Your mother also is naming your daughter as beneficiary of her traditional IRA.
The less good news: After the Tax Cuts and Jobs Act of 2017 (TCJA), gifts and bequests of assets that produce income–including traditional IRAs–may be more “taxing” for the beneficiary. In the many pages of the TCJA, there lurks a special reason for “kiddies” to beware. The TCJA makes having unearned income as a ‘kiddie’ more taxing.
First, what is the “Kiddie Tax”?
The “Kiddie Tax” (IRC Section 1(g)) is a specific tax on the unearned income of a child. For this purpose, IRC Section 1(g)(2) applies when either of the following two conditions are true:
The Kiddie Tax does not apply unless all three of the following conditions are true:
1 The NIIT (Net Investment Income Tax) may also apply if Single/$200,000 and Married Filing Joint/$250,000 limits are exceeded.
2 The NIIT (Net Investment Income Tax) may also apply if a child has income over $200,000.
As you can see, these changes may make shifting income to a child less attractive. Naming a child, or grandchild, as the beneficiary of a traditional IRA may also be less attractive. And while these changes sunset in 2025, it is still important to plan during the intervening years.
Roth IRAs may be even more valuable as a gift to a child, as they are tax-free (assuming the requirements are met).
This is a good time to review your clients’ IRA beneficiary plans, and determine whether they will still meet their goals.
To see other provisions of the TCJA, please see Steve Chmelka’s Tax Cuts and Jobs Act (TCJA) blog.
Should you have any questions regarding the Kiddie Tax, please feel free to contact the Pacific Life Retirement Strategies Group at (800) 722-2333 or send an email to RSG@PacificLife.com.
Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.
Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.
Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues.
Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.
No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency
For financial professional use only. Not for use with the public.